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Investing.com -- TD Cowen has added Gap Inc (NYSE:GAP) to its “Best Smidcap Ideas” list, citing sustained momentum at its core Gap and Old Navy brands and the potential for improvement at Banana Republic and Athleta.
The bank’s analysts believe the market is underestimating the company’s long-term brand durability and margin expansion potential.
“We believe brand momentum at Gap & Old Navy continues,” analysts said, adding that the recent pullback in shares—down 25% since first-quarter earnings—has created an attractive entry point.
They highlight that despite elevated expectations heading into the first quarter, fundamentals remain solid, and the guidance for second-quarter same-store sales growth is consistent with the first.
TD Cowen sees room for upside if the consumer backdrop holds and tariff pressures ease. Gap has quantified the expected impact from tariffs at $100 million to $150 million, based on an assumed 30% rate on imports from China and 10% elsewhere.
The analysts view the company’s full-year 2025 outlook as conservative and expect earnings of $2.23 per share, slightly above the Street’s $2.20.
Valuation remains a key part of the bull case. The analysts note the stock trades at roughly 9 times earnings, compared to its three-year average of around 13 times.
A reverse discounted cash flow (DCF) analysis implies the market is pricing in no earnings or revenue growth through 2035. In contrast, TD Cowen projects low-single-digit annual revenue growth and modest margin improvement, leading to a price target of $29.
“Continued execution and brand momentum at Gap & Old Navy and the brand turnaround at BR & Athleta could contribute to the overall growth,” the analysts said.
Potential risks include possible deterioration in sales at Gap and Old Navy or continued weakness at Banana Republic and Athleta. Tariffs remain another key concern, with further pressure on margins posing a downside risk.