Stifel Notes Gap's (GPS) May Comps Gained on Favorable Weather; Shares Will Likely Trade Higher on Depressed Valuation

Stifel affirms Gap, Inc. (NYSE: GPS) with a Hold rating following the company's May sales update on Thursday night.

Analyst Richard Jaffe commented, Comp sales decreased 6% in May, slightly better than our estimate and consensus. Management indicated that May results were negatively impacted by a shift in the Memorial Day holiday, with Sunday and Monday falling into June this year. However, the company saw an acceleration of traffic and sales heading into Memorial Day, an acceleration that was not apparent heading into Easter last month. This was likely, in part, driven by more favorable weather. Given the depressed valuation, we anticipate shares will trade up on this more favorable news tomorrow.

On the firm's Hold rating, Jaffe said, The various merchandising initiatives management has put in place at Gap division have not resonated with the consumer. Old Navy has struggled since fall 2016, as merchandising miss-steps and ineffective marketing contributed to the division’s weakness. Banana Republic’s new merchandising efforts have not been successful, with results eroding further. The prolonged underperformance of each of the Gap’s divisions despite management’s best efforts has undermined our confidence and limited our visibility for improvement. Management has announced an aggressive cost-cutting and business rationalization plan that will reduce expenses and improve profitability by closing underperforming stores. While we believe this is the correct move, we recognize that this does nothing to improve the appeal or long term success of the various Gap brands. While the shares appear inexpensive, (consensus out-year P/E of 10x is a discount to the company's two-year average of the out-year multiple for the company of 12x) without visibility for improvement in the fundamentals, we reiterate our Hold rating.

For an analyst ratings summary and ratings history on Gap, Inc. click here. For more ratings news on Gap, Inc. click here.

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