Jefferies cuts Gap to Hold as Old Navy trends weaken

Investing.com -- Jefferies has cut its rating for Gap to Hold from Buy, citing weakening trends at its Old Navy brand and tougher comparisons in the second half of the year.

Analyst Corey Tarlowe lowered his price target on the stock to $23 from $29, saying investor conversations have "shifted from whether the turnaround is real to how much longer it can be sustained," with particular focus on Old Navy's trajectory as comparisons become more challenging.

The firm said its data shows Old Navy trends weakening. While Gap and Urban Outfitters led its survey work in purchase-consideration growth, at 4% and 5% respectively, Old Navy's purchase consideration "declined 13% YoY and has weakened sequentially for several months," with value scores down 3%.

Banana Republic also saw purchase consideration fall 10%, which Jefferies said reinforces concerns that "momentum remains uneven across the portfolio."

Tarlowe flagged the second quarter as "the easiest compare of the year," with Old Navy lapping 2% same-store sales before significantly harder second-half comparisons, including a 6% figure in the third quarter.

The firm noted brand-building efforts remain active, including the Gap x Hailey Bieber partnership, and that early engagement around the beauty and accessories rollout has been encouraging, with Gap's Eau de Parfum Discovery Set selling out online.

However, Jefferies said that initiative "may be less materially impactful to NT financial results than we initially anticipated."

Together, the weakening Old Navy data, tougher second-half compares and a less material near-term beauty contribution reduced the firm's confidence, prompting the downgrade.

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