Stifel affirms Gap, Inc. (NYSE: GPS) with a Buy rating and $40 price target after the company announced October comparable-store sales and updated Q3 guidance on Monday night.

Analyst Richard Jaffe commented that "Comp sales decreased 3% in October, below our estimate and consensus, due to weak results at Banana offset somewhat by a positive comp at Old Navy. Management indicated that October was very promotional; eroding margins but bringing inventories down below last year’s level and below previous guidance of down slightly. This will better position the business for 4Q, likely helping to limit margin pressure as the company heads into the Holiday selling season."

Jaffe's outlook for Gap: While GPS remains a well-controlled and well-managed business, the merchandising challenge facing Gap and Banana Republic divisions continues to pressure results despite the positive performance at Old Navy. Results will be challenging in the near term, however management has initiated significant changes in the leadership and merchandising efforts at both businesses. Longer term, these efforts could help Gap to capitalize on the significant opportunity for improvement. However, with the recent leadership changes and weakness at both Gap and Banana Republic brands, the investment has become more speculative and necessarily longer term.

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