MKM affirms Gap (NYSE: GPS) with a Neutral trading and $21 price target following June sales results issued Thursday night.

Analyst Roxanne Meyer commented, GPS' 2% comp handily beat estimates (MKM -5.0%/Street -3.6%), representing an 8 and 5 pt. acceleration on a 2 and 3 year basis vs. May, respectively, aided somewhat by the shift of Memorial Day into June (2 pt benefit). This was GPS' first positive comp following 14 straight months of negatives, aided by an improvement in sequential traffic trends, most pronounced at Old Navy. Old Navy's 5% comp (MKM -4%/Street -3.3%) reflected a 7 and 13 pt. acceleration on a 2 and 3 year basis vs. May, respectively. While still negative, Gap and Banana Republic were each better than expected, with Gap down 1% (MKM -3%/Street -3.6%) and Banana Republic -4% (MKM -11%/Street -10.3%). Our sense is that inventory is on track to end the quarter in line with guidance for a LSD decline.

On Old Navy, Meyer commented, Old Navy's 5% comp was said to be "of high quality" with an increase in AUR. Traffic was down LSD, vs. the -MSD to -HSD range experienced in March-May. While week 1 was cited as having the best traffic (not surprisingly), improvement was noted across the month. However, we don't view the better than expected comp and improvement in metrics as an indication that merchandise reception has improved significantly. August could serve as a catalyst month, in our view, as the assortment is expected to be rebalanced.

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