On Thursday, Morgan Stanley adjusted its stance on Gap, Inc. (NYSE: NYSE:GPS) stock, lifting the rating from Equalweight to Overweight and nudging the price target upwards to $29.00 from the previous $27.00. This change reflects an anticipated approximate 20% increase from the stock's current price level.
The upgrade comes with a positive outlook on the company's earnings potential. Morgan Stanley's forecast for Gap's 2024 earnings per share (EPS) is set above the implied guidance and consensus, at $1.82 compared to the $1.65-$1.70 range suggested by the company and the $1.74 consensus among analysts. This projection is partly based on expectations of slightly higher profitability, with an estimated margin of 6.3% versus the market's expectation of 6.1%.
For the second quarter, Morgan Stanley anticipates Gap's EPS will align with the consensus estimate of 41 cents. The firm predicts that minor improvements in gross margin (GM) and selling, general, and administrative expenses (SG&A) could balance out any potential shortfall in revenue. The revised full-year forecast is slightly above Morgan Stanley's previous estimate of $1.75, factoring in greater SG&A efficiency.
Looking further ahead, Morgan Stanley maintains its projection for average top-line growth of around 1% from 2025 to 2028. Additionally, the firm expects an operating margin (OM) of approximately 8% by 2028, an increase from the prior estimate of around 7%.
This adjustment, along with a modestly higher terminal operating margin assumption of 8% (up from 7%) and an updated weighted average cost of capital (WACC), supports the new $29 price target, suggesting a potential 20% upside from current stock levels.
In other recent news, Gap Inc. has adopted a Senior Executive Severance Plan, set to take effect on July 1, 2024, covering executives Katrina O'Connell, Horacio Barbeito, Chris Blakeslee, and Mark Breitbard. In financial developments, the company has seen its price target raised by TD Cowen and Baird to $28, attributing to positive quarterly results and future expectations. CFRA also adjusted its price target for Gap to $20, while maintaining a Sell rating on the stock.
These adjustments follow a series of positive financial results for Gap Inc. The company's first quarter of 2024 was marked by positive comparable sales at its Banana Republic and Athleta brands, and a higher-than-anticipated benefit from commodity prices. Furthermore, Gap's full-year 2024 guidance has been revised upwards, forecasting a mid-40% growth in earnings before interest and taxes (EBIT).
Analysts from various firms, including BMO Capital Markets, Morgan Stanley, Citi Research, and Barclays Capital Inc., have provided mixed outlooks for Gap Inc., highlighting both the company's strong performance and potential challenges. These recent developments reflect the evolving nature of Gap Inc.'s financial performance and strategic decisions.
InvestingPro Insights
As Morgan Stanley raises its outlook on Gap, Inc. (NYSE: GPS), real-time data from InvestingPro aligns with a positive trend for the retailer. Gap's market capitalization stands robust at $8.61 billion, and its price-to-earnings (P/E) ratio of 13.39 indicates a reasonable valuation compared to industry peers. Notably, the adjusted P/E ratio has slightly improved to 12.31 over the last twelve months as of Q1 2023. Meanwhile, the company's revenue growth shows a quarterly uptick of 3.42% in Q1 2023, despite a slight decline of 2.69% over the last twelve months.
InvestingPro Tips further enrich the narrative, revealing that Gap has not only raised its dividend for three consecutive years but has maintained dividend payments for an impressive 49 consecutive years. Additionally, analysts have shown confidence in the company's near-term earnings potential, with 11 analysts having revised their earnings upwards for the upcoming period. Furthermore, Gap's stock price has experienced a significant uptick of 25.46% over the last six months, underscoring the potential for investment growth.
For investors seeking additional insights, InvestingPro offers more tips on Gap, which could help in making informed investment decisions. Use coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription, and gain access to a wealth of investment knowledge and tips, including those related to Gap's financial health and stock performance. With several analysts predicting profitability for the company this year and a profitable track record over the last twelve months, Gap appears poised for continued success.
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