Gap Inc (NYSE:GPS) is in the early innings of a turnaround under its new CEO Richard Dickson, analysts at Jefferies believe.
“With Mr. Dickson’s first full quarter under his belt, we believe Gap is on the right to drive continued improvements ahead,” they wrote in a note to clients following Gap’s estimate-beating third quarter earnings.
“We believe Mr. Dickson's prior experience in reinvigorating brands including Barbie, Hot Wheels, and Fisher-Price provides Gap with a head start in both formulating and implementing its playbook to drive improvements across the business. Therefore, we expect investors to increasingly focus on Mr. Dickson's approach to improving brand relevance and the company's overall product offering.”
The analysts forecast that in the long-term a mix shift toward Old Navy and Athleta should improve the company’s margin structure.
They noted the momentum within women's, kids and baby at Old Navy during the back-to-school season, while Athleta and Banana Republic weighed on the company’s performance.
“However, we think there are still risks around Old Navy maintaining its historical growth and margin rates, especially with growing competition,” they wrote.
“We believe slowing trends at Old Navy, which drives about 60% of revenue and even more of profit, will be a key focus among investors near term.”
They added that they remain cautious about the stock given how early Gap is in its turnaround, reiterating their ‘Hold’ rating and upping its price target from US$12 to US$14.
Gap shares had added 30.4% at US$17.83 late morning on Friday.
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