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Deutsche Bank Upgrades Gap, Removes ‘Sell’ Rating

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Deutsche Bank upgrades GPS after September sales

On Friday, October 7, 2016, Deutsche Bank upgraded Gap (GPS) from a “sell” to a “hold” after the company reported its September sales results. Analyst Paul Trussell commented in a note, “While questions around long-term door count & price competition from fast fashion peers will continue , the setup for GPS is more favorable near to medium term, in our view.”

While talking about the reasons for the upgrade, Trussell said, “With compares easing over the next few months, fit & fashion enhancements, & an improved apparel backdrop that includes cleaner inventories, strength in denim, & a more favorable weather outlook, we are upgrading shares of GPS to Hold from Sell. We believe the consumer’s appetite for apparel may be on the verge of increasing following a long cycle of big ticket purchases and while GPS still faces structural challenges, we give credit for increasing focus on door closures, cost cuts, & supply chain.”

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Analyst ratings and target price

Gap is covered by 32 Wall Street analysts who have collectively rated the company a 1.4 on a scale of 1 for “strong buy” and 5 for “sell.” In comparison, peers PVH (PVH), VF Corporation (VFC), and Hanesbrands (HBI) have been rated 2.2, 2.4, and 1.8, respectively.

Three of the 32 analysts have recommended a “buy” for GPS, 22 have recommended a “hold,” and seven have rated it a “sell.” The stock has been assigned an average target price of $24.48, indicating a downside of 7% over the next 12 months as of October 7, 2016. 

Gap is included in the portfolio holdings of the First Trust Large Cap Value AlphaDex ETF (FTA), which invests 1.1% of its holdings in the company

Valuations

Gap is currently trading at a one-year forward PE (price-to-earnings) multiple of 13.2x, operating closer to the higher end of its 52-week PE range of 8.4x–13.7x. However, the company is still cheaper than competitors PVH (PVH), VF Corporation (VFC), and Ralph Lauren (RL), which are trading at 16.2x, 16.5x, and 19.1x, respectively.

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