In a note to clients on Wednesday, Jefferies analyst Randal Konik advised investors to “aggressively” buy up Gap stock.
Konik highlighted that the company is addressing issues at the Gap brand with the announcement of store closures, and that the ongoing success of Old Navy — its sister brand that accounts for 75% of the group’s profit — and a recovery at Banana Republic should boost the company’s fortunes this year.
“We think Gap Inc will be one of the top S&P 500 stocks in 2019 so we would aggressively buy shares,” Konik wrote.
Konik’s sentiments are echoed by others. As of Friday afternoon, four other analysts were recommending buying Gap’s stock, according to the Bloomberg terminal.
However, 19 recommended holding the stock, and three said to sell it.
Retail expert Neil Saunders of GlobalData Retail strongly disagrees with the bullish view of Gap.
“I think the company is still a very mixed bag, and while Old Navy is performing well, and Banana Republic is gently recovering, the Gap brand is as broken as ever,” he wrote in a comment emailed to Business Insider on Friday.
In the most recent quarter, same-store sales for the Gap brand were down 7%, while its sister brands Old Navy and Banana Republic reported a 4% and 2% increase, respectively.
Group CEO Art Peck said in November that the company was disappointed with the results and admitted, “We need to do better.”
A Gap store in New York City in December. Business Insider/Jessica Tyler
While Gap is making strides to improve its business – Peck announced that the parent company would be closing hundreds of Gap stores in the near future – Saunders said this doesn’t address its main issue, that its product isn’t up to snuff.
“It is bland and uninspiring, and it is not conducive to driving volume,” he said.
Saunders added: “Constant discounting is a symptom of this as Gap’s products are not good enough to sell at full price. Only a complete revamp of the offer will solve the problems, but this does not seem to be on the cards.”
Gap has leaned on heavy discounting in order to clear its inventory in recent years; sale signs are a mainstay at its stores today.
In the most recent call with investors, Peck blamed excessive discounting on “operational missteps in the business,” which delayed the timing of new items and meant that Gap had to turn to discounts to clear unwanted clothing.
“My experience now has been, and this is universal, is if you have too much inventory or the wrong inventory, holding onto it does not make it better,” Peck said in May, in an apparent explanation for the heavy discounting.
Gap Inc. has increasingly leaned on its sister brands for growth, especially Old Navy, which has a cult following of price-conscious customers. Old Navy has seen positive same-store sales growth for the past six years but has set a high bar for itself in 2019, which will likely soften its performance, Saunders wrote.
Banana Republic may be on the road to recovery, but analysts say that it won’t be the brand to drive up Gap Inc.’s results.
“Gap, Inc. won’t soar on the basis of strong Banana Republic results,” Ray Hartjen, director of marketing for store analytics group RetailNext, told Retail Dive in August. “There’s just not that scale in the overall company portfolio. Gap rises and falls on the merits of Old Navy and its namesake brand.”
Equally, Athleta, the athletics brand that has become one of the most high-growth areas of Gap Inc.’s business, also contributes to a small part of the business overall.
“While the business has some bright spots, they are small spots of light in an otherwise overcast sky,” Saunders wrote.