Analysts Mixed Over The Gap Following Q2 Results

The Gap GPS reported its second quarter results last Thursday after market close. The retailer earned $0.70 per share, a penny better than analysts expected; revenue of $3.98 billion came in $10 million higher than expected.

The Gap's total company wide comp sales were flat in the quarter compared to a five percent rise a year ago. The Gap brand saw a five percent decline in comps; Banana Republic's comps were flat, while Old Navy's comps rose four percent.

The Gap's operating margins improved to 14.2 percent from 13.5 percent a year ago, but the company said that it expects roughly flat margins for the full fiscal year.

The Gap announced that it plans to enter the Indian market through franchise-operated Gap brand stores in 2015 with an objective of operating approximately 40 stores throughout the company.

Guidance was issued and the company now sees its full year fiscal earnings per share being $2.95 to $3.00 versus a previous guidance of $2.90 to $2.95.

Canaccord: Long-term margin expansion intact

Laura Champine of Canaccord Genuity continues to favor The Gap as a long-term investment, despite potential near-term headwinds.

"Elevated promotional levels, particularly at the Gap brand are still squeezing margins," Champine wrote in a note to clients Thursday. "We continue to favor The Gap as a long-term play as we expect omni-channel and supply-chain initiatives will reduce the dependence on markdowns and promotions."

Champine sees the rollout of omni-channel initiatives like reserve in store further driving store traffic. Additionally, the company is testing on an order in store plan that will expand to 1,000 stores in October.

The analyst believes that gross margin expansion will return as soon as the fourth quarter. Looking forward, margins are projected to rise by an average of 27 basis points per year.

Shares are Buy rated with a $50 price target.

Jefferies: Solid quarter but shares to remain range bound

Randal Konik of Jefferies believes that The Gap reported "solid" results but that isn't reason enough to favor shares.

"We have been off The Gap bus for some time now and the stock has remained fairly flat as Old Navy powers ahead while The Gap division lags," Konik wrote in a note to clients on Friday. "We think an inflection in margins and top-line is likely a 2015 event and thus believe shares will continue to be range bound for the duration of the year."

In the near term, the analyst believes that elevated promotional activity at The Gap, foreign exchange headwinds and higher marketing spend will continue to be a drag on earnings.

Konik believes that the company is improving its merchandise, but a margin re-acceleration is unlikely to be seen before 2015. The analyst is waiting for better visibility around a positive inflection in comp growth.

The analyst does state that the company's story "gets more interesting to us in 2015" but as it stands now, the risk to reward profile in owning shares is balanced.

Shares are Hold rated with a $40 price target.

Barclays: Old Navy continues to impress

Matthew McClintock of Barclays continues to believe that shares of The Gap are a compelling buy led by "robust" performance at Old Navy.

According to McClintock, The Gap has an impressive partnership with talented designers and commercial merchants to drive the business. The company feels confident that its Creative Director Rebekka Bay has a solid partner in Head Merchant Michelle De Martini.

"Specifically, starting early next month, we note the company plans to introduce the first product put together by this merchant and design team duo," McClintock wrote in a note to clients on Friday. "In addition to an improved assortment, the company expects to launch a new fully integrated marketing and digital campaign to support the launch and strengthen brand positioning."

The analyst adds that September will bring an "inflection point" for The Gap brand. Furthermore, momentum will carry forward to an "exciting" fall season.

Shares are Overweight rated with a $53 price target.

FBR: Not convinced yet

Susan Anderson of FBR & Co believes that The Gap's gross margins will continue to be pressured and the company will face significant tailwinds in the bottom half of 2014.

"While we like The Gap's international growth, supply chain, and omni-channel focus, we remain on the sidelines until we see consistent same-store-sales and margin execution or a more attractive valuation," Anderson wrote in a note to clients on Friday.

While the second quarter was challenged, Anderson believes that the company could see opportunities for gross margin and revenue expansion to begin in the bottom half of 2014. The analyst sees a potential 2.5 percent to 3.7 percent revenue boost from The Gap's upcoming order in store initiatives. In addition to the order in store initiative, a leaner inventory and fabric platforming benefits and an improved product assortment will help boost gross margins.

While the analyst expects incremental improvements as soon as the third quarter, it may take time to regain customers. Additionally, the analyst believes that the shopping environment will remain highly promotional.

Shares are Market Perform rated with a $41 price target.]

The Gap opened Monday at $45.78, up less than one percent from Friday's close.