Mizuho Securities: Gap's Q4 Guidance 'Reflects Continued Woes'

Following The Gap Inc.'s GPS third-quarter results issued on Thursday, Betty Chen of Mizuho Securities maintained a Buy rating on shares with a price target lowered to $45 from a previous $47.

“Although we are encouraged by the team's ability to skew the assortment toward select better performing categories including kids/baby, active and outerwear, we note The Gap continues to make adjustments to the merchandise, likely more visible in fiscal 2015,” Chen wrote in a note to clients on Thursday following the quarterly results.

The analyst adds that guidance currently embeds a continuation of soft comp trends, especially at The Gap brand.

However, Chen does note that management's fourth-quarter guidance represents a “sufficiently low bar” given last year's nearly 220 basis points merchandise margin decline. The company also benefits from entering the quarter with a cleaner inventory which declined 2 percent per store at the end of the third quarter.

Long-term, international expansion and omni-channel opportunities remain meaningful growth opportunities, according to Chen. The analyst notes that the company continues its expansion efforts in Europe, Asia and Latin America while entering the Indian market in 2015.

Domestically, The Gap continues to push towards a “seamless inventory” with an Order in Store capability at 1,000 Gap, Old Navy, Banana Republic and Athleta locations. Additionally, the company continues to learn from a two-day shipping pilot that could improve customer experience and reduce shipping costs in the near-term.