The Gap (NYSE: GPS) Gets Upgraded and Makes Its Case as a Buy

For anyone who thought that mall-facing retail was a dead story, it's just not so. It may be under fire from pretty much every other retail sector out there from online retail to stand-alone brick-and-mortar retail, but there is no doubt mall-facing retail is going to rage against the dying of its own light. For proof, look nowhere else than the Gap (NYSE: GPS), which is making its most powerful case yet as a stock to add to your portfolio.

The Comeback Trail Looks Brighter

It was just about three weeks ago when we first noted that the Gap had some serious comeback potential, even if it was carrying a lot of risk along for the ride. We pointed out the hits it had taken from the coronavirus, and noted that the company was already building a rally that took it off its post-coronavirus lows.

We even noted that the Gap was planning to leave its dividend in place, a bold statement about the company's expected future prospects; if the company thought it might have trouble keeping the lights on in the near-term, it probably wasn't going to commit to writing some big checks to investors.

The resulting comeback has started in earnest; the company gained nearly $2 on its share price—about 20 percent of its value at the time—just going from June 25 to June 26. It's made gains since but lost some gains too, as the stock slumped to yesterday's close of $11.15.

And the Comeback Doesn't Stop Here

The Gap's struggles haven't been lost on observers. The analyst sector recently weighed in with a big plus in the Gap's favor, as RBC Capital Markets stepped up its rating on the Gap to “outperform,” an upgrade from “sector perform.” Kate Fitzsimons, an analyst with the organization, noted that the Gap has “multiple catalysts” behind future growth.

Fitzsimons noted several of these catalysts in related commentary, noting that brands like Old Navy and Athleta had been taking it on the chin post-coronavirus, and that gave the Gap some potential room to run. Throw in the recent announcement of a connection to Kanye West's Yeezy Gap lineup to hit stores in the first half of 2021, an upcoming analyst day in the fall, and ongoing efforts to trim costs, and the Gap is obviously fighting hard for recovery and to both keep and draw customers.

It's the Yeezy Gap connection alone that could really build the Gap's fortunes, Fitzsimons noted. Over the next few years, Yeezy Gap may represent as much as $8 per share extra, though that's strictly a “blue sky” scenario. The more likely boost is between $2 and $5, which aren't to be sneezed at either. RBC now holds a price target of $18 on the Gap, which is nearly a 50 percent premium over current share prices. 

Not Going Down Without a Fight

The Gap is not putting all its eggs in the stylish Yeezy basket. It's actively making moves on several fronts that make it a compelling option going forward. One of the biggest is that it announced that it plans to pay vendors and suppliers for orders it canceled back in spring. Not surprisingly, it was one of the first to make it clear it couldn't take orders since its stores had been closed by government orders. With stores re-opening, it needs to cement relationships with suppliers, and this should go a long way toward doing that. It's also introduced its own line of branded facemasks recently, which are likely to be necessary fashion accessories for some time to come, and recently stepped up its sales with a new checkout code offering an extra 40% off sale styles.

It's not all good news at the Gap; it's actually the sole tenant at a retail condominium space in Lower Manhattan that's facing some real trouble. It's not only refused to pay rent therein but is actually demanding a refund from the current owner; it wants a prorated share of what it spent for March back. That might make for a store closing altogether, though in Manhattan, itself troubled, the impact may not be that great.

Still, one thing is clear. Though there are problems at the Gap, and problems for retail in general—the ongoing uncertainty of the coronavirus coupled with the shockwaves it's sending through the economy as a whole are just the start of the problem—the Gap will not go down without a fight. Some of its biggest moves may take some time to realize—the Yeezy bump won't hit for six months at least—but they're waiting in the wings. In the meantime, more prosaic measures like cost-cutting and improving promotional sales certainly can't hurt and make this a surprisingly attractive play in an entire sector some might have written off.