The upcoming year provides a rough backdrop for retail, according to Goldman Sachs. But Gap is a name the firm expects to do well. Analyst Brooke Roach upgraded the Banana Republic and Old Navy parent to buy from neutral. She also hiked her price target to $18 per share from $10, implying upside of 29.5% from Friday’s close. “While we acknowledge valuation is elevated for this business, we believe accelerating earnings growth (especially in 1H) will support share outperformance, particularly in a softer landing scenario,” she said in a note to clients. A “soft landing” is a term used to describe a situation in which inflation can be quelled while avoiding a recession. The stock gained 3.4% in premarket trading. It has lost 21.3% this year. Consumers are growing more choosy in retail spending amid inflation and concerns over a potential upcoming recession, Roach said. Wallet share is not expected to grow in 2023 as spending returns to pre-Covid levels. While resolving supply chain issues are helping ease inventory challenges, she said the retail sector will still be in a tough spot considering its comparisons for the first half of the year, worsening likelihood of closet restocking, limited pricing and continued uncertainty related to foreign exchange. Roach said 2022 was a bad year for Gap because it was one of the first companies to feel pain from higher inventory, given the focus on plus-size products that did not pay off. That resulted in a need to clear excess inventories and weighed on brand momentum but she said the latter has started improving in recent months. In 2023, the company will feel tailwinds from resolved supply chain challenges and margin improvement as airfreight expenses relax. Gap should outperform for the year when it comes to margin delivery and see “idiosyncratic” per-share earnings growth, she said. Roach noted valuation has already improved in recent months, but said some changes in its financials that will drive up per-share earnings have yet to be fully reflected. Earnings per share will be closely watched next year as an indicator of a company’s financial health. Many companies have already pulled or rolled back estimates for the next year amid concerns the tightening economy will pressure performance. She said better execution from Gap will help investors see a long-term path for it to get back to where it had per-share earnings before Covid. But she said the expected outperformance could be hurt by weak sales momentum with Gap and Old Navy, inflation or if basics and casual apparel continue underperforming. — CNBC’s Michael Bloom contributed to this report.
