One Wall Street analyst is advising clients to buy shares of The Gap (GPS) while the market remains spooked by the retailer's startling first-quarter results.
The apparel retailer reported an abysmal quarter on Thursday evening, headlined by a bearish 10% global drop in same-store sales and a miss on both the top and bottom lines.
CEO Arthur Peck blamed much of the shortfall on macro impacts that came to bear on results, noting that the separation of Old Navy and better weather conditions could result in better results in coming months.
Peck found little favor among investment firms, though, as only two lonely analysts retained "Buy" ratings on the stock as a wave of price cuts and downgrades rolled in after the earnings print.
However, Jefferies analyst Randy Konik is unique in not only his strong bull call, but his firm conviction that it is time to buy on the plunge.
"With shares down, we see a bottom forming, and we are unchanged in our view that Old Navy is a crown jewel worth more than the market cap of the enterprise today," he wrote in a note to clients on Thursday evening. "We are buyers of weakness."
For Konik, the trend toward the end of the quarter was overwhelmingly affected by external factors such as weather and retail sector sentiment that could shift in the back half of the year.
"A cold start to the quarter in Feb hurt results, but trends did get better throughout the quarter as the weather improved," he explained. "May has been hurt by unseasonable weather trends as well, but management has seen green shoots as the weather has turned."
Further, he sees the closure of over 100 stores in 2019 as a catalyst rather than a sign of caution for a decelerating retailer. Konik argued that the store closures should help the company improve margins and streamline the business moving forward.
"The market needs time to digest a tough Gap division, but Gap faces very easy sales and margin compares which is a good setup for calendar '19," he concluded. "At Old Navy, we think the split helps Old Navy obtain proper valuation, and results will get better as the weather turns."
The idea for the separation to promote positive valuations for the standalone brand has been one noted by Action Alerts PLUS portfolio manager Jim Cramer as well.
"If [Peck] can close the under-performers in Newco and get Old Navy as standalone, it almost reminds me of the days when Dayton Hudson became Target (TGT) and you got the fast growing off-price Target and the old fashioned department stores," Cramer commented when the separation plan was announced. "Then the department stores got sold and you were left with the fabulous Target."
To be sure, the execution of this plan will be pivotal and certainly won't come without significant challenges which are highlighted by a potentially shifting macro environment.
However, for more optimistic analysts like Konik, it could be a major upside catalyst waiting in the wings.
The Jefferies price target that remains at $40 per share for GPS, suggesting the stock more than doubles from its current level, is unquestionably unpopular and significantly above the Wall Street consensus of $24.47 per share.
Still, the shares are up about 5% from their opening low on Friday, suggesting there could be a segment of the market picking up on what Konik calls one of his "Franchise Picks" as it sputters to the week's close.