I always thought it odd that our small town had a Gap (GPS) store on its main street; it just didn't seem to fit with the old-town, mom-and-pop store environment. Our hardware store, for instance, has been around since 1869, so big retail seemed out of place.
A couple years ago, however, a new store, Athleta, took over for The Gap. Little did I know at the time that Athleta was actually a Gap brand. I was shocked the first time I went into that store with my wife, and I have not been back since -- pricey stuff, and I could not see it lasting.
That Athleta location is still there, and the brand itself made news on Tuesday when Citigroup cited Athleta as possessing value that the market is not recognizing. Citi believes the brand itself is worth $3.6 billion, a substantial number considering The Gap's current market cap is $6.4 billion and its enterprise value (EV) is $7.1 billion (I do not include operating lease liabilities in the EV calculation).
A positive view of Athleta was just part of Citi's rationale for upgrading GPS from neutral to buy. That upgrade pushed GPS shares up 10% on Tuesday, nearly back to pre-Covid levels. That's a fairly remarkable move for the stock, which suspended its dividend in March.
Citi put a $24 price target on GPS, which is a member of this year's Tax-Loss Selling Recovery Portfolio that is finally in positive territory since that portfolio's inception. Citi is bucking the trend with its rating on Gap, which has few buy ratings among the two dozen analysts who cover the name.
One thing that those covering Gap do agree on is that the company will lose money for the full year, with consensus estimates for a loss of $2.40 a share. The group forecasts brighter times ahead, with consensus earnings estimates the following year of around $1.00-plus a share but with a fairly wide range of estimates, from a loss of 5 cents to earnings of $1.58.
GPS is expected to report second-quarter earnings on Wednesday after the market close. Consensus estimates are calling for a loss of 40 cents a share on revenue of $2.92 billion. I'll be looking for when the company plans on resuming its dividend simply as an indication of renewed confidence or the lack thereof. Originally, the company deferred its first-quarter dividend into next year, then suspended the dividend as well as buybacks for 2020.
