Jefferies upgrades this retailer on emerging opportunity in beauty business

Jefferies upgraded Gap to a 'buy' rating from 'hold,' raising its price target to $30 from $22, citing "encouraging and sustainable" trends driven by brand revitalization and disciplined operations under CEO Richard Dickson. The upgrade is underpinned by Gap's expansion into the high-margin beauty segment, a turnaround at Athleta, and increased same-store sales at Gap and Old Navy, with the analyst projecting EPS of $3 by fiscal year 2028 and Q3 EPS above consensus. Shares rose 1% following the upgrade, ahead of Gap's Q3 results next week.

Analysis

Jefferies has upgraded Gap to a "buy" rating from "hold," raising its price target to $30 from $22, signaling a 24% upside potential. Analyst Corey Tarlowe highlights "encouraging and sustainable" trends, attributing improved brand revitalization and disciplined operations to structural changes implemented under CEO Richard Dickson. This reflects confidence in both near- and long-term top- and bottom-line growth.

Key growth catalysts include Gap's strategic expansion into the high-margin beauty segment, a market projected to reach $153 billion by 2029, which could generate hundreds of millions in incremental revenue and meaningful EBITDA upside. Further momentum is expected from a turnaround at Athleta under new leadership and increased same-store sales at Gap and Old Navy, driven by strong marketing campaigns.

Jefferies projects Gap's earnings per share to reach $3 by fiscal year 2028 and anticipates Q3 EPS of 62 cents, exceeding the Wall Street consensus of 58 cents. Following the upgrade, Gap's shares rose 1%, adding to a 3% year-to-date gain, indicating a positive initial market reception ahead of its Q3 results next week.

Key Decisions for Investors

• Investors should assess the implications of Jefferies' significant price target increase and "buy" rating, considering the detailed growth catalysts like the beauty segment expansion and Athleta's turnaround.
• Monitor Gap's upcoming Q3 earnings report closely for confirmation of the analyst's optimistic EPS forecast and further insights into the execution of strategic initiatives.
• Evaluate the long-term sustainability of operational improvements and the potential for the high-margin beauty segment to materially impact future revenue and EBITDA.