TD Cowen adds Gap to 'Best Smidcap Ideas' list on brand momentum

TD Cowen added Gap Inc. to its “Best Smidcap Ideas” list, citing ongoing strength at Gap and Old Navy, and potential turnarounds at Banana Republic and Athleta. Analysts believe the market undervalues Gap's brand durability and margin expansion, noting the stock's recent pullback offers an attractive entry point, trading at roughly 9x earnings versus a 3-year average of 13x. While tariff pressures and potential brand weakness pose risks, TD Cowen projects low-single-digit revenue growth and margin improvement, setting a $29 price target based on a reverse DCF analysis.

Analysis

TD Cowen has designated Gap Inc. (NYSE:GAP) as a 'Best Smidcap Idea,' predicated on the sustained momentum observed in its core Gap and Old Navy brands and the anticipated recovery at Banana Republic and Athleta. The bank's analysts contend that the market currently undervalues Gap's enduring brand strength and potential for margin expansion, particularly noting that a recent 25% decline in share price post-first-quarter earnings presents an attractive entry opportunity. Despite elevated expectations leading into Q1, underlying fundamentals remain robust, with second-quarter same-store sales growth guidance aligning with Q1 performance. Gap's valuation appears compelling, trading at approximately 9 times earnings compared to its three-year average of around 13 times; a reverse discounted cash flow analysis suggests the market is pricing in no earnings or revenue growth through 2035. In contrast, TD Cowen projects low-single-digit annual revenue growth and modest margin improvement, forecasting 2025 earnings per share of $2.23, slightly above the consensus $2.20, and establishing a $29 price target. However, potential risks include a deterioration in sales at Gap and Old Navy or persistent weakness at Banana Republic and Athleta, alongside tariff pressures, which Gap quantifies as a potential $100 million to $150 million impact based on assumed rates.

Key Decisions for Investors

• Investors could consider the recent 25% share price pullback and current valuation of approximately 9 times earnings as a potentially attractive entry point, given TD Cowen's positive outlook and $29 price target.
• Monitor the performance consistency of Gap and Old Navy brands and look for tangible signs of turnaround at Banana Republic and Athleta, as these are critical drivers for achieving projected growth and margin expansion.
• Closely track developments regarding international trade tariffs, particularly concerning imports from China, and their quantified impact on Gap's margins, as well as broader consumer spending trends which could affect sales.