Old Navy is coming to the rescue of its parent Gap

September 12, 2017, 11:22pm

Old Navy is coming to the rescue of the ailing brand known as the Gap.

Like every other retailer, Gap has struggled lately with increased online competition, changing consumer tastes, and stretched pocketbooks. But its Old Navy division was a bright spot when the company released earnings last month. And some think Old Navy could be form something of a foundation of a comeback for Gap.

On Tuesday, an analyst at Jefferies said he thinks shares of Gap Inc. could rise to around $39 a share, higher than his old target of $35. If the stock does go to $39, that would have been a tidy 56 percent gain from where the stock was trading Monday.

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The Jefferies analyst recommended clients buy the stock, based on his view that Old Navy’s value as a standalone company would be $12.7 billion based on its recent contributions to profit, versus the actual valuation of $10.8 billion that the stock market currently assigns to Gap as a whole. If that analysis is correct, it means that investors put a value of roughly zero dollars on the once mighty Gap brand.

It would also mean that Gap could make a some serious cash by selling Old Navy, or alternately, that Gap Inc. is undervalued because the value of the Old Navy business is being overshadowed by the sluggish performance of flagship Gap stores and other units such as Banana Republic.

The market liked the sound of that, and Gap’s shares leapt more than 6 percent following the Jefferies report issued early this morning. And it enjoyed the largest gain of any stock in the S&P 500 stock index.

Other details to watch:

– Jefferies’ analysts were able to calculate a value for Old Navy because Gap released performance data of its individual businesses for the first time as part of its regular quarterly report last month.

– Gap has said it expects to add a net of 70 new stores over the next few years, all dedicated to its fast-growing brands like Old Navy and Athleta. However, it is closing 200 stores including Gap stores and Banana Republics.

– Tuesday’s rally pushed Gap slightly ahead of rival Abercrombie & Fitch as an investment for the year to date. Gap is now up 21 percent, versus A&F’s 17 percent gain.