Gap stock isn't dead quite yet, analyst argues

Gap stock shouldn't be considered dead money just yet, one analyst contends.

That's despite Gap's ugly second-quarter earnings and operational failings overseen by an interim CEO who has served as a board member since 2002.

But there are slivers of hope for beleaguered Gap investors, according to a new note from Barclays retail analyst Adrienne Yih.

Here are the key details of Yih's contrarian call on Gap:

• Price Target: $9 (up from $6)

• Rating: Equal-Weight (upgrade from under-weight, or sell equivalent)

• Stock Price movement assumed: virtually none

• Gap's stock movement on Tuesday as of market close: +2% (the stock is down around 60% over the last five years)

Yih's call:

"While we do not see any immediate fix to the several issues plaguing Gap and acknowledge that fundamentals could get worse given weakening demand and cotton input costs on the rise, we do see the company taking significant measures to stabilize and improve the business," Yih wrote. "These include: 1) liquidating excess inventory, 2) aggressive cost reduction, and a very likely reduction in corporate overhead staff, where we estimate up to a 10% cut could be as much as $250 million to $300 million in gross annual savings, 3) the anniversary of significant usage of air over ocean, 4) the elimination of universal sizes in the Old Navy stores allowing for new, fresh inventory, as well as increased store productivity, and 5) the easing of aggressive promotional activity from the mass merchandisers Walmart and Target reducing exposure to non-staple categories, alleviating some of the pressure on lower-priced discretionary apparel."

Altogether, Yih added, these factors "lead us to believe that new downside catalysts are limited and any further negative catalysts that could appear on the horizon are risk factors investors should already be incorporating into their assessment of the company."

A man walks past a Gap store on Oxford Street in London, Britain, July 1, 2021. REUTERS/John Sibley (John Sibley / reuters)

The retail industry vibe:

Second-quarter earnings season has been brutal for retailers to say the least, headlined by lackluster reports and guidance from Best Buy, Kohl's, Big Lots, Abercrombie & Fitch, Nordstrom, and others.

Several risks confront the sector as investors turn their attention to the crucial holiday season.

First, inventory levels are absurdly too high given sales trends. Second, retailers are aggressively promoting products at the expense of profit margins. And third, the start of the key back-to-school shopping season has been mixed at best as inflation-weary shoppers pull back on certain spending categories.

From the Yahoo Finance archive: Walmart's CFO John Rainey in mid-August

“I'd say that what we're seeing is they [consumers] are still relatively healthy," Walmart CFO John David Rainey told Yahoo Finance. "We've seen some changes in consumer behavior that I put in three categories. One is there's a trade-down in both quality and quantity. So instead of buying deli meats, we're seeing things like canned tuna and chicken and even beans, as units were up over 25% in the quarter. They're buying smaller pack sizes to save money. We've seen an increase in the private brands growth effect, it's 2x for food what it was in the first quarter.”

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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