Kanye’s Cool Factor Prompts RBC to Upgrade Gap

Kanye’s cool factor and fixed cost reduction efforts make shares attractive at current levels, according to RBC analyst Kate Fitzsimons. The firm upgraded shares of Gap to OUTPERFORM from SECTOR PERFORM, with a price target of $18 (up from $13). 

• “With secular tailwinds at Old Navy and Athleta's backs post-COVID, we see potential for value unlock at the Gap brand, aided by multiple catalysts including a fall 2020 analyst day, the 1H21 Yeezy Gap launch, and productivity stabilization and fixed cost reduction efforts on a smaller fleet to come."

Yeezy Gap: The Gap’s collaboration with Kanye West can help the retailer appeal to younger consumers, something it hasn’t been able to do for years. RBC says the 1H21 launch of Yeezy Gap is a potential traffic driver to the Gap brand, and points to Kanye’s estimated $1.3 billion success with Adidas. Despite the potential, it won’t be easy to spark a turnaround. 2019’s 7% comp. sales drop represented the 6th consecutive year in negative comps for the company, and the stock has lost nearly three quarters of its value over the past five years. 

Leaning on Old Navy: For now, Gap will rely on Old Navy for stability. The brand accounted for over 85% of profits in 2019 vs. 49% of sales, according to RBC. Fitzsimons says Old Navy and Athleta are likely to be secular winners post COVID-19.