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The Ratings Game: Gap will get a near-term boost from back-to-school, tax credits and Kanye, says Credit Suisse

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Gap Inc. has a lot to look forward to in the next few months, including the coming back-to-school season, tax credits and the launch of a Kanye West collaboration, according to Credit Suisse.

Analysts led by Michael Binetti upgraded Gap
GPS,
-2.86%

stock to neutral from underperform and lifted their price target to $34 from $23 because of the “lack of near-term negative catalysts.”

The upgrade comes less than two weeks before Gap is scheduled to report result for the fiscal first-quarter, which ended in April.

“We remain bullish on U.S. apparel category sales through back-to-school and holiday 2021,” Credit Suisse said. “Gap over-indexes to the categories that we think could outperform in C2H (back-to-school categories like kids, denim).”

And the Yeezy collaboration with Kanye West, the Grammy-winning musician, fashion designer and businessman, is expected during the first-half of this year.

See: Yeezy Gap collection is coming in the first half of 2021

“While we remain cautious on the long-term outlook for the Gap brand, the upcoming launch of Yeezy apparel will be a near-term positive for the chain,” the note said.

Gap has been streamlining and executing a turnaround strategy during the pandemic, including recent sales of the luxury Intermix chain and the kids brand Janie and Jack.

The company is choosing to focus on its core brands, which include the namesake, Banana Republic, the growing Athleta brand, and Old Navy.

“The biggest change to our thesis is our view that Old Navy’s strong value position and high exposure to kids apparel categories will likely make that chain an outsized winner as the U.S. government starts to circulate assistance through child tax credits in July,” Credit Suisse said.

“Kids/baby is ~29% of Gap’s revenue, Old Navy is above that.”

Also: American families will finally get their Child Tax Credit money — here’s when the first payment will arrive

And: Department-store shares soar after clothing sales jump more than 700% from April 2020

The apparel category is getting a bump from stimulus spending and the vaccine rollout, which is helping to revive parties, restaurant dining and other events.

“The reopening-driven spending surge and U.S. fiscal stimulus are helping Gap generate better growth than we previously expected,” wrote UBS analysts in a note published Monday.

UBS rates Gap stock neutral and raised its price target to $38 from $28. Gap is scheduled to report its first-quarter financial results on May 27.

“[W]e think softline companies have to deliver very large beat and raises to drive their stocks higher and we lack conviction Gap’s beat and raise will qualify as ‘very large,” UBS said.

Macy’s is expected to report quarterly results on May 27, after the closing bell. The FactSet consensus is for a loss of 6 cents per share and sales of $3.41 billion.

“The reason we rate Gap neutral is we lack conviction Gap has enough self-help
drivers to lap stimulus next year and drive earnings-per-share growth in a way which justifies the market’s current 18.5x P/E.”

Gap stock fell 2.9% in Tuesday trading, but has rallied 74.7% for the year to date.

The SPDR S&P Retail ETF
XRT,
-0.21%

is up 46.4% for 2021 so far, and the benchmark S&P 500 index
SPX,
-0.31%

has gained 10.5% for the period.

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