Citi estimates Athleta is worth $3.6B on a standalone basis or in a sale
Shares of Gap Inc (GPS) jumped on Tuesday morning after the stock was upgraded to Buy at Citi. The upgrade follows positive commentary from Gordon Haskett on Monday that also focused on the value of the company's Athleta brand.
CITI SEES 'BIG UPSIDE POTENTIAL': Citi analyst Paul Lejuez upgraded Gap to Buy from Neutral and doubled his price target to $24, up from $12. The company ended its planned to spin off Old Navy, which could imply its board is willing to take on corporate actions to unlock shareholder value, Lejuez told investors in a research note. With the "favorable positioning" of athletic/casual retailers in a post-Covid world, Lejuez said Gap's Athleta brand "stands out as having value that may not be getting recognized by the market." At the midpoint of his valuation estimates, Lejuez estimated Athleta is worth $3.6B on a standalone basis or in a sale, considering his view that Old Navy is worth roughly $8.5B. With Gap's current enterprise value at just $6.5B, a sum-of-the-parts analysis implies "big upside," added the analyst.
ATHLETA COULD GET ATTENTION FROM LULULEMON'S RISE: Gordon Haskett analysts said in a note published before the open titled in part "Time for Gap to get itself some Lulu Fairy Dust" that the sustained strength in shares of Lululemon (LULU) could bring attention to "opportunities for those around it," such as Gap's Athleta brand, which the firm called "a poor man's" Lululemon.
While "obviously nobody is going to make the case Athleta is worth one-quarter" of Lululemon's valuation, or $12.5B, the firm said it "doesn't require much imagination" to come up with "a big number" such as possibly $5B in valuation potential for Athleta. The firm, which also noted that "investors have taken notice" that "a jet traceable to VF [Corp.] has been seen making trips to Oakland this summer and a Challenger 604 jet owned by GPS made a trip to Denver on Friday," said it does not think all of Gap is for sale but also told investors to "keep in mind" that they have "always thought Athleta would be high" on the shopping list of VF Corp. (VFC).
The firm said it would not be surprised if Gap's upcoming earnings call provides hints on Athleta's future.
WHAT'S NOTABLE: In July, RBC Capital analyst Kate Fitzsimons upgraded Gap to Outperform from Sector Perform with a price target of $18, up from $13. The analyst cited "secular post-COVID tailwinds" at its more popular Old Navy and Athleta brands, the "value unlock" at Gap brand that includes the launch of Yeezy Gap, potential catalyst and brand metrics announcements under the new management at the Analyst Day in the fall, productivity stabilization, and cost reduction efforts on a "smaller fleet."
PRICE ACTION: In morning trading, Gap shares gained 4.3% to $16.18.