The Morgan Stanley upgrade follows a string of Gap Inc. downgrades by other financial institutions this year.
“We like new management’s commitment to fleet and corporate downsizing, but are less confident in their ability to execute following [third quarter 2021’s] mis-execution. We worry about both the SG&A and gross margin trajectory post-2021. Gross margin gains are likely to reverse, and it is unclear if higher marketing spend will yield sales reacceleration.
Gap Inc. also operates Old Navy, where the performance has recently slowed, and Athleta, which continues to be the star performer in the portfolio and on track to reach $2 billion in volume in 2023. There have been reports that shareholder activists are pressuring the Gap board to spin off Athleta to raise shareholder value. Some analysts believe Gap brands, if separated out, would yield more value to shareholders than Gap Inc. as it stands now.
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