Gap, Inc. risk/reward 'favorable into 2Q EPS' - Citi

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Gap, Inc. risk/reward 'favorable into 2Q EPS' - Citi
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Citi analysts opened a 30-day positive catalyst watch on Neutral rated Gap Inc (NYSE: GPS ) in a note Friday.

The analysts told investors that they are opening the positive watch given the negative sentiment surrounding the stock. They also expect it to beat second-quarter earnings estimates.

"We expect 2Q EPS beat vs cons (AMC [after market close] 8/24) driven by stronger GM (+290bps vs cons +180bps), though we expect sales below cons (-8% vs cons -7%)," the analysts explained.

"We anticipate a sequential slowdown at ON [Old Navy] (-7% vs 1Q -1%), however we believe the market is bracing for an even weaker ON comp (-LDD)," they added. "We believe upside to 2Q GM will come from lower markdowns given inventory is in much better shape."

In addition, they stated the firm believes incoming CEO Richard Dickson will be given the benefit of the doubt to improve profitability.

"With shares trading at an F23E EV/EBITDA multiple of 4.0x and sentiment seemingly very negative, we believe the risk/reward is favorable into 2Q EPS," the analysts concluded.

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