Gap: Extreme Makeover


Gap: Extreme Makeover

Plans to revamp the world's largest specialty clothing retailer could mean the company is heading for a recovery.

After suffering lagging sales over the past year and a half, the world's largest specialty clothing retailer could be headed for recovery. Upgrading the stock to a buy this week, Bank of America analyst Dana Cohen says Gap (symbol GPS) looks "compelling" and outlined several scenarios for improvement in the next two years.

Cohen cautions that a short-term turnaround is unlikely. "Admittedly, one may need to be patient here, and time may be the biggest risk," Cohen says in a report. Given that the stock, at $18, is currently trading at 11 to 12 times analysts' 2006 earnings estimates, she says, "there is little in the way of expectations near-term."

The San Francisco retailer, which operates about 3,000 stores under the brand names Gap, Old Navy, Banana Republic, and Forth & Towne, has seen sales languish in recent quarters. The holiday season didn't boost optimism: Sales in stores open at least one year fell 9% in December. However, the company rolled out plans in January for a sweeping makeover to revamp store displays, increase customer service in fitting rooms and design clothes faster to keep up with shifting consumer tastes.

Cohen sees three possibilities for improvement. One leads to a turnaround via Gap's current initiatives. Another involves management changes in the company's senior divisions. If neither of those scenarios play out, Cohen says, a dramatic shakeout could occur at the senior management level.

Cohen's 12-month price target on the stock is $23.

--Katy Marquardt