Even though Gap’s (GPS) shares have already soared 31% so far this year, Citigroup (C) slapped a “buy” rating on the apparel maker on Wednesday amid new optimism about the company’s merchandise and valuation.
The upgrade by Citi from “neutral” and $8 boost to its price target helped drive Gap’s shares another 1% higher in premarket trading.
The bullish call comes a week after Gap's shares surged after the retailer revealed an 8% leap in April same-store sales and a bullish first-quarter EPS forecast that would top the Street’s views.
Based on Citi’s work with merchandise consultants and channel checks, “we believe important key items are working and it’s the first time we can remember that there aren’t major structural product weaknesses,” analyst Olivier Chen wrote in a note to clients on Wednesday.
In addition to the merchandise confidence, Chen cited Gap’s new global brand talent structure and the improving or at least stabilizing economy, which has “emerging wealth effect benefits.”
Chen also said Citi is optimistic that Gap’s comparable sales combined with “a new chapter in inventory control should drive positive earnings revisions and upward stock movement.”
Despite the 31% rally in 2013, Citi said Gap has more room to run, especially given the stock’s 13.5 price-to-earnings ratio, which is well below the sector’s PE ratio of 16.
Citi’s new price target of $48 is up from $40 previously and represents a potential advance of 17.4% from Gap’s close at $40.88 on Tuesday.
Boosted by the upgrade, shares of San Francisco-based Gap picked up another 1.27% to $41.40 in premarket trading Wednesday.