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Investors should get off the sidelines on Gap given the retailer’s potential for business improvement, according to Barclays. Analyst Adrienne Yih upgraded the retailer to overweight from equal weight. Her $13 price target implies shares could rally 26.2% from Monday’s close. “Our promotional checks suggest negative comps may occur at all four brands in 2Q23, but we note that promotions at both Gap and Old Navy appear to be ‘Flat’ to prior year,” Yih said in a note to clients Tuesday. “While this is not a sign of top-line recovery by any means, we do believe that severe curtailment of inventory should result in support to margins, along with improved freight.” Shares rose 4.1% before the bell Tuesday. But the stock has dropped nearly 8.7% since 2023 began, bucking the broader market’s ascent. Yih said the company could see margin upside with a shift to cleaner inventory levels and mitigated freight challenges. More specifically, she said the headwind from cotton and input cost inflation can turn into a tailwind in the second half of this year, while lean inventory can offset some impacts from ongoing promotions. And that follows a positive sales-to-inventory inflection in the first quarter of 2023, she noted. Despite the opportunity to recapture some of the margin, Yih noted the company can do more work to stabilize the business and make it more malleable to consumer demand signals. Through a cutback on redundancies and better use of marketing money, she said the company can get its brands — which include Banana Republic and Athleta, in addition to Old Navy and namesake Gap — back to their “healthy organic growth trajectories.” Yih also said she likes the new management tasked with getting the company to that place. She pointed specifically to incoming CEO Richard Dickson, who was previously COO of Mattel , as well as incoming Athleta CEO Chris Blakeslee, who was president of Alo Yoga. Between the new management and potential for margin capture, she said the company’s valuation multiple could be raised. — CNBC’s Michael Bloom contributed to this report.
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