Gap stock reaffirmed at Buy by UBS on earnings growth outlook

UBS has reaffirmed its Buy rating on Gap, Inc. (NYSE:GAP) and kept its $42.00 price target despite the stock's challenging past performance. The investment firm anticipates accelerated earnings per share (EPS) growth for Gap in the near future, forecasting a 23% EPS growth for fiscal year 2027, compared to 12% growth in fiscal year 2026 and a decline of 3% in fiscal year 2025.

UBS identified two primary drivers for this projected improvement: Gap's expansion initiatives in beauty products and handbags, along with a promising rise in the company's sales growth rate. The firm projects Gap's price-to-earnings (P/E) ratio to increase from its current 9.4 to 13 times, suggesting that the stock trades at a significant discount to its growth potential, as indicated by InvestingPro data.

The company's ongoing stock buyback program was also highlighted, with the InvestingPro tip pointing out that management has been aggressively buying back shares. During a recent meeting with Gap's chief executive officer, chief financial officer, and investor relations team, UBS increased its confidence in its positive outlook on the stock.

In recent news, Gap Inc. reported second-quarter adjusted earnings of $0.52 per share, exceeding Wall Street's forecast of $0.49. The company's revenue matched expectations at $3.7 billion, although it experienced a 2% year-over-year decline. Gap has also raised its full-year outlook for earnings, operating margin, and gross margin, reflecting optimism about its financial performance.

UBS's optimism about Gap's future is supported by other analysts. Morgan Stanley raised its price target for Gap to $23, citing the company's better-than-expected second-quarter results and resilient margins. Wells Fargo also raised its price target to $23, acknowledging Old Navy's resilience and improved comparable sales trajectory. Overall, the recent developments indicate a cautiously optimistic sentiment among analysts regarding Gap's future performance.