With its stock price sucking wind, a break-up of Gap (GPS) may be back on the table should an activist investor look to get involved, says one top Wall Street analyst.
"We point out that we believe there could be activist interest to split the brands and monetize the value of Athleta in particular," said Barclays retail analyst Adrienne Yih in a research note on Friday.
Yih downgraded her rating on Gap to Under-perform from Equal-weight and issued a $13 price target.
Gap shares fell 3.5% to $13.52 in Friday's session.
"Our rating is based on: 1) negative sales to inventory spread and increasing weeks of supply safety stock, 2) increasing promotional activity at Gap and Old Navy, 3) lack of significant brand loyalty at Gap and Old Navy given the value-oriented pricing, and 4) increasing need for advertising spend to reinvigorate Gap," Yih said.
The analyst added a potential activist situation could be a risk to her Under-weight rating.
To be sure, an activist investor trying to shake up Gap is definitely not far-fetched for several reasons.
For one, the company has done all the homework on a breakup of its portfolio of brands consisting of Gap, Old Navy, Banana Republic and Athleta.
Back in February 2019, the company said it would look to split up into two public companies. Old Navy was to be be spun off into its own public company, putting it in competition for investor love with better run value clothing retailers such as TJX Companies and Ross Stores.
Meanwhile, the remaining businesses were dubbed NewCo — Gap, Intermix, Athleta, Banana Republic. They were to live as its own separate entity.
The plans were scrapped by January 2020 in favor of a leadership overhaul designed to rejuvenate the company.
So, in that regard the company has gone through the motions of splitting up for the good of shareholders.
Secondarily, the company's performance since deciding to stay together has been mixed at best.
By March 2020, Old Navy savior Sonia Syngal was installed as CEO of Gap Inc.
The company has moved to shutter hundreds of stores to clash costs. It has also signed music icon Kanye West to pricey clothing line deal.
Despite some early progress in the turnaround, the COVID-19 pandemic has wreaked havoc on Gap's operations. The company issued a massively ugly quarter back in November 2021 that hammered the stock.
By early March, the company was back reporting respective fourth quarter sales declines of 13% and 11% at Gap and Banana Republic versus 2019.
So there is all of that.
And lastly, pure and simple Gap's stock price has been a terrible performer.
Shares of the retailer are down 52% in the past year compared to a 13% gain for the S&P 500. During that same span, shares of Abercrombie & Fitch are only down 6% and Macy's is up 49%.
Even with all of those factors in play, a prominent activist investor tells Yahoo Finance a campaign against Gap would be difficult.
More than 15% of Gap's outstanding shares are owned by the company's founding Fisher family, per Bloomberg data. Three Fisher members sit on Gap's board of directors. Gap co-founder Doris Fisher is an honorary lifetime director.
The structure makes it very hard to push through an activist agenda such as breaking the company up or adding new board members, the activist said.
Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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