JP Morgan Sees Gap And Limited Earnings Driving Higher In 2010

A new research report from JP Morgan indicates that Gap Inc. (GPS) and Limited Brands (LTD), parent company of Victoria’s Secret, are poised to see profits increase this year and drive EPS growth.

For Gap Inc., a few key points include:

  • The Old Navy brand could begin to rebound this year, seeing over $1 billion in revenue or $0.20 to $0.25 in EPS contribution over the next 5 years. JPM is maintaining their 2010 EPS estimate of $1.76, above management’s guided range of $1.70 to $1.75. The estimate is driven by comps up 2%
  • (Old Navy +2%, Gap flat and Banana Republic +5%) with EBIT margins up 50bps to 13.3% (vs. 10.1% 5-year average).
  • Their Dec 2010 price target is being raised to $24 (from $23 previous) and is based on a 13.5x multiple on our FY10 EPS estimate, a discount to the group given the muted top-line expectations, relatively robust annualized operating margins (estimated at 13% for 2010 vs. its five year average of 10.1%), and lack of square footage growth.

And as for Limited Brands:

  • Shares are up nearly 30% since late January, currently trading at $23.36 a share.
  • Growth will be driven by the Victoria’s Secret and Canadian businesses La Senza and Bath & Body Works Canada.
  • JPM’s 2010 EPS estimate is being raised to $1.60 (from $1.48 prior) and now represents the high end of management’s guided range. They assume comps up 3% at VS, with segment margins up 190bps to 13.0% (vs. 13.9% 5-year average).
GPS Comps March 11th

Photo: JP Morgan

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