Dive Brief:

• After downgrading Gap Inc. in January, Morgan Stanley analysts led by Kimberly Greenberger last week upgraded the retailer, saying its "recent misexecution & potentially overly optimistic 2022 … guidance" and their own bearish view are baked into the stock price.

• That followed Barclays analysts' speculation that the company could be targeted by activist investors, who might agitate for a spinoff of its rapidly growing Athleta brand, as reported by Women's Wear Daily.

• Wells Fargo analysts led by Ike Boruchow then said that such a separation would be more achievable than Gap's failed Old Navy spinoff because Athleta "is very healthy, was an acquired asset and its supply chain has less overlap with the knit-heavy [Gap] portfolio."

Dive Insight:

Analysts tracking Gap Inc. seem to think that things there are as bad as they can get.

That may be good news for the stock, but the company's leadership is on notice. That crew — installed in 2020 just before the pandemic became so destructive — was in focus in Morgan Stanley's vote of no confidence earlier this year.

For their part, in research published April 13, Wells Fargo analysts noted the operational experience of CFO Katrina O'Connell and CEO Sonia Syngal, which they gained during their tenures "within the company, providing them with a deep understanding of internal operations and where investments can provide the best returns — which in our view will inform their strategic decisions at the helm."

"They are clearly pursuing a culture of accountability and continuous improvement at [Gap Inc.] focusing on not only cutting SG&A, but also more importantly, determining where and how to reinvest the savings for long-term growth," Boruchow wrote.

But Greenberger's team remains concerned. In their April 14 note, Morgan Stanley analysts praised the new Gap Inc. commitment to downsizing its fleet and corporate workforce, "but are less confident in their ability to execute" after the company's poor performance in the third quarter last year. Going forward, the company's gross margin gains could reverse, and it's unclear that planned marketing could reignite sales, Greenberger said.

"Our fundamental concerns remain," she also said, citing problems including falling store traffic, declining brand health, apparel price deflation, falling margins, and the weakness at Gap and Banana Republic.