Analysts: Gap’s heavy advertising may drive holiday sales but may also weigh on profitability

Ahead of the Bell: Gap turnaround may be bumpy

NEW YORK — Retailer Gap Inc. said its sales are improving after a tough few years, and a big advertising push this holiday season could boost sales — but analysts caution that a rebound may be bumpy given the rough retail environment.

Thursday, Gap said quarterly earnings climbed 25 percent as a key sales measures at its Old Navy stores rose 10 percent — the first gain in at least two years. Sales at Banana Republic also improved after a lackluster period. The results stoked hopes that Gap’s turnaround is taking hold.

“Gap’s marketing muscle will prove a strong competitive advantage in an environment where cost-cutting is shrinking marketing budgets,” wrote analyst Adrienne Tennant in a note to investors Friday. She rates the shares “Outperform.”

The company’s marketing campaign will include new TV ads for the Gap chain, the first since 2006. Still, the holiday season is going to be tough amid rising unemployment, and Gap’s extra spending on ads and planned discounts may weigh on profit margins, cautioned R.W. Baird analyst Erika Maschmeyer.

Gap has made a strong turnaround with its Old Navy chain, repositioning the discounter to cater to frugal moms and improving stores, and has an excellent balance sheet. But investors’ expectations for improvements in market share are already reflected in Gap’s share price, said BMO Capital Markets analyst John Morris, who rates the shares “Market Perform.”

Gap shares slipped 6 cents to $21.80 in Friday premarket trading.