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Resurging Gap gains analysts' backing

Wall Street loves Gap Inc. Again.

The largest U.S. apparel chain has surged 37 percent to more than $26 a share this year and, on March 26, hit a 10-year closing high. Analysts are raising their price targets to levels -- $28 and higher -- not seen since one of the best-performing companies of the 1990s began to lose its footing in 2001.

The euphoria is being driven in part by February and March same-store sales that beat analysts' estimates and were the best back-to-back results since 2010. After shunning Gap for the likes of Hennes & Mauritz and Forever 21, U.S. consumers have been snapping up brightly colored denim at Gap's namesake stores and 1960s-inspired dresses from Banana Republic's "Mad Men" collection. Items from the chain's Diane von Furstenberg children's collection are popping up on eBay for about twice the original retail price.

Even analysts who earlier this year were less bullish on Gap have changed their tune. Two months of robust same-store sales will compel more people to "join in the positive chorus' on Gap, Dorothy Lakner, of Caris & Co. in New York, wrote in a April 5 note. For the first time since May, she has changed her recommendation to "above average," raising her price target to $32 from $27.

The big question is whether Gap's gains are sustainable, said Dave Weiner, an analyst at Deutsche Bank in New York.

"It's too early to say," Weiner said. "What the brand needs to do is prove it can sell product at full price. They are still a very promotional brand."

Gap's gains come as Americans continue to spend judiciously. U.S. same-store sales rose 3.9 percent last month, beating the estimate for a 3.3 percent gain, as many chains used discounts to woo shoppers. Though Gap sales climbed 8 percent, unseasonably warm weather and an early Easter may have prompted shoppers to stock up early on spring gear.

When Glenn Murphy, 50, became Gap's chief executive officer in 2007, he focused on international and online sales while shrinking or closing stores at home. Since 2007, sales in the U.S. and Canada have fallen 6.6 percent, and some investors began looking overseas for growth. In the past 12 months, Murphy has been re-emphasizing North America, which last year generated 85 percent of the company's $14.5 billion in revenue.

He has moved the creative operation to New York from hometown San Francisco, bringing together for the first time the design, marketing and production teams. He poached former Gap executive Tracy Gardner from J. Crew Group Inc. to advise on ways of making the women's clothes more appealing.

Improved customer response to the women's apparel "has translated to fewer promotions and markdowns," Gap spokeswoman Edie Kissko said in an email.

Murphy, who ran Canada's Shoppers Drug Mart Corp. chain before becoming CEO, has assembled and disassembled several creative teams at Gap. It seemed like he was throwing "spaghetti up against the wall until it sticks," according to Connor Browne, who oversees more than $3 billion as co-manager of the Thornburg Value Fund in Santa Fe, N.M. His firm owned 10.6 million Gap shares as of December.

"It would be great if the move of the design team to New York, bringing on the adviser from J. Crew, if all of that was finally hitting and they were designing product that resonates with customers," he said.