Gap's (GAP) Q3 earnings report provides further evidence management's turnaround strategies are delivering results, Morgan Stanley said in a note to clients Friday.

Key contributors include strong momentum in the Gap brand, Athleta's sales growth, Banana Republic's stability, Old Navy's rebound in sales, clean inventory levels, and the company's operating margin reaching its highest level in seven years, Morgan Stanley said.

Gap's revised Q4 guidance appears conservative, however, Morgan Stanley said, incorporating slower topline growth and lower earnings before interest and tax concentration. Morgan Stanley said it continues to see an upside to Gap's Q4 and full-year earnings per share guidance, "especially should management utilize the business' strong cash position to repurchase stock."

Morgan Stanley raised its price target on Gap's stock to $30 from $29 and reiterated its overweight rating.

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