The fourth quarter holiday shopping season is the most critical time of year for U.S. retailers like Gap, Inc. (GPS). Unfortunately, another major Wall Street firm is throwing in the towel on GPS stock ahead of this year’s holiday season.
On Thursday, J.P. Morgan analyst Matthew Boss downgraded GPS stock from “neutral” to “underweight” and cut his price target for the stock from $30 to $24. According to Boss, Gap’s same-store sales are trending in the wrong direction, and transportation costs, rising wages and trade war tariffs are all pressuring Gap’s margins.
In addition, Boss says Gap is dealing with its own internal product issues as well.
“The time frame for Gap banner sequential SSS improvement and return to ‘momentum’ is now less certain in our view as the brand grapples with operational issues and second-half assortment imbalance (bottoms > tops), with the new brand president unlikely to have material impact until the first half of 2019,” he says.
Gap same-store sales are down 2.5 percent in fiscal 2018, and rising costs are making it even more difficult to grow profits. Gap’s current employee minimum wage is $10, but Boss says the recent announcement from Amazon.com, Inc (AMZN) that it is raising its minimum wage to $15 puts pressure on Gap to follow suit.
Finally, Boss says Gap is scrambling to adjust to the impact of Chinese trade war tariffs, but it is likely exposed in the near-term. He says “direct sourcing exposure to China stands at 22 percent,” and while Gap is “currently working with vendors to pivot sourcing strategies,” Boss says there will be “a costly multi-year timeline for change given size/scale and specialization.”
J.P. Morgan isn’t the only Wall Street firm skeptical of Gap’s ability to navigate the upcoming holiday season. Bank of America analyst Lorraine Hutchinson says Gap will likely miss consensus earnings expectations in the third and fourth quarters. Like Boss, Hutchinson says the tops-to-bottoms ratio for Gap is too low and the company carried over too many summer products into the third quarter to try to maximize its sell-through rate.
“We think this points to risk to comps and margins in 2H, but management is guiding for continued sequential improvement,” Hutchinson says. “This is the key reason why we think the guidance looks un-achievable.”
Bank of America has an “underperform” rating and $24 price target for GPS stock.
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