There are a number of “red flags” at The Gap Inc. these days.
“Some factors include the company’s ability to hit fashion trends, pricing power improving gross margin performance, a better macro environment driving greater than expected sales growth, and the company increasing its dividend and share repurchase program,” read a J.P. Morgan note that was released to investors Thursday morning.
The note lowered The Gap’s rating to “underweight” and set a new price target of $24 for December 2019, down from the previous $30. The stock immediately fell after the market opened. The bank also lowered its fiscal year 2019 earnings-per-share to $2.38. That’s 12 percent lower than the Street consensus at $2.70 a share.
“Gap’s inability to demonstrate [same-store sales] improvement raises forward concerns if macro tailwinds moderate in 2019,” J.P. Morgan analyst Matthew Boss wrote in the note. Same-store sales declined 250 basis points in fiscal year 2018, compared with 2017, despite the current robust economy.
The likelihood of improved same-store sales, the note pointed out, and the company’s “return to momentum,” which was last seen in the second half of 2017, is “now less certain in our view as the brand grapples with operational issues,” such as unseasonably warm weather in some regions.
And that’s not all. Other headwinds include continued tariff tensions, excessive promotions to maintain inventory, rising transportation costs and the retailer’s low employment wage. The Gap has not raised its hourly minimum wage, currently at $10 an hour, since 2015, potentially making it harder for the retailer to secure temporary help through the holidays. Competitors Walmart, Target and Amazon all pay between $11 and $15 an hour.
The Gap’s stock closed 5.79 percent down at $25.56 a share. But it was a generally negative day for the market with all three major indices closing in the red. The Dow Jones Industrial Average dropped 327.23 points down, or 1.27 percent, closing at 25,379.45.
One “bright spot in the growing pie,” however, is Old Navy.
“We view Old Navy as best of breed,” the note read.