Gap Inc. stock, which has been on the decline for the past several months, took another swing on Thursday.
The stock dropped 4 points in pre-market trading after Barclays lowered its rating to “equal weight” from “overweight” and closed Thursday at $17.11, down 3.2 percent, or $0.5,7 from Wednesday’s closing of $17.68. The stock has ranged from a high of $37.63 to a low of $15.45 in the past 52 weeks.
Barclays analyst Adrienne Yih cited deeper promotions at Gap Inc.’s Old Navy, Gap and Athleta brands and the corporation’s exposure to households with incomes under $75,000, which would be most affected by the U.S.’ high inflation rate. Barclays also noted that Gap Inc. this year won’t have the benefit of last year’s government stimulus checks, a headwind facing all retailers.
“We are following our data that is suggestive of a more challenging demand backdrop for Old Navy and Gap, in particular, exiting the holiday season,” Barclays indicated in its report. “During January, our promotional checks showed Old Navy and Gap are running some of the absolute deepest promotions amongst retailers for this time of year. Coupling the potential for slowing demand (as suggested by deepening promotions) with inbound increases in inventory levels through second-quarter 2022, we see increasing risk for future merchandise margin erosion. As such, despite the pullback in both the sector and GPS shares, we believe there could be margin and EPS risk to the holiday quarter and 2022 guidance.”
Banana Republic on Thursday advertised an extra 50 percent off sale styles, while Gap had an extra 40 percent off women’s sale styles and 30 percent off select styles.
Barclays lowered its 2021 fourth-quarter stock price target for Gap to $15, from last year being targeted at $28.
Gap Inc. stock and the company’s image have been impacted by several factors. Seasons of changes in management and products have been unsuccessful at putting Gap and Banana Republic back on a stronger footing or reversing market share losses, though the company continues to generate strong cash flow and its biggest-volume brand, Old Navy, has generally performed well, while Athleta has been growing rapidly.
There have been supply change issues as well.
“While we entered the third quarter with growing momentum, acute supply chain headwinds affected our ability to fully meet strong customer demand. Still, we made an intentional investment in building enduring customer loyalty with accelerated use of air freight to serve them this holiday, choosing long-term growth opportunity over near-term impact to profitability,” said Sonia Syngal, Gap Inc.’s chief executive officer, when the company last November reported its third-quarter performance. Headwinds have involved COVID-19-related factory closures and continued port congestion.
“Current pressures have not distracted us from what matters: growing our billion-dollar brands, delighting our over 64 million customers with product and experiences that drive lifetime value and restructuring and digitizing our business with an eye on creating a better future, faster,” Syngal said.
For the third quarter of 2021, the company posted a diluted loss per share of $0.40. Excluding fees associated with restructuring the company’s long-term debt and net charges related to strategic changes in its European operating model, adjusted diluted earnings per share were $0.27.
Third-quarter net sales of $3.9 billion were down 1 percent compared to 2019 with supply chain disruption driving an estimated 8 percentage point negative impact due to constrained inventory. Comparable sales were up 5 percent versus 2019.
Going forward, Gap could report 2021 fourth-quarter earnings of -$0.12 per share, which would represent a year-over-year decline of 142.86 percent, according to the Zacks Consensus Estimate. Zacks estimates Gap Inc. generating sales of $4.53 billion for the fourth quarter of 2021, up 2.46 percent from the year-ago period. Gap Inc. has not yet revealed when it will report its fourth quarter.
The Barclays downgrade of Gap follows last month’s by Morgan Stanley to “underweight” from “equal-weight.” Morgan Stanley said the Gap’s estimates on margins “have not properly factored in how higher promotions, increased shipping expenses through higher e-commerce penetration and ongoing air freight headwinds may offset GPS’ rent, occupancy, and depreciation leverage from store closures.”
Morgan Stanley analyst Kimberly Greenberger wrote: “The magnitude of GPS’s third-quarter 2021 earnings miss and full-year guidance cut reflected mis-execution and suggested communication shortfalls in the organization. This left us less confident in the new management team and Gap’s ability to achieve its 2023 financial targets.”
As reported last week, Gap Inc. is being removed from the S&P 500 and shifting to the S&P MidCap 400, reflecting the declining market capitalization. “The Gap is more representative of the mid-cap market space,” S&P said of the decision.
Some industry reports have suggested that the market is eager for Gap to show more traction and merchandise depth with its Yeezy Gap program with Kanye West, to attract greater business with younger generations who may not have shopped Gap before. So far, there have been two single-product drops that have garnered much buzz. Even more buzz was generated last week with the announcement that Balenciaga would collaborate with Yeezy Gap. Those products are expected to be sold beginning in June.
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Gap brand seems to moving to more of a wholesale model with less dependence on stores. Last year, the company closed its 81 Gap stores and outlets in the U.K. and the Republic of Ireland, while continuing with the e-commerce in Europe, and said it was talking with third parties to license out and no longer own its units in France and Italy. The U.S. retailer and OVS signed a deal in November for the latter to own and operate Gap’s stores in Italy.