After getting hit with a string of downgrades this year from financial institutions, Gap Inc. finally got an upgrade — although it came with concerns and a cautious outlook.
Morgan Stanley & Co. on Monday upgraded Gap Inc. to “equal-weight” from “underweight” and said in its report that the retailer’s stock decline “implies the market appreciates our concerns: broader turnaround uncertainty against recent mis-execution and potentially overly optimistic 2022 EPS guidance,” which is for diluted EPS to be in the range of $1.95 to $2.15 for the year. “Our bearish thesis still stands, but appears priced in. We upgrade to equal-weight and maintain our $14 price target.”
The Morgan Stanley report also said Gap “is in need of significant transformation.” The Gap and Banana Republic brands have been struggling for several years.
“We like new management’s commitment to fleet and corporate downsizing, but are less confident in their ability to execute following [third quarter 2021’s] mis-execution. We worry about both the SG&A and gross margin trajectory post-2021. Gross margin gains are likely to reverse, and it is unclear if higher marketing spend will yield sales reacceleration.” The company’s multiyear program of closing Gap and Banana Republic stores in North America — 350 in total by January 2024 — was at the end of the fourth quarter 70 percent complete.
The report stated, “Our fundamental concerns remain: falling store traffic, e-comm disintermediation, declining brand health, apparel price deflation, falling margins. A portion of Gap’s portfolio is less competitive: Gap and Banana Republic.”
Gap Inc. also operates Old Navy, where the performance has recently slowed, and Athleta, which continues to be the star performer in the portfolio and on track to reach $2 billion in volume in 2023. There have been reports that shareholder activists are pressuring the Gap board to spin off Athleta to raise shareholder value. Some analysts believe Gap brands, if separated out, would yield more value to shareholders than Gap Inc. as it stands now.
Gap Inc. stock closed Monday on the NYSE at $14.29, up 18 cents or 1.28 percent. The stock is significantly down from its 52-week high of $37.63, and only modestly up from its low of $12.78.
In February, Bank of America and Barclays downgraded Gap Inc. Barclays downgraded the San Francisco-based retailer again earlier this month.
Gap Inc., impacted by supply chain issues, higher freight costs, charges from European closures and ongoing declines at the Gap and Banana Republic brands incurred a loss of $16 million, or $0.04 a share, in its fourth quarter but for the year, had a profit of $256 million, versus a loss of $665 million in 2021.