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JP Morgan Downgrades Gap Shares Citing Expected Holiday Struggles

This year’s holiday season may not be as robust for Gap Inc., according to Wall Street predictions, with J.P. Morgan on Thursday downgrading the retailer, citing operational issues and inventory imbalances, among other expected challenges.

In a note to clients on Wednesday, J.P. Morgan chief analyst Matthew Boss downgraded Gap Inc. shares from neutral to underweight, anticipating a challenging holiday season for the retailer, as reported by CNBC.

Boss cut his December 2019 price target down to $24 from $30, citing a deceleration of same-store sales of 250 basis points in FY18 along with flaws in the inventory and operations side of the business.

“The time frame for Gap banner sequential SSS [same-store sales] 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,” Boss said.

Additionally, Boss, who made Gap Inc. a top retail pick in 2017 and suggested it exhibited “encouraging” signs of growth, has lowered J.P. Morgan’s estimate for its earnings-per-share in FY19 to $2.38, which CNBC said is 12 percent below the current industry consensus. Gap CMO Craig Brommers also asserted the “2017 turnaround” sentiment in recent remarks.

News of the downgrade came at the expense of Gap Inc.’s stock, which fell on Thursday to its lowest point in months. When the market closed, its stock had fallen 5.7 percent, which was the worst day for the retailer since August.

Boss sees additional difficulties for Gap Inc.—which owns Gap, Old Navy, Banana Republic, Athleta and Intermix—as the trade war drags on and the business is exposed to more risk.

“Direct sourcing exposure to China stands at 22 percent, while Gap is currently working with vendors to pivot sourcing strategies, but noted a costly multi-year timeline for change given size/scale and specialization,” the analyst wrote.

Boss also suggested Gap distribution centers and warehouses will face “inflationary pressure” after Amazon raised its minimum wage for warehouse workers to $15 an hour. Gap Inc.’s company-wide minimum wage is currently $10 an hour and was set in 2015. Boss says management is aware “about 70 percent of Gap’s stores are at or above the market rate for employees today” and vulnerable to wage inflation.