Piper Jaffray: Time To Sell Gap

• Gap, Inc. GPS shares have declined 33.56 percent, year to date, from the high of $43.60 reached on January 7.
• Piper Jaffray’s Neely J.N. Tamminga downgraded the rating on the company from Neutral to Underweight, while reducing the price target from $34 to $28.
   
• Tamminga expects earnings to be lower in 2015, as compared to 2014, due to increased promotional expenses. Continued top management turnover in the mid to long term is also a concern.

Analyst Neely Tamminga said that all three of Gap’s divisions (Old Navy, Gap and Banana Republic) have increased promotional activity to a combined 96 percent of total sales. This comes at a time when most of the competition is cutting back on promotions so far in FQ3.

Old Navy had 16 days of storewide discounts so far in the third quarter, compared to 13 days in FQ3:14. Gap offered storewide discounts for 22 days, quarter to date, compared to 8 days during the same quarter in 2014. Banana Republic has offered discounts for 20 days, quarter to date, versus 17 days in FQ3:14.

Tamminga believes higher promotional levels in 2014, as compared to 2014, could be a risk to the company’s earnings.

Gap’s shares are “likely to be under pressure” following the departure of Stefan Larsson. Tamminga pointed out that under Mr. Larsson, Old Navy reported positive comps for 9 of the 11 past quarters, with no comp declines.