Credit Suisse Stays Underperform On Gap As Spring Sales Fail To Blossom

Credit Suisse maintains its Underperform rating on Gap Inc GPS, saying structural challenges continue to offset any product and design enhancement.

The retailer, which was expecting the Spring collection to boost the results, reported 7 percent fall in April comps down versus CS expectation for down 4.2 percent. The company's comps fell despite "a benefit from Easter and easy compares of down 12 percent in the prior year."

"Our thesis remains that underlying structural challenges from the rise of deep value retailers remains a considerable threat to the overall business," analyst Christian Buss wrote in a note.

Related Link: RBC On Gap: Too Soon To Call A Bottom

Buss noted that earnings would be under pressure until the company enhances supply chain capabilities and addresses pricing issues from over-reliance on promotional activity.

Home And Abroad

All three brands –Old Navy, Banana Republic and Gap – were in the red, particularly Old Navy with comps down 10 percent in April, a significant drop from down 6 percent in March and flat year-over-year in February.

"We believe the company's focus on product acceptance, rather than supply chain efficiency, has led to an erosion of store productivity," Buss noted.

Gap announced that it was going to evaluate the Old Navy and Banana Republic locations beyond North America in order to better "sharpen its focus on geographies with the greatest potential."

However, the analyst believes the retailer "should be focused on rationalization in North America where the company owns 2,600-plus stores."

Ratings And Estimates

The analyst cut his FY16 comp, revenue and EPS estimates to (1.9 percent), $15,621 million and $1.97 from (0.9 percent), $15,827 million and $2.22.

"We are increasingly cautious on traditional specialty retailers with outsized store footprints in light of the ongoing purchasing shift to the online channel," Buss added.

At time of writing, shares of Gap were down 12.33 percent to $19.12. The analyst cut the price target on the stock to $21 from $27.