Headwinds For Gap Outnumber Tailwinds; Citi Downgrades To Sell

Citi’s Paul Lejuez expressed concern regarding Gap Inc GPS, saying that while the Gap brand was expected to continue to struggle, Old Navy was possibly over-earning.

Lejuez downgraded the rating on the company from Neutral to Sell, while lowering the price target from $27 to $25.

Challenges

The analyst noted Q4 was off to a weak start, while “the prospect of lower taxes are unlikely to help GPS as much as other retailers.”

The Gap brand has been attempting a turnaround for at least 10 years now, having closed stores over the past 11 years. However, comps have declined for nine of the 11 years, while traffic has also decline each year.

In fact, Gap expects to close more stores than earlier predicted, along with a further decline in traffic during the important holiday shopping season.

“With all its changes in leadership and merchandising strategy over the years, Gap has been losing customers/traffic over time, and in a tough competitive landscape, it makes the task of recapturing customers a significant challenge,” Lejuez believes.

The company announced the appointment of Teri List-Stoll on November 15 as its executive vice president and CFP, effective January 17, 2017.

Other Headwinds

Although Old Navy’s margins are expected in the mid-teens, well ahead of other apparel retailers in Citi’s coverage universe, these levels appear unsustainable given the rising competition.

Among the other headwinds facing the company are Gap’s performance in China, the stronger U.S. dollar, continued decline in traffic and the disruption due to the chief financial officer transition.

In Friday's pre-market session, Gap was down 8.04 percent at $28.24.