Gap Stock Crashes 20% on Trimmed Outlook, Morgan Stanley Downgrades to Underweight 6 Weeks After Upgrading to EW

© Reuters. Gap (GPS) Stock Crashes 20% on Trimmed Outlook, Morgan Stanley Downgrades to Underweight 6 Weeks After Upgrading to EW

By Senad Karaahmetovic

Shares of Gap (NYSE:GPS) are down more than 19% in premarket trading Friday after the clothing and accessories retailer trimmed its FY adjusted EPS guidance, missing the consensus estimates.

Gap reported a Q1 loss per share of 44c, while analysts were expecting a loss per share of 14c. Net sales came in at $3.48 billion, above the analysts' expectations of $3.46 billion.

Total comparable sales in Q1 were down 14%, while analysts were expecting a decline of 9.93%. Gap global comparable sales plunged 11%, while analysts were estimating a slip of 3.2%.

Gap reported Old Navy comparable sales declined 22% in the period, compared to the expected drop of 16.8%. Comparable sales at Banana Republic rose 27% in the quarter, beating the expected growth of 11.8%. Athleta comparable sales were down 7%, while analysts were projecting a 10% growth.

The Q1 gross margin stood at 31.5%, compared to the consensus projection of 35.3%.

“We are revising our fiscal 2022 outlook to reflect the impact of certain factors impacting our near-term performance, including execution challenges at Old Navy, an uncertain macro consumer environment, inflationary cost headwinds, and a slowdown in China that is impacting Gap Brand,” said Katrina O’Connell, Executive VP and CFO of Gap.

“We expect our performance to improve modestly in the back half of the year and accelerate as we enter fiscal 2023,” CFO said.

The company expects to shut down around 50 Gap and Banana Republic stores in North America in 2022 as a part of its 350-store closure plan.

Morgan Stanley analyst Kimberly Greenberger downgraded GPS stock to Underweight from Equal Weight with an $8.00 per share price target, down from $13.00. Remember, the analyst upgraded GAP shares in April to EQ after it had downgraded the stock to UW back in January.

“We move back to Underweight, as consistent, protracted misexecution against a likely decelerating macro backdrop & further industry headwinds could pressure earnings lower for longer,” Greenberger said in a client note.

J.P. Morgan analyst Matthew Boss downgraded Gap from Neutral to Underweight with a price target of $9.00 from $11.00.

Credit Suisse analyst Michael Binetti reiterated a Neutral rating and cut the price target to $10.00 per share from $13.00.

“We are disappointed, but not surprised with 1Q results and updated guide. With industry optics suggesting the low income consumer (ON’s core) is under pressure, we don’t expect an easy path to a re-rating for the multiple soon,” the analyst told clients.