Analyst predicts holiday struggles for Gap Inc.

After predicting Gap's struggles with operational issues and inventory could lead to trouble during the holiday season, J.P. Morgan has downgraded Gap shares to underweight.


On the Thursday following the downgrade, the retailer's shares dropped by 5.8 percent in premarket trade. - Instagram: @gap

The retailer's shares dropped by 5.8 percent in premarket trade on the Thursday following the downgrade. 

“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,” analyst Matthew Boss said in a note quoted by CNBC. 

Boss cut his estimated December 2019 price target for the retailer from $30 to $24, implying an 11.5 percent decrease from Wednesday's closing rate. In addition, the analyst also lowered his fiscal 2019 earnings per share estimate to $2.38.

“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 continued.

According to Boss, Gap last raised its company-wide minimum wage to $10 in 2015, and should anticipate further pressure after Amazon's recent announcement to increase its wages to $15. 

Despite these negative predictions, Boss pointed out the strength of Gap's subsidiary, Old Navy. 

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