In a research note this morning, Citi analyst Paul Lejuez downgraded Gap (GPS) to Sell as he believes the risk/reward is skewed to the downside following recent share outperformance and as the company faces more challenging sales comparisons at Old Navy in 2018.
SELL GAP: In a research to investors, Citi’s Lejuez downgraded Gap to Sell from Neutral, arguing that the risk/reward balance is skewed to the downside with the stock up nearly 40% over the past three months. In 2018, Gap will face tougher sales comparisons and the challenge of driving sales without deleveraging SG&A, a challenge that became even more apparent in the third quarter of 2017, he contended. Overall, Lejuez sees Old Navy as “the key and it gets harder” in 2018. Additionally, the analyst told investors that he fears Gap will be challenged to keep merchandise margin increases in 2018, and estimates that every 25 basis points change in merchandise margin equals 6c in earnings per share.
TAX REFORM: Citi’s Lejuez also told investors that while many retail stocks are likely to see a big earnings per share boosts if the proposed tax reform goes through, he believes this has largely been priced in at Gap. He maintains a $28 price target on Gap shares.
PRICE ACTION: In morning trading, Gap is fractionally lower at $32.42 per share.
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