Gap Sinks After Morgan Stanley Says Sell, Warns Shares Could Tumble

The shares of Gap (GPS) are falling after Morgan Stanley downgraded the stock to Underweight, the firm’s equivalent of a sell rating. The stock’s recent rally is unjustified, given the company’s “structural weaknesses,” according to Kimberly Greenberger, an analyst at the firm.

WHAT’S NEW: Two of Gap’s major brands – Banana Republic and Gap – have “lost relevance with consumers,” according to the analyst. The brands cannot be fixed anytime soon, so the company will continue to lose market share, Greenberger stated. Although the retailer’s results can look “less bad” for a short period of time, it will probably not be able to overcome its “structural headwinds” over a time frame of one to two years, she predicted. Moreover, the stock has jumped 20% since mid-February, making the shares’ risk/reward ratio even more unattractive, she believes. If the company’s Old Navy unit continue to deteriorate, the stock could fall to $15, she warned.

COMP SALES DECLINES: On March 3, Gap reported that net sales for the four-week period ended February 27, 2016 were $888M, compared with net sales of $918M for the four-week period ended February 28, 2015. Gap Inc.’s comparable sales for February declined 2%, the company reported. On February 25, Gap reported that the company’s fourth quarter fiscal year 2015 comparable sales were down 7%, versus positive 2% last year.

WHAT’S NOTABLE: On February 24, short-seller Andrew Left of Citron Research, who has made headlines previously for his short reports on Valeant (VRX) and Mobileye (MBLY), stated during an interview on Bloomberg Television that he is shorting Gap. Left said he would not be surprised to see the apparel retailer’s stock to be trading below $20 per share within two months.

PRICE ACTION: In morning trading, Gap dropped 2.4% to $29 per share.