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Gap Headed Back Into Single Digits

The Gap Inc. (GPS) is trading lower by 17% on Friday morning after reducing Q1sales guidance for the Old Navy division, which accounts for more than half of total sales. Old Navy CEO Nancy Green stepped down at the same time, continuing a melodrama that started in 2019 when the apparel chain decided to spin off the division into a separate entity. It reversed the initiative in 2020 but a chronic sales slump has continued, as illustrated by the closure of 81 stores in the United Kingdom in July 2021.

Failing to Innovate

The company has failed to innovate for newer generations, encouraging long-time customers to shift their apparel purchases online, or to brick and mortar competitors. Global sales fell 16% in the first year of the pandemic and have bounced back, but are still trailing meager 2019 levels by a wide margin. The Old Navy division has mildly outperformed, posting flat three-year growth, while flagship Gap store sales have declined by a painful 3%. Supply chain disruptions have added to growth woes, with many products manufactured in Asian countries.

A Morgan Stanley upgrade ahead of the warning was poorly timed but Barclays analyst Adrienne Yih hit a home run, downgrading the stock to ‘Underweight’ while ticking off headwinds that include “1) negative sales to inventory spread and increasing weeks of supply safety stock, 2) increasing promotional activity at Gap and Old Navy, 3) lack of significant brand loyalty at Gap and Old Navy given the value-oriented pricing, and 4) increasing need for advertising spend to reinvigorate Gap”.

Wall Street and Technical Outlook

Wall Street consensus now stands at a mediocre ‘Hold’ rating based upon 3 ‘Buy’, 17 ‘Hold’, 2 ‘Underweight’, and 1 ‘Sell’ recommendation. Price targets currently range from a low of $12 to a Street-high $20 while the stock has opened Friday’s session more than 30 cents below the low target. This depressed placement suggests that analysts have allowed post-pandemic recovery optimism to overrule an impartial review of the troubled balance sheet.

Gap hit an all-time high at 53.75 in 2000 and settled into a multi-decade trading range, with support between 8.50 and 9.50. It fell to a 25-year low at 5.26 in April 2020, ahead of a bounce that reinstated range support in June. The uptick ended out near 2018 resistance in the mid-30s in May 2021, giving way to a decline that sliced through the .786 Fibonacci rally retracement at 12.25 overnight. The failure to remount this price will sharply raise odds for a selloff into the 2020 low.

Catch up on the latest price action with our new ETF performance breakdown.

Disclosure: the author held no positions in aforementioned securities at the time of publication. 

This article was originally posted on FX Empire

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