BofA Downgrades Gap On Old Navy Concerns

Old Navy, which contributes to around 55% of Gap Inc’s GPS sales, is likely to be “disproportionately hurt” by its exposure to low-income consumers and worsening supply chain disruptions, according to BofA Securities.

The Gap Analyst: Lorraine Hutchinson downgraded the rating for Gap from Neutral to Underperform, while reducing the price target from $26 to $14.

The Gap Thesis: Although supply chain challenges were expected to ease after the holiday season, retailers have indicated that air freight prices have risen and that ocean delays continue, Hutchinson said in the downgrade note.

While most retailers offering low ticket products have not used air transport due to its impact on margins, Old Navy “made the strategic decision to do so to avoid disappointing its customers,” the analyst wrote.

“The brand generated outsized sales growth in 1Q and 2Q21 as reopening combined with stimulus to drive comp acceleration to 25%/18% (vs. 2019) … This will likely be difficult to lap as pent-up demand is behind us and the consumer will have less incoming federal funds,” she added.

The analyst reduced the earnings estimate for fiscal 2022 by 48 cents to $1.59 per share.

GPS Price Action: Shares of Gap had declined by 0.033% to $15.36 at the time of publication Tuesday morning.

Photo: Courtesy Gap