Even Yeezy Can't Help: JPMorgan Downgrades GAP (GPS) Shares to Neutral on Poor Q3 Results and Guidance Miss, Stock Down 20%

November 24, 2021 6:03 AM EST
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Price: $17.37 +0.17%

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Shares of Gap (NYSE: GPS) are down nearly 20% in pre-open Wednesday after the company delivered disappointing Q3 results and guidance.

Gap reported Q3 EPS of $0.27 a big miss compared to the analyst estimate of $0.51. Revenue for the quarter came in at $3.94 billion, again significantly lower than the consensus estimate of $4.47 billion.

Gap is calling for EPS of $1.25 to $1.40, versus the consensus of $2.20.

“While we entered the third quarter with growing momentum, acute supply chain headwinds affected our ability to fully meet strong customer demand,” said Sonia Syngal, CEO, Gap Inc.

Gap shares were further hit in after-hours Tuesday as JPMorgan analyst Matthew Boss downgraded to Neutral from Overweight and slashed the price target to $22.00 per share from the prior $39.00 as multi-year model risks are rising.

Boss shared three key points from the earnings report:

  1. ROD: “Based on our model math, GPS has seen ~350bps of ROD leverage vs. 2019 TTM, suggesting the largest structural margin opportunity now in the rear view mirror (& incremental gains in mgmt’s control more limited looking forward).”
  2. Merchandise Margin: “Mgmt outlined a product margin opportunity of ~240bps in the Analyst Day Plan, which was expected in part to offset the online channel shift headwind of 280bps. Looking forward, +350bps of product margin expansion in FY21 (relative to 2019) suggests modest giveback in a “normalized” promotional landscape with the online mix shift headwind pacing larger than Analyst Day expectations.”
  3. SG&A Puts/Takes: “While the reset of marketing to ~6% of sales served as a FY21 pressure point, mgmt expected to see fixed cost productivity (i.e., SG&A leverage) to fuel investments for growth with SG&A ex. marketing deleveraging by >100bps on our model in FY21 (i.e., 3Q’s 240bps of SG&A ex. marketing deleverage vs. 2019) with technology infrastructure investments multi-year by our work.”

GAP shares were up 22.3% YTD heading into the Q3 print. GAP stock price is now indicated to open at $18.80, indicating a near 50% plunge from the May highs.

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