- In a downgrade of Gap Inc. on Thursday, Morgan Stanley analysts warned that its Q3 performance and recent guidance cut may reflect "mis-execution" and "communication shortfalls" at the apparel retailer.
- "This left us less confident in the new management team & [Gap's] ability to achieve its 2023 financial targets," analysts led by Kimberly Greenberger said in an emailed client note.
- Gap's downgrade also reflects Morgan Stanley's overall outlook on mall-based retailers and department stores. After experiencing a year of growth, analysts expect their margins and earnings results to potentially decline in 2022 as they did pre-COVID.
Despite Gap Inc.'s years-long attempt to extricate itself from the mall, a major leadership shakeup in 2020, fast-rising sales at its Athleta brand and a partnership with Yeezy, the company continues to falter.
Gap's third quarter net sales of $3.9 billion were down 1.4% from 2019 and 1.3% from 2020. Inventory constraints due to supply chain disruption are estimated to cost between $550 million to $650 million in lost sales as well as $450 million in air freight costs for the year.
Gap will be especially vulnerable in a year when apparel sales are likely to take a hit as consumers spend more on services, and at a time when mall-based specialty retailers and department stores are at a disadvantage, Morgan Stanley analysts said.
"In fact, recent Softlines 2021 holiday updates & the latest US apparel import data suggest apparel demand could be slowing & the inventory re-stocking process has begun," Greenberger wrote. "If continued, retail price discounts & promotions could return as soon as 1Q21, leading margins lower."
By contrast, the analysts reiterated their positive outlook for off-price stores as consumers seek value to offset higher prices.
Editor's note: Daphne Howland contributed to this report.