Down and Out: Gap Stock Drops After CEO Departs
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Gap Inc.’s stock continued to slide Tuesday, a day after the sudden departure of the retailer’s president and chief executive officer Sonia Syngal on Monday.
On Monday, right after the news on Syngal came out, Gap Inc. stock slipped just 2 percent. But on Tuesday, after several critical investor analyst research reports on Gap were issued, the shares by the end of trading had fallen 5 percent, or $0.44, to $8.32, which is close to its low for the last 52 weeks of $8.16. The stock has traded as high as $32.59 in the past 52 weeks.
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Wells Fargo cut its rating on Gap to equal weight from “overweight” citing expectations that “the string of downbeat results will continue,” according to a report from the financial institution issued Tuesday.
Wells Fargo analyst Ike Boruchow noted Gap “has now negatively pre-announced/missed the past two quarters.”
“This comes after Gap missed their [fiscal year 2021] plan by approximately 35 percent in 2021,” Boruchow wrote in his report. “While the macro is far from good today, the majority of these issues appear to be self-inflected and centered on Old Navy. As such, as we remain cautious on our space, we simply cannot continue to recommend a name that is juggling company specific challenges on top of growing macro pressure.”
In another report, Simeon Siegel, managing director and senior analyst at BMO Capital Markets Bottom Line, stated, “Low numbers are going lower as Gap Inc. continues to try to work through inventory in an environment that is turning increasingly deflationary.”
Similar to several other major retailers such as Target, Walmart and Bed, Bath & Beyond, Gap is having to manage through excess inventories due to the arrival of shipments that had been delayed, and consumers cutting their spending back due to inflation and recession fears. On Tuesday, Gap was running a 60 percent off sale on summer apparel.
Syngal will be succeeded on an interim basis by Bob Martin, executive chairman of the board, until the company can find a permanent replacement. The company also said former Walmart Inc. executive Horacio “Haio” Barbeito will become president and CEO of Old Navy, the value and family-oriented chain, and Gap’s biggest division. Barbeito will join Old Navy on Aug. 1, succeeding Nancy Green, who left in late April.
Barbeito most recently served as president and CEO of Walmart Canada. During his 26-year career at Walmart, he served in a variety of roles across merchandising, marketing, supply chain and store operations with experience in five countries. He has served in CEO roles at Walmart for 10 years, first as president and CEO of Walmart Argentina and Chile before taking the CEO role at Walmart Canada, where he has spearheaded a modernization effort to grow that market’s omnichannel business.
“We look to Mr. Barbeito’s plans to improve Old Navy’s omnichannel initiatives, improve e-commerce profitability, and improve merchandising and planning efficiency and consistency,” Goldman Sachs indicated in an equity research report. “Based on his prior experience, we believe his experience matches well with Old Navy’s value-focused customer.”
Syngal’s departure comes as the $16.7 billion Gap Inc. has had a sustained inability to pull itself out of the doldrums. Its three biggest brands — Old Navy, Gap and Banana Republic — have all been faltering for some time, though Old Navy only in the last few seasons after a series of missteps over sizing and fashion miscues. Syngal rose to CEO in March 2020, just at the outbreak of the pandemic, and a particularly difficult time to be running a retail business.
While challenges at Gap Inc.’s Old Navy, Gap and Banana Republic brands are widely known and reported, Wells Fargo in its report said that at the Athleta division, which has been opening stores and gaining market share, “the growth profile is seemingly hitting a snag.”
Wells Fargo lowered its 2022-23 earnings per share estimates on Gap down to $10 from $16.
According to media reports, B Riley Securities dropped its price target on Gap Inc. to $8 from $12, and Telsey Advisory Group reduced its price target to $10 from $13.
“Management changes are welcome news following consistent mis-execution over the last 1.5 years, more or less, but we worry the near-term remains challenged and see further risk to the second half Street earning per share estimate,” Morgan Stanley indicated in its report Tuesday on Gap Inc.
“And while we suspect new management could eventually outline a revitalized path for Gap to get back on track to 10 percent EBIT margins longer-term (in-line with the 2020 plan outlined by Syngal and her team, and well received by the market at the time, we fear the near-term may continue to be challenged on ongoing inventory realignment and likely high subsequent promotional and discounting activities.”
Consequently, Morgan Stanley trimmed its estimate off Gap’s second EPS by 30 cents to 6 cents.
“Gap is in need of significant transformation,” Morgan Stanley wrote in the report. “Our fundamental concerns remain: falling store traffic, e-commerce disintermediation, declining brand health, apparel price deflation, falling margins.”
Gap said Monday that it expects its adjusted profit margins for the second quarter to be zero or negative, and that sales will decline from year-ago levels. It also expects sales to decline from year-ago levels.
“We believe today’s negative [second quarter] pre-announcement, which did not come with a full-year guidance update, will result in a reduction to the company’s full-year outlook when they report second-quarter results on August 25,” Goldman Sachs indicated. “Ahead of today’s negative pre-announcement, we had already seen the 2022 guide as optimistic given the embedded assumption for a sequential acceleration in comp trend in the second half versus 2019 levels against an uncertain consumer backdrop. Since then, the company has seen sharper margin pressure in the second quarter, the promotional environment across the industry has deteriorated, and we have less conviction in the macro backdrop that would support a sequential improvement in sales and pricing momentum.”
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