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Piper Jaffray's Craig Johnson: 'Gap Shares Just Purely Out of Fashion'

(Mohamed Ahmed Soliman | Dreamstime.com)

Monday, 11 November 2019 02:58 PM

One Wall Street experts predicts lower prices for one of the worst-performing retailer stocks.

Gap said late Friday it was sticking with plans to spin off its Old Navy brand into a separate company, as Wall Street analysts questioned its commitment to the project following the surprise exit of Chief Executive Officer Art Peck.

Gap shares (GPS) fell 5.5% on Friday after Thursday's shock announcement, which came along with another weak batch of forecasts for quarterly sales and full-year earnings. The shares rebounded on Monday and were higher in late trading.

However,Craig Johnson, chief market technician at Piper Jaffray, told CNBC that the worst might not be over for the clothing retailer.

“Gap shares are just purely out of fashion at this point in time,” Johnson said. “You’re back to levels you were at in 2016 and 2011, and it doesn’t look like there’s any indication that a bottom has been made,” he said.

“On a relative basis, this stock has seriously lagged the overall market. If you go back to 2012, the S&P is up 143% and this stock is still at the same level it was in 2012. I’m not willing to go bottom-fishing here on this stock until there’s clear evidence of some sort of trend change starting to unfold with the shares and at this point in time, you don’t have that. I’m avoiding the shares altogether,” said Johnson.

The abrupt change in leadership comes just before the year's main holiday shopping season, with merchandise already ordered and stores stocking up ahead of the unofficial kickoff over the late November U.S. Thanksgiving weekend.

But analysts said the change in leadership would not impact the company either way, Reuters explained.

Peck, who held the top job since 2015, planned to split the better-performing Old Navy brand from Gap and Banana Republic, and Gap in an email to Reuters said, "The board continues to believe in the strategic rationale for the planned separation, and the preparation for separation continues as planned."

It added that there would be a regularly scheduled meeting of its board next week and that any additional details on the company's attitude to the spin off would be provided in an earnings call on November 21.

Several Wall Street brokerages said the deal should be canned.

"It makes little sense to spin Old Navy until, at least, its sales have stabilized," David Swartz, an analyst with brokerage Morningstar, said in a note to clients, adding that Old Navy represented most of Gap's enterprise value as a company.

Robert Fisher, the son of Gap's founders, has taken over as interim chief executive officer of the retailer. Fisher, who also serves as the company's chairman, is Gap's largest shareholder with a 12.5% stake, according to Refinitiv data.

The Gap brand, once a trend setter with its casual logo emblazoned hoodies and Khaki cargos, has struggled to keep pace with fast-fashion rivals such as Inditex's Zara and H&M and has experienced several years of falling sales.

While the retailer has invested heavily in some of its most iconic categories like denim, its product assortments are still viewed by many as lacking newness and Gap needs to market more effectively to younger consumers as competition stiffens, analysts said.

Peck's successor will not be able to make needed change in time to holiday sales this season, several industry experts said.

"It's already too late, all the plans are set, everything's etched in stone, nothing's changing," said Jerry Storch, chief executive officer of consultancy Storch Advisors.

"If you brought in the most spectacular person imaginable and they had all the answers, they still couldn't change anything until probably as late as next fall."

© 2020 Thomson/Reuters. All rights reserved.

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One Wall Street experts predicts lower prices for one of the worst-performing retailer stocks.
gap, shares, stock, fashion
Monday, 11 November 2019 02:58 PM
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