On Monday, UBS updated its outlook on Gap Inc. (NYSE: NYSE:GPS), raising the price target to $9 from the previous $8 while reiterating a Sell rating on the stock. The adjustment follows Gap's fourth-quarter report for fiscal year 2023, which exceeded UBS's expectations. Despite the improved performance, UBS remains cautious about the retailer's prospects.
Gap's fiscal year 2023 comparable sales were down 2%, adding to a 7% decline from the previous year, indicating a continued loss of market share. Furthermore, the company's guidance for fiscal year 2024 suggests that the earnings before interest and taxes (EBIT) margin is still declining compared to pre-pandemic levels. UBS has expressed concern that Gap may find it difficult to reverse this downward trend in profitability.
The financial firm anticipates that these challenges could lead to future earnings misses and subsequent underperformance of Gap's stock. UBS's forecast for Gap's earnings per share (EPS) for fiscal year 2025 is 26% below the consensus, signaling skepticism about the company's ability to meet market expectations.
UBS predicts that these potential earnings misses may cause Gap's price-to-earnings (P/E) ratio to adjust downward, aligning with their target of 11 times earnings from the current 14 times. This outlook suggests a cautious stance on the apparel retailer's stock performance in the near future.
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