Gap shares were falling Tuesday after Morgan Stanley downgraded its rating on the company to Underweight from Equal Weight. The bank sees promotions and discounts hurting margins. 

“On the back of last week’s worse-than-expected holiday updates/lowered 4Q21 outlooks & alarming surge in November U.S. apparel imports, we are concerned that retail promotions & discounts could return for apparel retailers as soon as 1Q22, leading margins lower,” Morgan Stanley wrote. Gap has lowered its expectation for full-year adjusted earnings to $1.25 to $1.40 a share, down from prior guidance of $2.10 to $2.25.

MS  also pointed to the third-quarter earnings miss by Gap, which she said suggests poor execution and communication shortfalls. The retailer reported revenue of $3.94 billion, widely missing analysts’ forecasts for revenue of $4.39 billion, due to inventory delays and increased shipping costs.

Overall, mall retailers and department stores’ margin before interest and taxes is expected to exhibit some slight erosion in 2022, potentially reverting back to the declining path seen pre-Covid.

Eighteen out of 24 analysts tracked by FactSet rate the stock at Hold, while three have a Buy rating. One rates the stock at Overweight and one as Sell. The average price target is $22.01.  

Trade accordingly with your risk