By Tonya Garcia
JPMorgan downgraded Gap shares citing 'markdown risk' as more than $2 billion in market cap is wiped away with 24.1% decline
Gap Inc. shares suffered their worst day in history Wednesday, after the apparel and accessories retailer said global supply-chain disruptions took a bigger-than-expected toll on its earnings.
Gap (GPS) shares fell 24.1%, the largest percentage decline in the retail chain's 55-year history on the public markets, according to FactSet, which adjusts for stock splits. The decline wiped away more than $2 billion in market capitalization and left Gap with a per-share price of $17.84, its lowest closing price since September of 2020.
Gap's third-quarter results missed expectations, and the company revised its guidance "solely based on the acute revenue and margin impacts from supply chain disruptions," Chief Financial Officer Katrina O'Connell said on an earnings call Tuesday afternoon, according to a FactSet transcript.
Full earnings coverage:Gap stock tanks as results miss, guidance lowered due to 'significant' supply-chain issues
The company now expects supply-chain disruptions to result in $550 million to $650 million in lost sales. The company also expects to incur $450 million in airfreight expenses for the year.
"We consciously chose to air approximately 35% of our holiday product, given the 2.5-month delays from Vietnam closures in Q3 and the over three-week West Coast port delays so that we can give our customers as much holiday product as we can deliver on their expectations," O'Connell said.
"While this is material to our profitability, we believe it is necessary to further mitigate sales losses and retain customers for the long term."
Other retailers, such as Walmart Inc. (WMT) and Target Corp. (TGT), chartered their own ships to bypass the bottlenecks in the global supply chain network.
Earlier in the call, Gap Chief Executive Sonia Syngal called Vietnam the company's "top manufacturing country."
Also: Walmart, Target, Home Depot and other large retailers are chartering ships to bypass supply chain problems. Will the strategy save Christmas?
"While we had planned into the known supply chain constraints as we entered the quarter including COVID-related closures in Vietnam, the shock to our business persisted longer than anticipated as weeks turned into months," Syngal said.
Syngal tried to focus on a few highlights from the troubled quarter, including the launch of BodEquality, Old Navy's inclusive sizing program, and sales of the Yeezy "Perfect Hoodie," which Syngal said, "delivered the most sales by an item in a single day in Gap.com history," and new digital capabilities that the company expects to scale into 2022.
Athleta and Banana Republic are also part of the Gap portfolio.
But the good news was outweighed by problems, and drove a downgrade to neutral from overweight at JPMorgan. Analysts lowered their price target to $22 from $39.
"[M]anagement cited 'inventory currently on the way now' suggesting potential delayed receipt timing into Black Friday/Holiday raising markdown risk into 1H," analysts said.
Read: Supply-chain delays now could lead to discounts for shoppers down the line, analysts say
Wells Fargo called the results "disappointing across the board." Analysts maintained their overweight stock rating but slashed their price target to $25 from $40.
"The biggest issue we see is the stock is now heading to the 'penalty box' as management has created a near-term credibility issue -- raising guidance and calling out their supply chain prowess just three months ago, and today materially cutting guidance while others in the space appear to be navigating the pressures fairly well," analysts wrote.
GlobalData warns that, beyond supply chain problems, the Gap brand is in need of some work to generate the same excitement as the Yeezy merchandise.
"Our recent checks in stores reveal a holiday line up that is mundane to the point of tedium," wrote Neil Saunders, managing director at GlobalData.
"In our view, Gap still has a lot of work to do in rebuilding its brand and making it more relevant and interesting to shoppers. If it doesn't, as the heat comes out of the consumer economy it runs the risk of seeing core sales deteriorate further."
Gap stock is down 11.6% for the year to date while the S&P 500 index has gained 25.2% for the period.
-Tonya Garcia
