Gap shares fall after Citi downgrades to sell, says November rally has gone too far

  • Citi Research lowers its rating for Gap shares to sell from neutral, saying the retailer will face difficulties next year.
  • "We believe the stock is likely to go lower from current levels and the risk/reward skews unfavorable," the firm says.
  • Gap shares are up 25 percent in November.
GAP EARNS
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Gap shares have gone up too far over optimism for strong holiday sales, according to a top Wall Street firm.

Citi Research lowered its rating for Gap shares to sell from neutral, saying the retailer will face difficulties next year.

"The stock is up nearly 40% over the past 3 months. … We believe this is above fair value," analyst Paul Lejuez wrote in a note to clients Thursday. "In F18 GPS will face more challenging sales comparisons at Old Navy (after a strong F17 with comps +5% at Old Navy), difficult merch margin comparisons."

Gap shares are up 25 percent in November through Wednesday. Its shares fell 2.6 percent in Thursday's premarket session after the report.

Lejuez reaffirmed his $28 Gap price target, representing 14 percent downside to Wednesday's close.

The analyst estimated Gap's 2018 earnings per share will benefit by 23 percent if tax reform passes with a lower 20 percent corporate tax rate. However, he noted even after this potential earnings benefit, the company's valuation will still not be attractive.

"We believe the stock is likely to go lower from current levels and the risk/reward skews unfavorable," he wrote.

Earlier this week, a Wall Street analyst declared Gap the Thanksgiving and Black Friday "weekend winner" as strong store traffic pointed to a better-than-expected holiday season.

Gap did not immediately respond to a request for comment.

— CNBC's Michael Bloom contributed to this story.