Wells Fargo downgrades Gap, says it cannot recommend buying the apparel retailer after CEO exit

Published Tue, Jul 12 20226:07 AM EDT

Wells Faro no longer advises investors continue buying shares of Gap following news that the apparel retailer's most recent chief executive will step down. Analyst Ike Boruchow downgraded shares of Gap to equal weight from buy and slashed his price target, saying in a Monday note that investors should start looking elsewhere for companies with more robust businesses amid a tough macro environment. "[As] we remain cautious on our space, we simply cannot continue to recommend a name that is juggling company specific challenges on top of growing macro pressure," Boruchow wrote. "As the space is likely in just the early innings of fundamental decline, we simply need to rethink any fringe OW rated names where our thesis is not reasonably intact." Wells Fargo cut the price target by roughly 37%, to $10 from $16. The new price target still represents about 14% upside from Monday's closing price. The firm lowered its fiscal year 2022 and 2023 earnings per share guidance to 20 cents and $1.10, down from previous estimates of 42 cents and $1.45, respectively. The downgrade follows Gap's announcement Monday that CEO Sonia Syngal will be stepping down from her position. The current executive chairman, Bob Martin, will serve as interim CEO while a search is conducted for a successor. It's the latest of several disappointing headlines for the apparel retailer, which is struggling to turn around its business amid a tough macro environment. The company is dealing with "structurally impaired" margins in its Old Navy business, as well as ramping up athleisure brand Athleta. "[The] persisting issues at ON have caused a further loss of credibility, and GPS is now the first company under coverage to lower multiple times and see margins dip back well below pre-COVID levels (we now model ~1.0% vs. 6.3% in 2019)," Boruchow wrote. "While we had attempted to look past the noise and look for value deeper in the portfolio, we must admit the fundamentals are deteriorating far worse than we would have anticipated," Boruchow added. Gap shares dropped more than 6% in Tuesday premarket trading. —CNBC's Michael Bloom contributed to this report.