Shares of Gap Inc (NYSE:GPS) are up double digits Friday on the company’s strong first-quarter results, but UBS analysts didn’t buy into the hype.
The firm reiterated its Sell rating and lowered its price target to $6 from $7 in a note published prior to the results Thursday.
Gap beat expectations and reported a first-quarter adjusted profit of $0.01 per share, above an expected loss of $0.16. The company’s shares added more than 13% Friday afternoon to $8.41.
UBS is skeptical of the macroenvironment.
“We continue to believe the US consumer softgoods spending environment will weaken...” analysts wrote Thursday. “We think this amplifies the challenges GPS faces from ongoing share loss. Weak sales will result in fixed cost deleverage, which will more than offset GPS’ margin recapture benefit from easing supply chain costs, in our view.”
In their view, the market hasn’t fully accounted for a potential recession.
“The question many are asking is if the stock’s 13x FY2 P/E indicates the market has fully priced in a recession,” analysts wrote. “We believe the answer is no. Our view is “rate-of-change” matters more than valuation. In other words, as long as Gap's comp sales growth trend decelerates, the stock is likely to fall, even if the stock's valuation looks low.”
The firm lowered its fiscal year EPS estimate to a loss of $0.25 per share from a loss of $0.20 per share.
Contact Andrew Kessel at andrew.kessel@proactiveinvestors.com
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