Monday, November 22, 2010

Gap (NYSE:GPS) Promotional Activity Concerns Analysts

While the promotional activities of Gap, Inc. (NYSE:GPS) will drive more traffic to their stores, concerns it may be training customers to wait for sales has Needham & Company concerned.

Needham said, "At -10x our FY11 EPS estimate of $1.84, GPS is trading below the sector average of -13x but in-line with low-end of its long term organic growth rate of 10% to 12%, which we think is a fair valuation at this time. While we think that product continues to look better Y/Y, we are concerned that increased promotional activity at both Gap and BR, (while effective traffic drivers), is training the customer to wait for sales. Lower sourcing costs have offset promotional activity, resulting in continued margin expansion, which could moderate going forward as sourcing costs are expected to increase in F2H10 or F1H11."

Needman maintains a "Hold" rating on Gap, which closed Friday at $20.70, dropping $0.21, or 1.00 percent.

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