Gap's Margin Expansion Expected to End Due to Tariff Pressures

Gap's operating margin expansion is likely to end due to tariff pressures and macro uncertainty. Barclays analyst Adrienne Yih downgrades the retailer to Equal Weight from Overweight, citing margin compression. The analyst notes that Gap's "blue sky scenario" is off the table.

Tariff pressures and macroeconomic uncertainty are likely to disrupt Gap's (NYSE:GAP) momentum, according to a recent downgrade by Barclays analyst Adrienne Yih. The analyst downgraded the retailer from Overweight to Equal Weight, citing margin compression and a diminished "blue-sky scenario" for significant margin and earnings per share (EPS) revisions. This shift in outlook underscores the challenges that tariffs and broader economic conditions pose to Gap's financial performance.

Yih attributes the downgrade to several factors, including increased promotional activity at Gap and Athleta banners, and the impact of new tariffs that went into effect on August 7. Additionally, the 2011 cotton inflation demonstrated that apparel retailers lack the ability to pass higher input costs to consumers, suggesting that tariff-induced cost increases would leave the company with few pricing levers. Consequently, Barclays has revised its target price for Gap to $19, reflecting weaker pricing power, outsized tariff impact, and expectation for softer long-term growth.

The second-quarter earnings report, scheduled for August 28, is expected to show an adjusted profit of $0.55 per share on $3.73 billion in revenue, marking a year-over-year increase of 1.9% and 0.2%, respectively. Despite early weakness tied to Barclays' downgrade, Gap shares have been in the plus column for a third consecutive day, moving in tandem with a broader market rally.

Gap's operating margin expansion, which had been impressive over the past six consecutive quarters, is now expected to slow down due to these external pressures. The company will need to navigate the complexities of tariffs and macroeconomic uncertainty to maintain its financial health.

References:
[1] https://seekingalpha.com/news/4488355-gaps-blue-sky-scenario-off-the-table-as-tariff-pressures-pinch-margins
[2] https://www.ainvest.com/news/barclays-upgrades-ulta-beauty-overweight-target-price-14-higher-2508/