Gap Inc. (NYSE:GAP) fell by around 20% Friday due to concerns about tariffs, and the potential impact they could have on margins.
Matt Boss is a JPMorgan retail analyst and Extel Hall of Famer. He believes the stock market has overreacted, but there are compelling reasons to purchase Gap’s shares at the current price.
Why have Gap’s shares fallen?
Investors’ fears about an additional $150 million of tariffs that will hit Gap, and brands such as Old Navy have triggered today’s GAP share sell-off.
Boss said that this tariff burden was factored in at a double-digit low multiple. This equates to approximately $5 to $6 of equity value being removed from shares.
Gap’s latest quarter results showed solid fundamentals despite these worries. Same-store sales were up by mid-single-digits for the core Gap, and only low-single-digits for Old Navy.
A steady increase in sales is expected to drive a 8%- 10% growth of the company’s bottom line over a multi-year period.
The market has gone wrong
Matt Boss stressed that tariffs were not a recent issue for Gap and other retail companies. Many of them have aggressively reduced their exposure to China – a traditional major source of risk.
In a CNBC Interview today, the JPM Analyst revealed that “Gap’s sourcing will be 3% from China this year,” adding, “our group is on average a single-digit China influence today, down 20% from 2019.
The retail industry is reducing tariffs by diversifying their sourcing and adjusting pricing strategically.
Some companies cautiously implement price increases of low- to-mid-single digits, while others wait to see final tariff rates to pass costs on to consumers.
JPMorgan seizes the opportunity
Boss, despite recent volatility in the market, remains positive about Gap’s turnaround and rates its stock as overweight.
The fair price for GAP is in the 30s, which is well above its current value, if management executes their plan.
Investors who are willing to see beyond the short-term noise of tariffs can take advantage of pullbacks such as those seen recently.
The fundamental outlook of Gap and other well managed retailers is unchanged despite the recent market turmoil.
Matt Boss points out that investors shouldn’t see recent GAP stock declines as an indication of a market in distress, but rather as a chance to buy into a sector experiencing a selective and durable recovery.
The consensus on GAP’s shares is “overweight”, which also includes other Wall Street analysts.
Gap Inc. has an analyst average price target of just over $27, which suggests a potential upside of more than 20 percent from the current level.
The post Why the market is wrong in selling Gap stocks on tariff warnings may be updated as new information becomes available.
