Victoria's Secret and Gap downgraded on macro headwinds

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By Sam Boughedda

UBS analysts downgraded Gap Inc (NYSE:GPS) and Victoria's Secret & Co (NYSE:VSCO) to Sell from Neutral in a note to clients on Thursday.

The analysts told investors that they anticipate macro forces and share loss will cause Gap and Victoria's Secret to deliver weak growth and miss street expectations.

Focusing on Gap, the analysts wrote: "We think the macro backdrop is going to be weak over the next twelve months and this will amplify the issue GPS faces from ongoing share loss. Weak sales will result in fixed cost deleverage, which will offset much of GPS's margin recapture benefit from easing supply chain costs.

"These factors should cause GPS to miss the Street's EPS forecast, causing downward consensus EPS revisions over the NTM. Our FY23E EPS forecast is 36% below consensus. Downward revisions will likely cause the stock's P/E to retreat back to low levels, toward our target P/E of 11x from today's 15x level. Our Price Target is $7, 38% below current levels. We see a 1:1.1 upside/downside skew."

Meanwhile, for Victoria's Secret, they lowered the firm's price target on the stock to $27 from $43 and said the tough macro environment is causing the firm to have a more negative view on its growth outlook.

"We believe elevated inflation, rising interest rates, structurally weaker store traffic in mall based locations, and a competitive retail environment will pressure VSCO's sales and margins much more than what the market expects. These issues caused us to lower our Price Target and EPS estimates," writes the analysts.

"We now view VSCO among one of the weakest FY23E growth outlooks. Our new FY23E EPS forecast is 38% below consensus. We think earnings misses will put downward pressure on VSCO's stock price. Our Price Target is ~18% below the current stock price."