Citi downgrades several apparel stocks, including Gap, because of inflation hitting consumers

A squeeze on lower-income consumers as shown by last week’s earnings reports are a “wake-up call” for retail companies including Gap , according to Citi. Analyst Paul Lejuez downgraded a string of apparel names, saying in a Monday note that the companies will find it hard to pass on rising costs to consumers given that “even some of the best run retailers in the country (WMT/TGT)” were surprised by inflationary pressures tied to the ongoing conflict in Ukraine. “Last week was a wake-up call for retail that showed the stars (which were so aligned in 2021) are now misaligned for F22,” Lejuez wrote. “[We] are lowering our earnings estimates across a wide range of companies that we believe are most at risk of seeing margin declines in 2022 (largely apparel-based companies). And we are taking a more cautious view of the demand outlook for these same retailers in 2023,” he continued. The firm believes companies such as Gap are under pressure given that they have too much apparel inventory at a time when consumers are shifting away from goods. Lejuez expects that the apparel category will have to get more “promotional” over the next several quarters. Shares of Gap dropped nearly 5% in Monday premarket trading. “Companies should look to pass thru higher costs to the consumer, but this will likely be harder than it was in 2021 given high inventory levels relative to sales. This is especially true in apparel where promos are already increasing,” Lejuez wrote. Here are the downgrades and price target cuts from Citi: Abercrombie and Fitch: neutral from buy, PT to $30 from $59 American Eagle Outfitters: neutral from buy, PT to $14 from $39 Kohl’s: neutral from buy, PT to $39 from $55 Ralph Lauren: neutral from buy, PT to $98 from $140 Carter’s: sell from buy, PT to $68 from $110 Gap: sell from neutral, PT to $8 from $13 Children’s Place: sell from neutral, PT to $36 from $48 Urban Outfitters: maintained buy, PT to $30 from $42 Under Armour: neutral from buy, PT to $10 from $19 —CNBC’s Michael Bloom contributed to this report.

Men wearing face masks walk past a Gap store at a shopping area, as the country is hit by an outbreak of the new coronavirus, in Beijing, China February 7, 2020.

Jason Lee | Reuters

A squeeze on lower-income consumers as shown by last week’s earnings reports are a “wake-up call” for retail companies including Gap, according to Citi.

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