UBS lowers Gap stock price target to $23 on tariff uncertainty

UBS lowered its price target on Gap (NYSE:GAP) to $23 from $27, maintaining a Neutral rating, citing uncertainty around fiscal year 2025 gross margin guidance due to new US tariffs, despite anticipating solid sales trends that could exceed consensus. This cautious stance contrasts with mixed analyst sentiment, as Barclays downgraded the stock on tariff concerns while TD Cowen and JPMorgan maintained positive ratings, highlighting growth potential and favorable financial projections. The upcoming earnings report is a key near-term catalyst, with options markets implying a significant 8.6% stock move.

Analysis

Analyst sentiment on Gap, Inc. (GAP) is bifurcated ahead of its earnings report, driven by a conflict between strong near-term sales data and future margin uncertainty. UBS maintained its Neutral rating but lowered its price target to $23 from $27, citing concerns over how new US tariffs will impact the company's fiscal 2025 gross margin guidance. This caution is echoed by Barclays, which downgraded the stock to Equalweight with a $19 price target on similar tariff-related margin fears. Conversely, bulls like TD Cowen (Buy, $29 PT) and JPMorgan (Overweight, $29 PT) see continued upside, with JPMorgan projecting a 3.5% revenue increase and an EBIT margin between 8% and 10%. Despite the margin overhang, UBS's own channel checks suggest sales trends are solid, potentially leading to a 100-basis-point beat on consensus revenue and a $0.02 beat on EPS ($0.57 vs. $0.55 consensus). The market is pricing in heightened volatility, with options implying an 8.6% post-earnings move, significantly above the 6.7% historical average. The company's recent actions, including a declared $0.165 quarterly dividend and the appointment of a Nike veteran to lead Athleta, underscore ongoing strategic initiatives amidst these macroeconomic pressures.

Key Decisions for Investors

• Investors should focus on the forthcoming fiscal 2025 gross margin guidance, as its potential revision due to US tariffs is the central point of analyst disagreement.
• Given that options markets are pricing in an elevated 8.6% post-earnings move, traders might consider volatility strategies, while fundamental investors should weigh the modest 9.09x P/E against the significant guidance risk.
• A long position is a bet that strong sales trends will outweigh tariff-related margin compression, a risk that has prompted downgrades from both UBS and Barclays.
• Pay attention to any strategic updates on the Athleta brand following the appointment of its new president, as this is a key component of Gap's long-term growth narrative.