Merrill Lynch downgraded Gap Stores (GPS ) to near term neutral from buy, while maintining a long term buy on the retailer.
Analyst Mark Friedman said the downgrade reflects less compelling risk/reward scenario, and uncertainty as to timing of earnings recovery. He adds recent operating developments were worse than forecasted, including significant increase in current effective tax rate. He also says early holiday product flow shows little improvement in tough retail environment. The recent ratings downgrades by S&P and Moody's further compound stream of negative news. He also cut his $0.33 fiscal year 2002 (January) EPS estimate to $0.29, $0.60 fiscal year 2003 to $0.55. He sees a potential for a turnaround in 2002.