Breakout

Gap Buys Luxury Retailer, Announces New Buyback: Short it Now! Says Sozzi

Jeff Macke
Breakout

Shares of the Gap (GPS) are up sharply in early trading after the company announced better-than-expected same-store sales for the month of December. The company also announced a the purchase of high-end women's retailer Intermix and a $1 billion share buyback. Gap shares were up about 70% in 2012, helping make it Yahoo! Finance's first-ever Company of the Year.

All of which suggests you should sell the stock immediately, according to Brian Sozzi, chief equities analyst at NBG Productions. "I don't want any exposure to Gap right now," Sozzi says, adding the acquisition of Intermix and buyback suggest the company is trying to divert some attention from a peak on operating margins. "They've extracted so many costs and closed so many stores, how much more can they push this without doing something else like a buyback?"

Related: If a Company Is Buying Back Shares, Sell Them the Ones You Own

Also concerning is the Gap flowing colorful Springtime goods into stores in the dead of winter. Leading the season is old-school retail but a poor fit with today's "wear now" customer. It's 15 degrees in Manhattan and a record 65% of the U.S. had snow coverage as of the end of last month. In those conditions Sozzi says he doesn't want to buy a pink shirt and most other consumers won't either.

Throw in the payroll tax hike and an ever more fickle consumer and Sozzi thinks the stock should be avoided at best and is a flat-out short for more aggressive traders. "Gap at the end of the day is a discretionary purchase, I don't want any exposure to it," he concludes.

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