Gap (GPS) - Get Report, a leading global specialty retailer, reported its third-quarter FY10 results last Friday. Gap competes with other specialty retailers like Aeropostale (ARO) , Abercrombie & Fitch (ANF) - Get Report, J.Crew Group and Urban Outfitters (URBN) - Get Report.

Ahead of Black Friday shopping deals, we noticed a flurry of promotional activities such as

Wal-Mart

and

Best Buy's

free shipping promise; however, we believe that aggressive promotions might also hurt some retailers including

Gap

. In particular, we are concerned that aggressive pricing campaigns could lead to margin pressure causing us to adjust our

optimistic $34 Trefis price estimate for Gap's stock

.

Consumer Outlook Modestly Improving

Recent consumer data and some earnings make us cautiously optimistic on the consumer. As the outlook for the US brightens versus easy comparables last year, we could see a confidence for retailer stocks tick higher as the holiday season gets underway, especially following the announcement of J. Crew's potential buyout.

We are generally growing more positive on the retailers, and we expect that major specialty retailers like Gap, Abercrombie & Fitch and American Eagle will see decent sales figures this holiday season in part due to increased promotional activities.

Last week we wrote that Abercrombie's earnings gave us increased confidence in its profit margin and sales metrics outlook. (See

Abercrombie & Fitch Sales, Profitability Lift Outlook

)

With Gap, on the other hand, we saw an increase in its inventory per square foot by 9% at the end of third quarter 2010, which may lead to increased markdowns in order to drive sales and add pressure to profit margins. While we are still positive on the stock, we need to watch this.

Lower Margins From Promotional Activities

We are concerned that aggressive promotional activities this holiday season could provide some downside risk to our current profit margin forecasts. We expect EBITDA margins (a profit margin measure) to trend modestly higher from around 15% currently to around 17% in the coming years. However, if this drops to 12%, this would reduce our price estimate by around 5%.

See our full estimates

for Gap here

.

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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.