Gap Inc. (NYSE: GPS) has been downgraded to junk ratings at Fitch Ratings. The news comes on the heels of multiple analyst downgrades or price target cuts after this week’s disastrous earnings report.
Fitch downgraded the Gap’s Long-Term Issuer Default Rating to BB+ from BBB-. Had the rating remained at BBB-, it would have remained investment grade. The only good news here is that Gap’s Rating Outlook is Stable, implying that more downgrade risks are not immediate.
Before investors panic just on a credit rating downgrade, they should note that Fitch’s rating continues to reflect positive aspects of Gap’s credit story. The ratings agency said that Gap has capital discipline, positive free cash flow, scale and investments in Omni channel capabilities. Fitch said in its downgrade report:
The downgrade reflects Fitch’s reduced confidence in stabilization of sales, expectations of continued gross margin volatility, and belief that Gap will need to continue using real estate actions and large-scale cost reduction programs to protect EBITDA in the face of sales declines. Fitch expects EBITDA to decline to the $2 billion range in 2016 versus $2.3 billion in 2015 and a peak of $2.7 billion in 2014, with leverage expected to remain in the mid-3x range.
There is a weak outlook that just cannot be ignored here. Gap’s comparable store sales continue to suffer. A reading of −5% in first-quarter comparable sales figure comes after a reading of −7% in its fourth quarter.
Gap should be able to win from significantly easier comparisons and benefit from sourcing and merchandising changes made back in 2015. Instead it sees material decline continuing. Overall traffic declines are an issue across the mall space, but Gap has problems on top of all the macro issues.
Gap’s April net sales were $1.12 billion for the four-week period ended April 30, 2016, versus $1.21 billion a year earlier. Here is what Gap CEO Art Peck said of its own quarterly sales trends:
Our industry is evolving and we must transform at a faster pace, while focusing our energy on what matters most to our customers. We are committed to better positioning the business to recapture market share in North America and to capitalizing on strategic international regions where there is a strong runway for growth.
Gap shares suffered handily on Tuesday, falling to $19.30, after closing at $21.81 on Monday. That’s an 11.5% drop. Things weren’t looking any better on Wednesday with a drop of 3.1% to $18.70. Gap’s new 52-week range, after hitting a multiyear low on the same day, is $18.70 to $39.59.
Want to Retire Early? Start Here (Sponsor)
Want retirement to come a few years earlier than you’d planned? Or are you ready to retire now, but want an extra set of eyes on your finances?
Now you can speak with up to 3 financial experts in your area for FREE. By simply clicking here you can begin to match with financial professionals who can help you build your plan to retire early. And the best part? The first conversation with them is free.
Click here to match with up to 3 financial pros who would be excited to help you make financial decisions.
Have questions about retirement or personal finance? Email us at [email protected]!
By emailing your questions to 24/7 Wall St., you agree to have them published anonymously on a673b.bigscoots-temp.com.
By submitting your story, you understand and agree that we may use your story, or versions of it, in all media and platforms, including via third parties.
Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.
Latest from 24/7
