Gap's default rating cut to junk by Fitch as slump persists

[NEW YORK] Gap Inc's long-term issuer default rating was cut to junk status by Fitch Ratings after the retailer struggled to pull out of a sales slump.

Fitch downgraded the rating to BB+ from BBB-, the firm said in a statement on Wednesday. The move followed a 7 per cent decline in Gap's same-store sales last quarter. Analysts had predicted a gain of 1.1 per cent, according to Retail Metrics.

Gap's evaporating sales may force the retailer to rely more heavily on real estate deals and other cost-cutting moves to maintain profit, Fitch said.

Earnings before interest, taxes, depreciation and amortization will probably fall to around $2 billion in 2016, compared with US$2.3 billion last year and a high of $2.7 billion in 2014, the firm said.

Chief Executive Officer Art Peck, who took the reins last year, had said the company would show signs of a turnaround by this season. Instead, sluggish store traffic in March continued into April.

The company's budget-minded Old Navy fared especially poorly last month. Comparable sales at that chain plunged 10 per cent in April, compared with the 2.6 per cent increase analysts had estimated.

Gap's US$1.25 billion of 5.95 per cent bonds due 2021 traded as low as 101 US cents on the dollar, down from 102.50 US cents Tuesday, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The notes traded as high as 109 US cents on April 6.

The company's total debt is US$1.7 billion, with a weighted average maturity of March 10, 2020, according to data compiled by Bloomberg.

BLOOMBERG