Skip to main content

Gap Gets Cut to Junk

The struggling retailer takes another hit.
  • Author:
  • Publish date:

Shoppers have been saying for some time that the


(GPS) - Get Gap Inc. (The) Report

stores are full of junk. Now its bondholders' portfolios are, too.

Credit-rating agency Standard & Poor's downgraded the apparel chain's credit rating Thursday to a junk, or noninvestment grade, rating in another blow to the down-and-out retailer. Gap, which has about $2.6 billion in debt, is on watch at rival rating agency Moody's, which

recently slashed its rating for Gap to one notch above junk.

The downgrade, which has the effect of raising the company's borrowing costs, followed Gap's announcement Thursday that it had lined up a two-year, $1.3 billion secured bank facility. That type of financing is normally reserved for financially weaker companies whose bonds don't earn an investment-grade rating.

"The downgrade is based on a protracted record of disappointing sales and earnings," S&P said. "Management faces significant challenges in turning around the performance of each of its brands, as the weak economy has exacerbated an already poor retail environment. Because of this, no significant improvement in credit measures is likely to occur in the near term."

Scroll to Continue

TheStreet Recommends

The rating agency noted the continual decline in Gap's business over the past two years. Operating margins fell to 16.2% in the 12 months ended Nov. 3, 2001, from 21.5% in the year-before period and 24.1% in 1999. Same-store sales dropped 13% in 2001; return on capital plunged to 13.8% from an average of 32% from 1996 to 1999.

Shares ended trading today down 55 cents, or 4.1%, at $12.79.

Standard & Poor's said the company's outlook was "stable" and that it is off review for further downgrades.

Gap is scheduled to report earnings Feb. 27. On average, analysts expect the company to report a loss of 4 cents a share, compared with a 31-cent per share profit in the year-ago period, according to Thomson Financial/First Call. The company recently

reported its 21st straight month of declining same-store sales when January comps plunged 16%, worse than the 12.6% decline projected by analysts.

The retailer was once one of the favorite growth companies on Wall Street. But for more than a year and a half, it has been

on the outs, as same-store sales have declined sharply amid a series of fashion faux pas. Meanwhile, the company has continued to open new stores at such a feverish pace that many analysts now say that new stores are cannibalizing older ones.

This year is regarded as make-or-break for the company: If it doesn't get its fashion right and boost sales, the company could be forced to aggressively restructure, say analysts.

Gap shareholders won't take much more of this junk.