L Brands (LB) - Get Report and The Gap Stores (GPS) - Get Report have been struggling all year, and now credit agency S&P Ratings has downgraded the two retailers' credit ratings in a note Tuesday.
S&P downgraded both companies by a single notch with L Brands now sporting a BB- rating and Gap now hit with a BB rating. Those new ratings are three and two tiers below investment grade, respectively.
In the case of L Brands, "Customers are continuing to move away from purchasing at [Victoria's Secret] in favor of other retailers that offer lower price points, greater array of merchandise sizes, and marketing campaigns focused on diversity and inclusivity," wrote the S&P analysts. "We believe management has struggled to anticipate and react to rapidly evolving customer preferences."
Last week, Gap reported earnings of 37 cents a share compared with 69 cents in the year-earlier period. The latest adjusted earnings were 53 cents.
Revenue came in at $4 billion, off 2.2% from $4.09 billion.
Analysts surveyed by FactSet were expecting the company to report earnings of 50 cents a share on revenue of $3.97 billion.
Meanwhile, L Brands had a less successful quarter, leading analysts at MKM Partners to cut the company's full-year earnings expectations to $2.40 from $2.51 per share.
The firm admitted that the parent company of Victoria's Secret and Bath & Body Works had a "better outcome than anticipated" in the third quarter but it is still "far from stable."
"We continue to be in awe of BBW's comp and operating income growth, particularly in a promotional environment, however, Victoria's Secret performance is a significant offset and is increasingly concerning, even with new leadership at both VS and PINK," said analyst Roxanne Meyer.
