Gap (GPS) Stock Slumps as Fitch Downgrades to Junk Status on Sales Concerns

NEW YORK (TheStreet) -- Gap (GPS) - Get Report stock is declining 2.44% to $18.83 in mid-afternoon trading on Wednesday after ratings agency Fitch downgraded the retailer's long-term issuer default rating to junk status earlier today. 

Fitch cut the rating by one notch to BB+ from BBB- and noted the rating outlook is stable. 

The ratings downgrade comes after Gap earlier this week warned that first quarter earnings and revenue will likely fall short of analysts' expectations. 

It "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," the ratings agency said in a statement.

Fitch anticipates that EBITDA will decline to the $2 billion range this year, down from $2.3 billion in 2015 and a peak of $2.7 billion in 2014. Leverage is expected to stay in the mid-3 times range. 

The agency isn't entirely negative on Gap, and cites capital discipline, positive free cash flow, scale and investments in omnichannel capabilities as positive aspects of the company.

Separately, TheStreet Ratings team rates the stock as a "hold" with a ratings score of C+.

Gap's strengths such as its attractive valuation levels, largely solid financial position with reasonable debt levels by most measures and expanding profit margins. However, as a counter to these strengths, we also find weaknesses including feeble growth in the company's earnings per share, deteriorating net income and weak operating cash flow.

You can view the full analysis from the report here: GPS

TheStreet Ratings objectively rated this stock according to its "risk-adjusted" total return prospect over a 12-month investment horizon. Not based on the news in any given day, the rating may differ from Jim Cramer's view or that of this article's author.