Fitch Downgrades Gap Rating Into Junk On Sales Woes

Fitch Ratings downgraded its long-term issuer default rating on The Gap Inc. into speculative grade, or "junk", status Wednesday after the retailer warned about slumping sales in its first quarter. The agency cut the rating to BB-plus from BBB-minus and said the outlook is stable. The move "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 agency said in a statement. Fitch is expecting EBITDA to fall to the $2 billion range in 2016 from $2.3 billion in 2015 and a peak of $2.7 billion in 2014, with leverage expected to remain in the mid-3 times range. The rating also includes positive elements to The Gap story, it said, citing capital discipline, positive free cash flow, scale and investments in omnichannel capabilities. Shares were up 0.3% in early trade, but are down 22% in the year so far, while the S&P 500 is up 1.6%.