Gap Downgraded by S&P as Investors Sound Caution on Old Navy Separation

The Gap Inc. has been downgraded by S&P Global.

The agency has lowered the issuer credit rating and issue-level rating of the specialty apparel and accessories retailer from “BB+” to “BB.” It also announced a negative outlook for the firm, with the possibility of marking down its rating over the next year, based on the outcome of the previously announced Old Navy spinoff.

“The downgrade reflects our view that Gap Inc.’s performance struggles will persist as it faces a torrent of competitive headwinds and potential distractions from the planned separation of its core Old Navy brand in mid-2020,” the S&P report read.

It also added expectations that Gap Inc.’s mall-based Gap and Banana Republic concepts will remain under pressure amid stiff competition in today’s retail environment.

“Inconsistent execution, fashion misses and weak traffic trends have pressured results this year,” the agency wrote. “We believe the company is losing market share to stronger operators across the apparel sector, including fast fashion, off-price and mass merchandisers.”

The San Francisco-based company first revealed in February the split of Gap Inc. into two publicly traded companies: one being Old Navy, and the other retaining the flagship Gap brand as well as Banana Republic, Athleta, Intermix and Hill City.

Although Old Navy had been the crown jewel in Gap Inc.’s financial portfolio for some time, making up almost half of the retail group’s $16.6 billion in sales last year, it, too, has been faltering as lately. In its third-quarter earnings report released last week, Gap Inc. saw the Old Navy banner post a same-store sales decline of 4%. During the second quarter, it dropped 5%, and its comps were also down 1% in the first quarter.

Overall, Gap Inc. noted adjusted earnings per share of 53 cents, versus predictions of 51 cents. It topped analysts’ lowered forecasts following the company’s warning that it was expecting disappointing results. Revenues decreased 2% to $4 billion.

“We are not pleased with the third-quarter results and are focused on aggressively addressing the operational issues that are hindering the performance of our brands,” said Interim President and CEO Robert J. Fisher. “We continue to make progress against our separation plans, which will provide improved focus and a further catalyst for transformation.”

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