Fitch Downgrades Gap's IDR to 'BB+'; Outlook Negative.NEW YORK New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of -- Fitch has downgraded its ratings on The Gap, Inc. (Gap) (NYSE NYSE See: New York Stock Exchange :GPS) as follows: --Issuer Default Rating (IDR IDR In currencies, this is the abbreviation for the Indonesian Rupiah. Notes: The currency market, also known as the Foreign Exchange market, is the largest financial market in the world, with a daily average volume of over US $1 trillion. ) to 'BB+' from 'BBB-'; --Senior unsecured notes to 'BB+' from 'BBB-'. The Rating Outlook is Negative. The rating action affects approximately $513 million of debt. The downgrade reflects the company's continued weak same store sales Same Store Sales A statistic used in retail industry analysis. It compares sales of stores that have been open for a year or more. Notes: This statistic allows investors to determine what portion of new sales has come from sales growth and what portion from the opening of trends which have resulted in lower operating margins and weaker credit metrics. As a result, the company has announced that management and the board of directors are together reviewing Gap's and Old Navy's brand strategies. The weak operating trends and the uncertainty related to the strategic review of the portfolio are reflected in the Negative Rating Outlook. The ratings continue to consider the company's competitive operating environment In computing, an operating environment is the environment in which users run programs, whether in a command line interface, such as in MS-DOS or the Unix shell, or in a graphical user interface, such as in the Macintosh operating system. as well as its diverse store base and liquidity position. Gap has reported negative comparable store sales for 28 of the last 31 months. Most recently, for the holiday period of December 2006 comparable store sales were down 8%, on top of a decline of 9% in December 2005. The weakness is particularly evident at the company's two largest banners, Gap and Old Navy, which account for 85% of revenues and is despite the company's efforts to improve the quality and assortment of the merchandise and service levels in the stores. The weak comparable store sales trends have resulted in continued promotional activity, which, together with efforts to improve service levels, have resulted in lower operating margins. For the latest twelve months ended Oct. 28, 2006 EBIT EBIT See: Earnings Before Interest and Taxes EBIT See earnings before interest and taxes (EBIT). margin declined to 8.4% from 12.8% in fiscal year 2004. Given the weak holiday sales results, Gap announced a reduction of its full year 2006 guidance with EBIT margin expected to be about 7% compared with previous guidance of 10%. As a result, Fitch anticipates that credit measures will deteriorate further from current levels of 2.8 times (x) EBITDAR Earnings Before Interest, Taxes, Depreciation, Amortization, and Restructuring Costs - EBITDAR An indicator of a company's financial performance calculated as: = Revenue - Expenses (excluding tax, interest, depreciation, amortization, and restructuring costs) coverage of interest and rents and 2.9x leverage, measured by total adjusted debt/EBITDAR, for the latest twelve months ended Oct. 28, 2006. Fitch expects that EBITDAR coverage of interest and rents will fall below 2.5x, and leverage, measured by total adjusted debt/EBITDAR will increase to over 3.0x. Also, further margin deterioration will constrain cash flow generation over time. In addition, as a result of the weak comparable store sales results, the company announced that management and the board of directors would review Gap's and Old Navy's brand and merchandising strategies. However, given the time frame for implementing and executing on a new strategy, it is not likely that any meaningful improvement from this review would be apparent until late 2007 at the earliest. In addition, while it is unclear what will be the result of the strategic review, any capital structure changes could result in a weaker credit profile for the company given the company's low level of funded debt Funded Debt Long-term debt that matures after more than one year. Notes: This is usually issued as a bond or a long-term note. See also: Bond, Debt, Maturity, Note Funded debt Debt maturing after more than one year. . Nonetheless, Gap's current liquidity position remains strong, with $2.4 billion of cash and short term investments as of Oct. 28, 2006. Fitch's rating definitions and the terms of use Terms of Use are rules set up by the owner of an intellectual property or service to govern how they may be legally used. In many cases, terms of service are used as a contractual agreement between a company and users of a service they provide. of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures Policies and Procedures are a set of documents that describe an organization's policies for operation and the procedures necessary to fulfill the policies. They are often initiated because of some external requirement, such as environmental compliance or other governmental are also available from the 'Code of Conduct' section of this site. |
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