Fitch Ratings cut its outlook on Gap Inc. to negative from stable after a tough year for the specialty fashion giant.
The ratings agency said the switch reflected “the continuation of weak operating trends across Gap’s brands” as well as its own “reduced confidence in the company’s ability to drive flattish comparable-store sales to resume [earnings before interest, taxes, depreciation and amortization] growth.”
Fitch expects the company’s EBITDA to slip to $2.1 billion this year from $2.3 billion in 2015. That mean’s this year’s on track to be about 20 percent below the $2.7 billion seen in 2013.
“Gap faces operating challenges both near-term and long-term,” Fitch said. “The company is struggling alongside other midtier apparel retailers, as the industry has seen sales bifurcated to higher-end aspirational brands and lower-end fast-fashion and off-price channels. This industry challenge is exacerbated by a lack of a strong product cycle and Gap Inc.’s inability to connect with customers with compelling, trend-right fashion (particularly at the Gap and Banana Republic brands).”
The debt watchdog continues to rate Gap’s credit at “BBB-minus.”
Fitch said Gap has generally been “disciplined with regard to its capital structure” and an “innovator in omnichannel capabilities,” but said these positives “have been mitigated by Gap’s inconsistent success introducing new product lines across its brands. Comps trends have been generally negative for the past two years, worsening to [negative] 7 percent in the fourth quarter of 2015.”
On Thursday, Gap reported a 27 percent drop in earnings last year, to $920 million. Chief executive officer Art Peck admitted to a series of fashion “misses,” which ranged from too many sweaters to armholes on jackets that were too small.
“With a year of transition behind us, I’m confident that we have the right strategies in place to fuel our long-term growth,” Peck said. “We made significant progress in 2015 transforming our product operating model, enabling us to be more responsive to trends and market conditions, and consistently deliver on-brand product collections.”
Investors traded shares of the company down 1.3 percent to $27.23 Friday.