Gap Inc.’s stand-out strength in the first quarter is helping its credit profile.
Moody’s Investor Service bumped its outlook on the casualwear company’s credit rating to stable from negative, citing its “prudent” financial policies, including efforts to reduce debt while maintaining “excellent” liquidity, despite a tough year in retail.
“The company has outperformed its peers in an extremely challenging and volatile retail environment demonstrating comparable sales growth and margin expansion and we expect new management initiatives accompanied by store rationalization and improved inventory management to gradually improve operating performance,” said Moody’s vice president Mickey Chadha.
Moody’s noted the “relatively shorter” term of store leases in the Gap portfolio, which also includes Banana Republic, saying there is “additional flexibility to rationalize its store base if needed.”
Gap has closed about 600 stores since 2008, but a recent report from Wells Fargo said the company likely needs to shutter an additional 305 doors, or 13 percent of its current base, in order to have an appropriate balance between sales and costs.
Moody’s also sees “a number of credible opportunities for growth,” in the Gap family, including more omnichannel retailing and a possible expansion of Athleta.
As for Banana Republic, Moody’s singled the brand out as one that “continues to constrain growth in overall profitability.”
While discussing Gap’s results, chief executive officer Art Peck said the new president of Banana Republic, Mark Breitbard, “knows the brand, knows the company and is hitting the ground running.”
“I’m not going to promise when we will see the progress but there are tremendous opportunities to make quick progress,” he said.
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