Gap Inc. is taking on debt to buy back shares, jumping into hot bond markets Thursday just as its operations showed the pressure of a 10 percent drop in comparable-store sales for March.

This story first appeared in the April 8, 2011 issue of WWD. Subscribe Today.

The San Francisco-based retailer said the proceeds of its bond offering — which was said by financial sources to have raised $1.25 billion through the sale of 10-year notes — would go toward “general corporate purposes including share repurchases.” The company also secured a $400 million five-year term loan and inked a new $500 million revolving credit facility with Bank of America Merrill Lynch, J.P. Morgan and Citigroup Global markets.

The share buyback might be an effort to assuage shareholders in what could be a tough year. One shareholder in particular — Sears Holding Corp. chairman Edward S. Lampert, who recently scooped up 35 million shares of Gap, or 5.8 percent of those outstanding —is known to favor share repurchases.

“From the tone of the [bond] presentation they made, it looks like this year they don’t expect earnings to do much because of input costs,” said Rosemary Sisson, director and debt analyst at Knight Libertas. Raw material and labor costs are expected to squeeze profit margins across the industry this year.

“They don’t really expect any kind of improvement this year,” Sisson said. “They’re kind of waiting for 2012, so what do you do to make shareholders feel like they need to [invest in your firm] for the next six months?”

In February, Gap’s board approved a $2 billion share buyback plan and boosted the stock’s annual dividend to 45 cents, a 5 cent increase.

Shares of Gap declined 34 cents, or 1.5 percent, to $22.72 Thursday. Their 52-week high of $26.34 was reached on April 26, while the corresponding low of $16.62 came on Aug. 27.

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