GAP DENIES DIFFICULTY WITH DEBT
Byline: Jennifer Weitzman
NEW YORK — Gap Inc. Tuesday snapped back at reports that it was in danger of violating its debt agreements, saying a subscription research firm miscalculated its financial estimates.
Gap, which reported a third-quarter net loss of $48 million, said it expects its debt level at yearend to be in the range of $2.2 billion to $2.3 billion. On that basis, the earnings before interest, taxes, depreciation and amortization required to maintain the debt covenant is one-third of those amounts, in the range of $730 million to $770 million, the firm said.
“Grant’s Investor Inc. misestimated the level of EBITDA needed to maintain Gap Inc.’s debt covenant as per its bank facilities at the end of the fourth quarter due to an overstatement of the expected yearend debt levels,” the company said in a statement. The online research firm said it expects Gap’s EBITDA to fall below $1.084 billion reported for the 12 months ending last January. According to a report published Tuesday, Gap could be in danger of violating its debt covenant if it fell below that mark, which was seen as a “distinct possibility.” Gap recently warned that its fourth-quarter loss could be “considerably worse” than the 6-cent loss reported in the third quarter, excluding a tax-related charge.
Richard Jaffe, specialty retail analyst with UBS Warburg wrote in research notes that he estimates the San Francisco-based firm’s long-term debt at yearend will total $1.73 billion and EBITDA of $943 million. Also, he wrote that he believes Gap’s loan covenants required that its debt-to-EBITDA ratio remain below 3, suggesting a possible debt level of $2.8 billion, based on a fourth-quarter loss estimate of 10 cents. Still, he said a worst-case scenario might entail Gap losing 25 cents a share in the fourth quarter, reducing EBITDA and earnings per share to zero. With depreciation and amortization totaling about $679 million this year, debt could hit $2.04 billion, permitting an additional $300 million in borrowing.
Although Jaffe said he expects challenges to remain for Gap, he said he remains “hopeful for fall 2002 that a more attractive merchandise assortment and an improved retail environment will contribute to positive sales and earnings growth,” which will in turn pay down the debt.
Meanwhile, troubles for Gap continue to mount. Last Tuesday, Moody’s Investors Service warned it may cut the ratings on Gap’s senior unsecured debt and commercial paper. The agency has twice this year downgraded Gap’s senior unsecured debt ratings, cutting them three notches from A2.