Fitch Affirms Gap Inc. at 'BBB-'; Outlook Stable
CHICAGO -- March 19, 2013
Fitch Ratings has affirmed the 'BBB-' Issuer Default Rating (IDR) for The Gap,
Inc. (Gap). The Rating Outlook is Stable. The company had $1.2 billion of debt
outstanding at fiscal year-end Feb. 2, 2013. A full list of ratings follows at
the end of this release.
KEY RATING DRIVERS
The affirmation reflects Gap's improvement in operating trends and credit
metrics in 2012 after a challenging 2011, strong free cash flow after
dividends (FCF), and growth opportunities in its online business, newer retail
concepts, outlet stores and emerging markets. These factors are balanced
against its mature businesses in North America, weakness in Western Europe and
Japan, and intense competition from newer retail formats.
Gap generated better than expected improvement in operating performance in
2012, as its comp store sales were up 5% following a negative 4% in 2011,
reflecting strong customer response to the company's apparel offerings, and
offsetting weakness in international markets.
Lower cotton prices contributed to a 320 basis point (bp) rebound in the gross
margin rate, which was offset in part by a 65bp increase in the SG&A ratio as
the company reinvested in advertising and product quality. The result was a
250bp improvement in the EBIT margin to 12.4%. EBITDA improved in the year to
$2.5 billion from $2.0 billion in 2011.
Fitch sees the potential for moderate growth in comp sales in 2013, driven by
double digit growth in online sales (which add approximately 2% to the
consolidated comp), and flat to modestly negative store level comps. 2013 will
be the first year since 2007 when new store openings offset the decline in
square footage at its domestic Gap and Old Navy businesses, and top line sales
should benefit from modest growth in square footage going forward.
Cotton prices will continue to work in the company's favor in the first half
of 2013, which Fitch believes, together with some expense leverage, should
lead to 30 - 50 basis points of additional operating margin recovery for the
Financial leverage (adj. debt/EBITDAR) improved to 3.0x at end-2012 from 3.5x
at end-2011, reflecting the repayment of the $400 million term loan together
with strong growth in EBITDA. Leverage is expected to improve slightly from
this level in 2013, as EBITDA grows modestly and adjusted debt is relatively
Gap has maintained solid liquidity, with an unused $500 million revolver and
cash and cash equivalents of $1.5 billion as of year-end, compared with
management's stated target of $1.2 billion.
In addition, the company generated solid FCF after dividends of $1.0 billion
in 2012. Fitch expects FCF to range from $700 - $800 million over the next two
years, and to be directed primarily to share repurchases under a new $1
billion authorization. The company may also use some of its excess balance
sheet cash for share repurchases, but is nonetheless expected to retain
sufficient cash to handle its seasonal working capital needs without having to
tap its $500 million revolver.
A positive rating action could result from an extended period of positive
sales momentum and margin improvement, together with the maintenance of more
conservative financial policies that drive adjusted leverage toward the
mid-to-high 2x range on a sustainable basis.
A downgrade could result from a performance reversal, and/or a more aggressive
financial posture that pushes adjusted leverage toward the mid 3x range.
Fitch has affirmed the following ratings:
The Gap, Inc.
--IDR at 'BBB-';
--$500 million senior unsecured revolving credit facility at 'BBB-';
--Senior unsecured notes at 'BBB-'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).
Applicable Criteria and Related Research
Corporate Rating Methodology
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Philip M. Zahn, CFA, +1-312-606-2336
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Monica Aggarwal, CFA, +1-212-908-0282
Mark Oline, +1-312-368-2073
Brian Bertsch, New York, +1 212-908-0549
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