Fitch Ratings believes recent announcements are "collectively of concern"

Fitch Ratings believes recent announcements are "collectively of concern"

Disappointing margin guidance, management departures and new debt issuance at Gap Inc have raised concerns among analysts for the US retail giant's current and future business trends.

Credit ratings and research company Fitch Ratings says that although the announcements do not have a near-term impact on the Gap's credit rating, they are “collectively of concern”. 

The San Francisco-based retailer has said it expects third-quarter gross margin to be flat with the second quarter, which Fitch Ratings says will represent a 300 basis point decline over last year, compared to declines of 100 and 200 basis points in its first and second quarters respectively. 

While year-to-date declines are partially related to the strong US dollar, Fitch believes they are the result of higher inventory-clearing markdown activity. “Weak margins highlight continued difficulty connecting to customers with compelling, trend-right fashion,” it explains. 

And Fitch says it is concerned the departure of Old Navy president Stefan Larsson could “lead to a slowdown in comp momentum for the brand”, given that current strength at Old Navy is mitigating sales weakness at Gap (38% of sales) and Banana Republic (18% of sales).

While Fitch does not expect significantly positive sales growth from any of the retailer's brands, it believes a slowdown at Old Navy would have negative EBITDA implications if the Gap branded stores did not improve concurrently. 

In addition, the exit of Banana Republic creative director Marissa Webb suggests weak trends in that brand will likely “continue at least for the next six to nine months, as product lines under her direction have not resonated well with customers”. 

Fitch expects Gap's 2015 EBITDA to total US$2.2bn, assuming recent product challenges continue into the holiday selling season, yielding slightly negative fourth-quarter comps and year-over-year gross margin declines similar to the third quarter. 

And although it predicts the retailer's EBITDA will improve to $2.4-2.5bn over the next three years, Fitch notes: “A worse-than-expected holiday or lack of sales momentum into spring 2016 could trigger a negative ratings outlook or downgrade.”