By Austen Hufford

Fitch Ratings on Wednesday downgraded Gap Inc.'s credit rating to junk status, days after the clothing retailer warned of weak sales across its brands and said it would take steps to streamline its business.

Fitch cut the credit rating of Gap's debt by one notch to BB+ from BBB-, bringing it below investment grade. Many potential debtholders aren't allowed to buy non-investment-grade debt.

Fitch said the downgrade reflects "reduced confidence" in sales stabilization and expectations of continued gross margin volatility. The ratings agency also believes Gap will need to use real estate actions and large-scale cost-reduction programs to protect profitability in the face of sales declines.

Gap is being squeezed by fast-fashion retailers such as H&M operator Hennes & Mauritz AB and Zara owner Inditex SA, which push low-price items and shift their selections quickly. To combat the sales slump, Gap CEO Art Peck has brought in new executives and promised to source goods more quickly.

The company has also been shrinking its footprint, by closing dozens of locations in its home market. On Monday, the company indicated it would revamp its overseas operations.

Gap's debt is still rated as investment grade by Standard & Poor's and Moody's. Fitch said Gap's rating outlook is stable.

Write to Austen Hufford at austen.hufford@wsj.com

(END) Dow Jones Newswires

May 11, 2016 10:20 ET (14:20 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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