GPS Gap Inc

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 it was concerned about declines in comparable-store sales and gross margin and on Gap's "continued reliance" on large-scale cost-reduction programs to protect profitability in the face of sales declines.

"Gap continues to see material declines in traffic, and while traffic declines are an issue across the mall space, Gap's outsized declines are an indication that customer loyalty is waning as product continues to disappoint," the ratings agency said.

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.

Fitch said Gap is in the challenging middle-market apparel sector, stuck between higher-end aspirational brands and lower-end, fast-fashion brands.

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 10:34 ET (14:34 GMT)

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