S&P; May Lower Gap’s Credit Ratings

Standard & Poor’s on Thursday warned that it may downgrade Gap Inc.’s credit and debt ratings after the nation’s largest apparel chain reported a 16% drop in January sales at stores open at least one year.

Analysts had expected Gap to report a decline of 10% to 15% in same-store sales. Gap’s poor showing came in a month when overall retail sales rose to their highest level in nearly two years. The sales decline was the 23rd in a row for Gap.

Meanwhile, analysts said Gap could lose more business with its new merchandise return policy.

As of Monday, patrons of the company’s Old Navy stores who don’t have a receipt for a shirt, for instance, can exchange it only for another color or size, not a pair of khakis. At Banana Republic, no receipt now means no return.

“At this point, they should be happy just to get anybody to walk into a store,” said analyst Marty Bukoll of Northern Trust Corp., which owned 3.3 million Gap shares as of September. “What they need to do is make their customers happy, not irritate them.”

San Francisco-based Gap, on Thursday also reaffirmed its expectation that it would post a loss of 3 cents to 5 cents a share for its fiscal fourth quarter ended Sunday, its first back-to-back quarterly loss in 25 years.

The company also said it planned to cut capital spending by 60% this year from last year to about $400 million. It had expected to spend $600 million to $650 million for the year.

S&P; said it was reviewing Gap’s BBB-plus senior unsecured debt rating, its third-lowest investment grade, and its A-2 commercial paper rating, its second-lowest.

“The Gap may not be able to adequately turn around its flagging sales and earnings at Gap, Banana Republic and Old Navy stores,” S&P; said.

S&P;’s move follows a Jan. 14 downgrade by Moody’s Investors Service of its equivalent ratings to Baa3 and Prime-3, which are just one notch above “junk” status. Moody’s warned it may cut those ratings again.

S&P; said it expects Gap to post some improvement this year, but that the announcement showed “its merchandise margins continue to suffer from lower markdown margins and higher sales at markdown on a year-over-year basis.”

Still, it said that over the near term, Gap “has very good financial flexibility.” The company said it expects to end its fourth quarter with $800 million in cash and $2 billion in debt.

Gap shares, which have fallen 56% in the last year, closed up 20 cents at $13.10 on the New York Stock Exchange.