GAP Stock Price Plunges 10% As Moody’s Downgraded the Stock to Junk

GAP Stock Price Plunges 10% As Moody’s Downgraded the Stock to Junk
Written by:
Michael Harris
27th March, 15:23
Updated: 3rd April, 04:36
  • GAP cuts capital expenditures by $300 million and suspends dividend
  • The retailer also closed all stores in North America and pulled its full-year forecast
  • Moody’s downgraded GAP credit rating to junk
  • GAP stock price crashes 10%, approaches new multi-decade low

Shares of GAP (NYSE:GPS) gapped around 10% lower on Friday after the company withdrew its full-year forecast, closed all stores in North America, cut spending plans and suspended dividend payout. As a result, Moody’s cut GPS credit rating to junk status, prompting a sharp fall in stock price.

Fundamental analysis: Coronavirus hits hard

GAP, a major clothing retailer and owner of Gap, Old Navy, and Banana Republic brands, announced it suspended its dividend due to the coronavirus outbreak.

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GAP also said it will draw down on its entire US$500 million credit facility as it struggles to cope with the consequences of “stay-at-home” policies. The retailer has also been forced to close its Old Navy, Athleta, Banana Republic, Gap, Janie and Jack, and Intermix stores across North America.

“To assist the efforts underway to slow the spread of the coronavirus, we are closing all stores in North America for the next two weeks,” said Sonia Syngal, incoming CEO, in a press release.

“Our focus remains on supporting the health and livelihood of our employees, while caring for our customers and communities. We will provide our impacted store employees with pay continuity and benefits during this two-week period. And, together, we look forward to welcoming our customers back in our stores soon.”

GAP also withdrew its full-year forecast due to the coronavirus uncertainty. The retailer previously said it expects 2020 adjusted earnings in the range of $1.80 to $1.92 per share, a projection that took into account a $100 million sales hit in Asia and Europe.

The company will also decrease its capital expenditure plans by $300 million during the year.

As a result, Moody’s downgraded GAP stock to a junk status, due to the “steady decline in Gap’s cash flow from operations and credit metrics as well as the anticipated disruption of the COVID-19 virus in the face of unprecedented temporary store and mall closures.”

Technical analysis: Stock price approaching key support

GAP stock price has now rotated lower, and therefore has failed to sustain the rebound from the 24-year low of $6.04. The relief rally has been short-lived as the risk is again clearly to the downside.

GAP stock weekly chart (TradingView)

The bears are now looking to push below the 24-year low and below the $6 handle as they target the $4.5 mark and the next support level. On the upside, the price action needs a quick move and close above the $9.5 mark for the bulls to regain some confidence.

Summary

Shares of GAP crashed 10% lower after the clothing retailer withdrew its full-year guidance, suspended dividend, cut capital expenditures and closed all stores in North America due to the coronavirus outbreak. As a result, Moody’s has downgraded the stock credit rating to “junk”.

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