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Rating Action:

Moody's rates Gap, Inc.'s proposed senior unsecured notes Ba3; outlook changed to positive

13 Sep 2021

New York, September 13, 2021 -- Moody's Investors Service ("Moody's") today affirmed Gap, Inc.'s (The) ("Gap") corporate family rating (CFR) at Ba2 and its probability of default rating at Ba2-PD. At the same time, Moody's assigned a Ba3 rating to Gap's proposed senior unsecured notes and changed the outlook to positive from stable. The speculative grade liquidity rating remains SGL-1.

The net proceeds from the company's $1.5 billion proposed senior unsecured notes and cash on hand will be used to tender for its senior secured notes. Its Ba2 senior secured rating will be withdrawn upon full repayment of these notes outstanding.

"The change in outlook to positive from stable reflects governance considerations including Gap's intention to repay approximately $750 million of debt and its conservative financial strategy which has targeted a smaller dividend than prior to the pandemic and its continued high cash balances," said Senior Vice President Christina Boni. "Gap also continues to achieve significant improvement in its earnings as it recovers from the impact of the pandemic. A better than expected sales trajectory has been experienced in 2021 at all of Gap's major brands with positive comparable sales at the Old Navy, Gap and Athleta brands relative to 2019," Boni added.

Affirmations:

..Issuer: Gap, Inc. (The)

.... Corporate Family Rating, Affirmed Ba2

.... Probability of Default Rating, Affirmed Ba2-PD

Assignments:

..Issuer: Gap, Inc. (The)

....Senior Unsecured Regular Bond/Debenture, Assigned Ba3 (LGD4)

Outlook Actions:

..Issuer: Gap, Inc. (The)

....Outlook, Changed To Positive From Stable

RATINGS RATIONALE

The Gap, Inc.'s Ba2 corporate family rating reflects governance considerations which includes the planned repayment of $750 million of debt, the suspension of its common dividends as well as share repurchases at the onset of the pandemic and its historically conservative level of funded debt to cash balances. The company has reinstated a common dividend at approximately 50% of its historical level (approximately $180 million annually) and has announced a return to modest share repurchases. The rating is also supported by its solid market position in the specialty apparel market with its ownership of leading specialty apparel brands (Old Navy, Gap, Banana Republic, and Athleta). The relatively shorter term of its store leases (approximately five years) has enabled the right sizing of its mature brands (Gap and Banana Republic) while continuing to add stores to its higher growth concepts (Old Navy and Athleta). Investments in its online and mobile business have also strengthened its operational profile and improved its customer experience. The company has managed the disruption posed by the COVID-19 pandemic effectively returning most of its major brands to growth relative to 2019 (with the exception of Banana Republic). Continued integration of its online and store experiences also supports its efforts to increase customer conversion.

Gap's speculative grade liquidity rating of SGL-1 reflects its very good liquidity evidenced by its $2.7 billion of cash and short-term investments at the end of the second quarter of 2021, significant free cash flow generation which was supported by solid inventory and cost management and no borrowings under its $1.85 billion asset based revolving credit facility.

The company enhanced its liquidity in May 2020 by securing a $1.9 billion asset based revolving credit facility and utilizing a significant portion of its unencumbered real estate assets and intellectual property to secure its $2.25 billion of senior secured notes. The proposed retirement of these senior secured notes would release the associated collateral. Given its intended repayment $750 million of debt post the proposed transactions, we expect leverage to return to approximately under 2.5x in 2021 as the business continues to recover.

The positive outlook reflects Gap's success at resetting its cost base while stabilizing its operating performance and maintaining very good liquidity. The outlook also reflects that Gap will maintain a conservative financial strategy.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

An upgrade would require consistency of performance at all its major brands, continued margin expansion and very good liquidity, as well as a conservative financial strategy. Quantitatively, debt/EBITDA would need to be sustained below 3.5x and EBIT/Interest above 3.5x.

Ratings could be downgraded should operational performance weaken and not be poised to return to 2019 levels or liquidity deteriorates for any reason. Ratings could also be downgraded if debt/EBITDA is sustained above 4.0 or EBIT/Interest is sustained below 2.5x.

Headquartered in San Francisco, California, The Gap, Inc. is a leading global retailer offering clothing, and accessories for men, women, and children under the Gap, Banana Republic, Old Navy, and Athleta. LTM net sales were approximately $16.6 billion. The Gap, Inc. products are available for purchase in more than 90 countries worldwide through 2,937 company-operated stores, 557 franchise stores, and e-commerce sites

The principal methodology used in these ratings was Retail Industry published in May 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1120379. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Christina Boni
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Margaret Taylor
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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