Gap to Shore Up Liquidity Amid Cash Squeeze Warning

Gap Inc. (GPS) raised $2.25 billion in debt as the cash-strapped clothing retailer warned that it may run out of money in the next 12 months, while also announcing the suspension of rent payments.

Gap will use the net proceeds of the debt offering to refinance its $1.25 billion notes due April 2021, as well as all outstanding amounts under its existing $500 million, five-year, unsecured revolving credit facility, which is scheduled to expire in May 2023, and for general corporate purposes.

In March, the ailing apparel retailer temporarily closed its North American retail stores and a significant number of our stores globally due to the coronavirus-related lockdown orders implemented by governments around the world.

“As we continue to manage through the impacts of the COVID-19 pandemic in fiscal 2020, it continues to negatively impact our operations and liquidity,” Gap said in a SEC filing. “We will need to take additional actions to both preserve existing liquidity and seek additional sources of liquidity, beyond our currently available cash and credit facilities within the next 12 months as existing cash and cash expected to be generated from operations may not be sufficient to fund our operations.”

In addition, Gap announced that it stopped all rent payment in April for its North America stores, which amounts to $115 million. The retailer is in negotiations with the parties under those leases to defer or abate the rent during the store closure period. Going forward once stores reopen, the company is seeking also to change the terms (including rent) of its leases, in certain instances to terminate the leases to permanently close some of the stores.

As part of the clothing retailer’s cost-cutting frenzy, it will cut planned capital expenditures by about $300 million in fiscal 2020, pull the full-year 2020 guidance issued on March 12, defer payment dates for our its previously announced first-quarter dividend, and suspend its regular quarterly cash dividend for the remainder of fiscal year 2020.

The company’s shares have slumped 60% since the beginning of the year closing 2.8% lower at $6.90 on Friday.

Wall Street analysts have a bearish outlook on Gap’s stock, rating the retailer with a Moderate Sell based on 10 Holds and 5 Sells. The $10.64 average price target implies 54% upside potential in the coming 12 months. (See Gap stock analysis on TipRanks).

As of February 1, Gap had cash, cash equivalents, and short-term investments of $1.7 billion. Going forward, the clothing retailer expects to have $750-$850 million of cash and cash equivalents inclusive of short-term investments in the fiscal quarter ending May 2.

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