US CREDIT-Gap sales improvement may lead debt tighter
NEW YORK, May 1 (Reuters) - Gap Inc.'s (GPS.N) debt spreads may have some upside left as improving store sales and clothing designs signal the struggling company may be on track to turn around its business.
The clothing retailer's credit spreads have been volatile in the last year as the owner of the Banana Republic and Old Navy chains tried to improve falling sales, was subject to speculation it may be a leveraged buyout candidate and was cut into junk territory by the three major ratings agencies.
The cost to insure Gap's debt blew out as wide as 160 basis points in January on LBO speculation, though this receded after the company ousted its Chief Executive Paul Pressler that month.
Gap's credit default swap spreads have since rallied to around 99 basis points, or $99,000 per year for five years to insure $10 million in debt.
"As more sales and data points come out, we think there's still room for tightening," said Edward Mui, analyst at independent research company CreditSights.
Gap earlier this month reported a 6 percent gain in March for sales at established stores on Thursday, exceeding Wall Street expectations. Traffic was up 2 percent and 4 percent, respectively, at the Gap and Old Navy chains, compared with negative 7 percent at both chains in February. For details, see [ID:nN12306804].
The company's same-store sales have been negative or flat in every month but three since June 2004, when consumers began gravitating away from the casual, cotton fashions at Gap and Old Navy.
"Right now, the problem is getting customers into their stores. ... They are focusing on bringing in customers and reinvigorating the Gap brand," said Mui.
Gap recently entered into a partnership with the CFDA/Vogue Fashion Fund, which includes selling limited-edition designer collections in Gap stores.
The designs are focusing on basic concepts, such as adding a twist to white shirts, Mui said. "So far, those lines are doing pretty well, their merchandise is looking a lot better in terms of quality and design," Mui said.
Compared with RadioShack Corp. (RSH.N), another retailer trying to turn around a struggling business, Gap has made more progress and has more upside left, Mui said. Spreads may be unlikely to tighten significantly from current levels, however, he added.
RadioShack, which is to trying to stabilize its business by closing unprofitable stores and reducing headcount, reported better-than-expected first-quarter profit on Monday as cost cuts helped offset weaker sales. [ID:nN30411341]
The electronics retailer's credit default swap spreads have rallied to around 112 basis points, after blowing out to around 200 basis points in January.
Gimme Credit analyst Carol Levenson, however, argued that both RadioShack and Gap are likely to get worse before they get better, rating both companies as deteriorating credits.
Same-store sales at RadioShack are still suffering, Levenson said in a report on Tuesday. The retailer is also seeing continued weakness in wireless sales and "has made a significant bet in this category that hasn't paid off lately," she added.
