Standard & Poors (S&P) lowered the issuer credit rating to ‘BB’ from ‘BB+’. The downgrade reflects our view that Gap Inc.’s performance struggles will persist as it faces a torrent of competitive headwinds and potential distractions from the planned separation of its core Old Navy brand in mid-2020

Brands include Gap, Old Navy, Banana Republic and Athleta.

S&P said it expects operating results will remain under pressure through the holiday season and into 2020 as the company wrestles with waning brand appeal and intense competitive pressures.

S&P wrote in its note, “Inconsistent execution, fashion misses, and weak traffic trends have pressured results this year, with consolidated comparable store sales declining 4 percent year to date and gross margins down approximately 100 basis points. We believe the company is losing market share to stronger operators across the apparel sector, including fast fashion, off-price, and mass-merchandisers. We expect the company’s mall-based retail concepts, including Gap and Banana Republic, will remain under pressure from secular challenges and eroding margin trends will be difficult to reverse.”

S&P also lowered the issue-level rating on the company’s notes to ‘BB’ from ‘BB+’. The ratings were removed from CreditWatch. The outlook is negative, reflecting that S&P could lower the rating over the next 12 months based on the outcome of the company’s planned spin-off of Old Navy or if the company’s overall performance fails to stabilize.

S&P said, “The negative outlook reflects our expectation that operating results will remain challenged by ongoing intense competitive pressures and execution risks will persist with all of its key brands, including Old Navy. It also reflects the risk that we could lower the rating based on how the company will be funded following the planned spin-off of Old Navy.

“We could lower the rating if weak operating trends accelerate, including sustained declines in comparable store sales and margin erosion, causing credit metrics to deteriorate, including adjusted leverage exceeding 3x. Under this scenario, persistent product issues and negative traffic trends would result in heightened inventory markdowns and weakening cash flow generation. We could also lower the rating depending on the outcome of the planned separation, based on our assessment of the standalone group’s competitive position and its capital structure.

“We are unlikely to take a positive rating action until we have greater visibility into the company’s prospective capital structure and financial policy following the planned spin-off of Old Navy. We could revise the outlook to stable if the company’s efforts to strengthen operational execution and restore relevance lead to sustained improvement across all brands, including stabilizing sales and profitability trends while maintaining leverage below 3x.”