S&P Global Ratings upgraded the debt ratings of Gap Inc., the parent of Athleta, due to the company’s comparable-sales acceleration and operating margin improvement in 2025 despite difficult macroeconomic conditions.
S&P said it expects Gap, which also owns the Gap chain, Old Navy and Banana Republic, will sustain improved operating margins in 2026 as it manages increased costs from tariffs and continues to execute its brand reinvigoration plan.
S&P raised its issuer credit rating on Gap Inc. to ‘BB+’ from ‘BB’. At the same time, it raised our issue-level rating on the company’s senior unsecured notes to ‘BB+’ from ‘BB’. The ‘3’ recovery rating reflects S&P’s expectation for meaningful (50 percent-70 percent; rounded estimate: 60 percent) recovery in the event of a default.
The stable outlook reflects S&P’s expectation that Gap Inc. will sustain improved operating performance, supported by brand momentum, that will lead to leverage sustained below 2x.
S&P said in its analysis, “The upgrade reflects steady improvement in Gap Inc’s operating performance despite weak consumer confidence. The company’s S&P Global Ratings-adjusted EBITDA margin expanded to 17.6 percent in the third quarter on a trailing-12-month basis compared to 16.7 percent for the same prior-year period and 11.5 percent in 2023. This demonstrates good execution of the company’s reinvigoration plan and improved operational efficiency. In addition, the company’s focus on inventory management resulted in only a 5.5 percent increase in value compared to the prior year due to elevated merchandise costs and lower units. While elevated tariff rates hurt the merchandise margin by 190 basis points in the quarter, it was partially offset by higher prices on specific products, cost management and fixed-cost leverage. We forecast an adjusted EBITDA margin of 17.2 percent in 2026 compared to 17.1 percent this year as the company manages elevated tariff rates on goods. In 2027, we expect the adjusted EBITDA margin will increase to 17.5 percent due to higher average unit retail (AUR) from improved price realizations and cost-reduction initiatives. In our view, the company’s ability to sustain comparable sales growth momentum will be a critical factor to improve its operating margins.
“The company’s reinvigoration plan focused on strengthening its brand position by enhancing consumer value perception and improving operational efficiency. Marketing optimization through strategic collaborations allowed the company to leverage the power of its iconic brand equity and broaden its consumer reach. In addition, more effective inventory management following supply-chain challenges three years ago contributed to reduced promotions and increased inventory turnover, leading to improved operating margins and faster cash conversion. Operating efficiency efforts also included optimized store operations, increased productivity, and reduced overhead expenses, which are expected to result in cost savings of about $150 million in 2025. While the reinvigoration plan has generated benefits over the last two years, we continue to apply a negative comparable ratings adjustment to our issuer credit rating to account for the relatively short track record of the improved performance. It also reflects the risk of potential operational missteps or the brands losing momentum due to shifting consumer preferences.
“We expect comparable sales will continue to grow in 2026, supported by brand momentum. Gap Inc. reported total revenue growth of 3 percent in the third quarter, with comparable sales accelerating to 5 percent, largely driven by Old Navy and Gap banners’ consistent execution. Old Navy’s comparable sales increased by 6 percent in the quarter due to a compelling assortment of merchandise, notably in the activewear category, with growth across different income cohorts and affordable price points. In addition, the company started to expand beauty product categories in 150 stores. Gap brand’s comparable sales increased by 7 percent in the quarter, driven by denim. The company used campaigns, collaborations, and partnerships to increase relevance and customer acquisitions, with increasing engagement of younger demographics. Gap brand’s product assortment has resonated well with consumers due to on-point merchandising and styles that are on-trend and at the right price points.
“Banana Republic reported a revenue decline of 1.1 percent in the quarter due to store closures as the company continues to optimize its fleet, which was partially offset by comparable-sales growth of 4 percent. We expect the company will continue to adjust the banner’s value/price balance with a focus on premium offerings. Athleta reported a revenue and comparable sales decline of 11 percent in the quarter, as the brand continues to reset its inventory and reposition itself as an aspirational premium brand. The company has recently made changes in the Athleta management team, appointing Maggie Gauger as brand president and CEO to lead the turnaround efforts. While we expect continued weakness in Athleta in 2026, it contributes less than 10 percent of the company’s overall revenue.
“We expect the company’s overall revenue will increase 2.1 percent in 2026, supported by continued brand relevance and market-share gains led by Gap brand and Old Navy. We expect Old Navy’s value offerings will resonate with consumers as inflation affects spending habits. In 2027, we expect revenue will grow 1.8 percent, partially supported by the roll out of new product categories like beauty and accessories and the stabilization of the Banana Republic and Athleta brands.
“Gap Inc.’s ample cash balance provides a cushion to its credit metrics. The company’s S&P Global Ratings-adjusted leverage improved to 1.2x in the third quarter compared to 1.4x in the prior year due to an elevated cash balance and improved profitability. The company doesn’t have a stated leverage target as part of its financial policy, but it has strategically strengthened its liquidity position in the last three years by increasing its cash balance. As of Nov. 1, 2025, the cash, cash equivalents and short-term investments balance reached $2.5 billion, in addition to a fully undrawn $2.2 billion asset-based lending (ABL) facility due in 2027. Our base-case forecast assumes a cash balance reduction back to historical levels of $1 billion–$1.5 billion. Therefore, we forecast adjusted leverage will increase to 1.6x in 2026 and 2027, driven by an increase in shareholder returns.
“We expect Gap Inc. will generate consistent free operating cash flow (FOCF). Reported FOCF decreased to $280 million in the third quarter on a year-to-date basis compared to $540 million in the prior year due to elevated costs from tariffs, the timing of merchandise inventory, and higher compensation payments. While the company has generated more than $1 billion in reported FOCF in the last two years, we believe tariffs will dent the company’s FOCF in 2025 due to higher working-capital requirements and lower profitability. In addition, the company plans to increase capex spending to $500 million-$550 million this year, which includes investments in technology to drive efficiencies and customer experience and new product categories. We project reported FOCF will increase to $932 million in 2026 compared to $820 million this year. In 2027, we expect reported FOCF will further increase to $993 million as the company executes its reinvigoration plan.
“The stable outlook reflects our expectation that Gap Inc. will sustain improved operating performance, supported by brand strength, which will lead to leverage below 2x.”
