Gap (NYSE:GPS) revealed that it did not pay rent on its stores in April. It did so in a regulatory filing that warned that the company may not have enough cash to weather the coronavirus crisis.
Gap's stock has lost almost 60% of its value since the beginning of the year, as the company was forced to close its brick-and-mortar stores and furlough thousands of employees amid the COVID-19 pandemic.
These latest updates confirm what many retail-focused investors already suspected: Gap belongs on the long and growing list of apparel and department-store chains that are in deep trouble right now.
Gap: Cash is becoming a problem
In a filing with the Securities and Exchange Commission (SEC) before the market opened on Thursday, Gap said that its existing cash, and the additional cash that it expects to bring in, might not be enough to sufficiently fund its operations if its physical stores remain closed for an extended period.
The company listed the steps it has taken to date in response to the pandemic, a few of which had not been previously disclosed:
- Drew down all the cash available ($500 million) from its revolving line of credit;
- Withdrew the guidance for the 2020 fiscal year that it issued on March 12;
- Deferred its first-quarter dividend and suspended dividends for the remainder of fiscal 2020;
- Suspended its stock-buyback program;
- Cut its planned capital expenditures by $300 million;
- Furloughed most of its store teams in the U.S. and Canada (more than 80,000 people);
- Cut an unspecified number of jobs at the corporate level around the world;
- Temporarily cut pay for all senior executives and directors; and
- Suspended rent payments for its closed stores, saving about $115 million per month.
Regarding that last point, the company said that it's in the process of negotiating with landlords to either defer rent payments or agree on abatements and that it will terminate some leases entirely and permanently close the stores. But, it warned:
If we are unable to renegotiate the leases and continue to suspend rent payments, the landlords under a majority of the leases for our stores in the United States could allege that we are in default under the leases and attempt to terminate our lease and accelerate our future rents due.
Last but certainly not least: Gap said that as of May 1, it expects to have between $750 million and $850 million in cash remaining. The company had about $1.7 billion in cash and equivalents as of Feb. 1, the end of its most recent fiscal quarter.
What it means: New CEO has moved quickly to cut cash burn
Simply put, it means that new CEO Sonia Syngal has scrambled to cut costs quickly in her first weeks on the job. Gap's decision to suspend rent payments on its stores follows a similar move by Urban Outfitters (NASDAQ:URBN), and as with Urban Outfitters, it pushes some of the acute risk of the moment onto the landlords -- but it also raises the risk of being found in default on the leases.
At least one prominent Wall Street analyst liked the moves. In a note following Gap's SEC filing, Morgan Stanley analyst Kimberly Greenberger upgraded Gap to the equivalent of hold from sell while dropping her price target for Gap's stock to $10 from $11.
Greenberger said that while her estimates for Gap's full-year results are still "meaningfully" below the Wall Street consensus, she thinks that the stock's steep decline since January suggests that much of the sales and earnings risk is already baked into the price. She thinks that Gap's shares could benefit from a retail sector rally later in the year, as retail stores in North America begin to reopen once the pandemic fades.
What's next for Gap
Investors might have to wait a bit longer for additional updates. Gap hasn't yet announced a date for its next earnings report, but it typically reports in late May.