Gap stops paying landlords as retailers reel from virus lockdown

Gap said on Thursday it had stopped paying rent to its landlords to try to preserve cash and Target warned its profitability was under pressure, in announcements that demonstrated the financial pain being felt by US retailers, from the weakest to the strongest, as a result of the coronavirus lockdown

New York-listed Gap, which owns Banana Republic and Old Navy as well as the eponymous chain, said the suspension of rent payments for stores that have been closed was saving the company $115m per month in North America.

But it added that cash flow “may not be sufficient” to fund its operations and it was likely to have to take further steps to strengthen its balance sheet, including potentially raising new debt and further job cuts.

“There can be no assurance that we will successfully complete these actions,” it said.

Gap has already suspended dividends and share buybacks, drawn down all of the $500m available on its revolving credit facility and reduced $300m worth of capital expenditure it had planned this year.

Most of its store workers in the US and Canada have been furloughed without pay, and all operating expenses are being reviewed for possible cuts.

The company said it expected to have between $750m and $850m in cash and cash equivalents left by the start of May, down from $1.7bn three months earlier.

While weaker retailers, whose stores have been forced to close are fighting to strengthen their balance sheets, stronger operators are looking to see how they can capitalise on the opportunities presented by the shutdown.

They include big-box chain Target, which some investors believe can emerge as a winner from the crisis. Like its peer Walmart, Target stocks a wide range of goods, from clothing and electronics to essentials including groceries and toiletries, and has been able to keep stores open.

Stockpiling initially boosted Target’s sales, and they have continued to be strong online and in groceries. The company disclosed on Thursday that like-for-like food sales jumped about 40 per cent in March.

So far this month, ecommerce revenues have jumped more than 275 per cent. However, after an initial surge ahead of the Covid-19 lockdown, overall like-for-like store sales had declined “in the mid-teens” percentage range in April.

There was already weakness in some areas in March, where sales declined by a “low single-digit” percentage in homeware and more than 30 per cent in apparel and accessories.

Brian Cornell, chief executive, said the crisis would put “near-term pressure on our profitability”. The company said its operating margin in the first quarter, which ends at the start of May, would decline more than 5 percentage points.

Michael Fiddelke, chief financial officer, said that despite the immediate pressures “we expect to have the financial capacity to emerge from this crisis in a position of strength”.