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Gap Balks at $115M in Rent Payments as Q1 Cash Dries Up

Facing as much as a 55 percent plunge in Q1 cash and cash equivalents, Gap is putting off $115 million in rent payments, the company warned Thursday.

In a regulatory filing Thursday with the Securities and Exchange Commission, Gap warned that with the coronavirus pandemic keeping stores closed, it might not have sufficient reserves to fund future operations. That’s why it’s suspending payments to landlords starting this month for leases across North America.

Gap is in negotiations with landlords either to defer or abate the rent owed during the store closure period, modify lease terms–including rent–going forward when stores reopen, or in some instances ending the leases and permanently closing some of its brick-and-mortar locations.

“Although we believe that strong legal grounds exist to support our claim that under common law we are not obligated to pay rent for the stores that have been closed because of the governmental and public health authority orders, mandates, guidelines and recommendations,” Gap said in its SEC filing, “there can be no assurance that such arguments will succeed and any dispute under these leases may result in litigation with the respective landlord, and any such dispute could be costly and have an uncertain outcome.”

The store closures are giving Gap another headache to worry about: liquidity.

The San Francisco-based apparel giant said it needs to seek “additional sources of liquidity within the next 12 months as existing cash and cash expected to be generated from operations may not be sufficient to fund our operations.” Some of those options include new debt financing or another short-term credit facility, further deferring capital expenditures and reducing headcount. Gap could also reduce operating expenses, order less merchandise and extend terms for payment of good and services.

“If our business does not generate sufficient cash flows from operating activities, and sufficient funds are not otherwise available to us from borrowings under our credit facility or other sources, we may not be able to cover our expenses, grow our business, respond to competitive challenges or fund our other liquidity and capital needs,” Gap said, adding that the full extent of the pandemic’s impact depends on future developments that are still uncertain and unpredictable.

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At the start of fiscal 2020 on Feb. 1, Gap’s cash and cash equivalents, and short-term investments, totaled $1.7 billion, which it expects to slide to between $750 million and $850 million at the end of the first quarter, ending May 2. That equates to a decline of 50 percent to 55 percent from the start of the new fiscal year.

While the first quarter typically represents its lowest quarterly revenue, most of the cash has been used to fund operations. The closure of stores, a major revenue driver, have been a major factor is Gap’s wavering cash position.

Plus, there’s little clarity around when non-essential stores can safely reopen. While some states have talked about beginning to reopen locations, experts are broadly concerned about the possibility of second-wave infections. And recent studies indicate that consumers also might want to see certain efforts to ensure their safety while shopping in the physical stores.

“Any significant reduction in consumer visits to, or spending at, our and our franchisees’ stores, caused by COVID-19, and any decreased spending at stores or online caused by decreased consumer confidence and spending following the pandemic, would result in a loss of sales and profits and other material adverse effects,” the company said.

Other risks Gap raised include those that impact its supply chain, such as disruption to factory partners, in its distribution centers, logistics operations or elsewhere with service providers, or at Gap due to worker shortages.

“We may also see disruptions or delays in shipments and negative impacts to pricing of certain components of our products,” the company said.

The company has already drawn down its entire $500 million availability from its revolving credit facility, reduced planned capital expenditures by $300 million for fiscal 2020 and suspended stock repurchases and its regular quarterly cash dividend for the remainder of the year. Most store associates have been furloughed, although Gap is still paying health care benefits until stores can reopen. It’s also reduced pay for the retailer’s leadership team on a temporary basis.

Gap isn’t the only retailer that has put rent payments on hold. Most are looking at their expense structures, including J.C. Penney and Macy’s, which have both extended the time frame for paying vendors. And following draw downs on credit lines, other retailers are also exploring options to raise cash both to fund operations and help with paying down borrowings from their revolvers. Some, such as PVH, are also looking at private placements overseas.