Jan. 8 (Bloomberg) -- Shares of Gap Inc., the largest U.S. clothing chain, rose the most in more than two years after CNBC reported the company had hired Goldman, Sachs & Co. to explore strategic alternatives.

The stock jumped $1.37, or 7.3 percent, to $20.26 at 4 p.m. in New York Stock Exchange composite trading, the biggest gain since Nov. 4, 2004. Gap hired Goldman Sachs prior to Christmas and the bank could recommend a sale or a spinoff of one of its units, such as Banana Republic, said CNBC's David Faber.

Gap said last week its board was reviewing strategies at the Gap and Old Navy chains to stem sales declines. Chief Executive Officer Paul Pressler, hired in 2002, had to cut prices to clear stock after stores failed to generate holiday traffic. The company is poised to report its second straight full-year profit decline.

``It's very constructive'' to hear Gap may be hiring Goldman Sachs, said Jordan Posner, who helps manage more than $1.6 billion in assets at New York-based Matrix Asset Advisors, including 2.3 million Gap shares. Pressler ``has had enough opportunity to get the merchandising side right.''

Gap is worth in the range of at least the ``mid-20s'' a share, Posner said.

Gap spokesman Greg Rossiter said the company doesn't comment on ``rumors and speculation.'' He said Gap has had a relationship with Goldman Sachs since 1995, as it does with other top investment banks.

Board Report

The results of the board's review will be released before March 1, the San Francisco-based company said.

The company last week cut its earnings per share forecast for the second time since November, to 83 cents to 87 cents for the year ending this month, down from an earlier projection of $1.01 to $1.06.

Pressler, hired from Walt Disney Co., has appointed new executives, including chiefs for the Gap and Old Navy chains, in an effort to turnaround sales declines. His contract will expire later this year. At least eight top executives have left the company as revenue dropped.

The company failed to lure shoppers with skinny black pants at the Gap chain -- promoted with ads featuring the late Audrey Hepburn -- and less clutter and more upscale items such as leather jackets at Old Navy.

Old Navy

Old Navy lost share to retailers including Target Corp. and Gap lost shoppers to stores such as Abercrombie & Fitch Co., investors including Adam Friedman of Cleveland-based Integrity Asset Management, which owns retail stocks though not Gap, have said.

``Gap stores have been donating a lot of market share for a long time and I don't think it's going to be easy to turn the core business around,'' said Robert Buchanan, a St. Louis-based analyst at A.G. Edwards & Sons. He rates the shares ``hold.''

December sales at stores open more than a year fell 8 percent, missing the 4.7 percent drop analysts estimated, according to data compiled by Retail Metrics LLC. Comparable- store sales declined in 28 of the past 31 months, and Gap slashed prices on some clothes almost 90 percent last month.

Same-store sales at Gap in North America dropped 9 percent, while Old Navy tumbled 10 percent, both missing analysts' estimates. Banana Republic posted a 2 percent increase, exceeding projections for a 0.2 percent gain. Gap's international sales fell 8 percent.

Bond Risk

Moody's Investors Service said last week it may cut Gap's credit ratings from the current level of Baa3, the company's lowest investment-grade ranking.

The perceived risk of owning Gap's bonds also rose as the CNBC report revived speculation the company could be acquired in a leveraged buyout. Credit-default swaps based on $10 million of Gap bonds jumped 27 percent to $167,000 from $132,000 at the start of today's trading, according to data compiled by Credit Suisse Group. The increase suggests deterioration in the perception of credit quality.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They were conceived to protect bondholders against default and pay the buyer face value in exchange for the underlying securities should the company fail to adhere to its debt agreements.

Leveraged buyouts generally are bad for bondholders because the acquirers typically borrow two-thirds of the purchase price to fund the deal, causing a drop in the target company's credit ratings.

To contact the reporter on this story: Andria Cheng in New York at lcheng@bloomberg.net.

Last Updated: January 8, 2007 16:49 EST