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Merrill Lynch Downgrades Gap

Gap (GPS) posts 30 cents, vs. 21 cents, second-quarter earnings per share despite 3% same-store sales drop. Merrill Lynch downgrades the stock to neutral and cuts estimates.

Analyst Mark Friedman says he is lowering his rating to neutral from buy and cutting estimates as sales in August disappointed: he calls into question how difficult it's going to be for management to improve earnings, and gives us no real visibility about the timing of a turn.

Friedman believes all three brands are struggling, thinks it's likely that the holiday season will be aggressive, the turnaround timing is now uncertain, and that more aggressive markdowns from the largest specialty retailer could put pressure on the Gap segment.

He cuts fiscal year 2006 (January) EPS estimate to $1.33 from $1.57, and fiscal year 2007 to $1.50 from $1.68.

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