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Lehman Cuts Gap to Equal-Weight from Overweight

Lehman downgraded Gap (GPS) to equal-weight from overweight, after the company posted its third quarter results.

Gap said it had 24 cents earnings per share in the third quarter compared to 28 cents during the comparable year ago period. It also cut its $1.30 to $1.34 fiscal year 2006 earnings per share estimate to between $1.12 and $1.17.

Analyst Jeff Black says the company's management has done an admirable job on the financial leg of its recovery, but the next phase, as outlined on a conference call, involves the more challenging effort to revamp merchandising while investing in some far-reaching initiatives on the technology side. He says the fourth quarter is clearly in trouble -- traffic is down at all divisions, and early reads on holiday lines are unfavorable. He notes that improvements in the merchandising side could be three to four quarters out. He also cut his $1.23 fiscal year 2006 (ending January) earnings per share estimates to $1.13, and his $1.40 fiscal year 2006 to $1.27. His $22 stock price target falls to $19.

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