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Seismic Change At The Gap?

It's a tough call for an analyst in an awkward spot. Margaret Mager of Goldman Sachs (GS) is probably not too comfortable with her "sell" recommendation on Gap (GPS). The specialty apparel retailer recently hired Goldman to explore strategic alternatives, since sales continue to deteriorate. The stock is down from 21 on Oct. 22 to 19.38 on Jan. 24. Mager stands firm on her sell. In a report, Mager says Gap "can't realistically explore strategic options until its business is performing better." Paul Pressler's resignation as CEO on Jan. 22, she says, was no surprise, but "it is a necessary change." Mager adds that her reservations "remain numerous" and "will challenge any CEO or new management team." But Michelle Clark of Morgan Stanley (MS), which owns shares and has done banking for Gap, rates it "overweight" in anticipation that some "value-creating change initiative is near." One possibility: a leveraged buyout, or a spin-off of one of its units--probably Banana Republic. She values Gap at 23-25 in an LBO. She says Chairman Robert Fisher's family, which owns 37%, could lead an LBO with private equity groups. Dana Cohen of Bank of America, who also rates Gap a buy, values the stock at 25, assuming an 80% probability of a turnaround.

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

By Gene G. Marcial

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