By and  on January 10, 2007

Amid a whirlwind of speculation about what will happen at Gap Inc., from asset sales to going private to executive departures, two things are certain — there is no easy fix and it won't be an easy business to sell.

Gap soon will disclose that it is seeking strategic alternatives or significant executive changes. According to a source, the company held an unscheduled board meeting in San Francisco Tuesday, raising expectations that a critical announcement could be coming soon.

Gap stock dipped slightly Tuesday on the New York Stock Exchange to $20.19, from Monday's close of $20.26 on reports the retailer had hired Goldman Sachs to explore a possible sale of all or part of the company. Trading remained heavy, with 15.5 million shares traded Tuesday, compared with the daily average of about 6.7 million.

Gap Inc.'s senior unsecured debt was cut to junk status on Tuesday by Fitch Ratings, which cited weak sales over the holiday period and shrinking profit margins. Fitch said in a statement it cut its rating on about $513 million of Gap's senior unsecured notes to "BB+" from "BBB-," the lowest investment grade level.

Fitch Ratings said Gap's liquidity position remained strong, with $2.4 billion of cash and short-term investments as of Oct. 28, 2006 — which could make it an attractive target.

But according to market experts, selling the struggling retailer might be difficult for several reasons. The Fishers, Gap's founding family, won't sell their shares cheap; a buyer faces a major task fixing the various divisions; the group's core businesses are mature, with too many stores that are too large and no owned real estate; the management team seems to be hemorrhaging, and analysts continue to speculate over the future of Paul Pressler, Gap's president and chief executive officer, who is under increasing pressure from Wall Street. That pressure, sources said, was likely to remain, since analysts predict Gap is going to have another tough year.

"I think Paul Pressler will not be on the fourth-quarter conference call," said one analyst, who requested anonymity. Pressler's contract expires in September.

According to sources, there was a string of executive departures this week, including Ivy Ross, executive vice president of product design and development at Old Navy; Christopher Hufnagel, vice president, Gap brand store experience, and Kyle Andrew, vice president of Gap Marketing. Sources said Andrew was headed to Kenneth Cole, and that Hufnagel is joining Under Armour. There was no word on Ross' future. Gap officials could not be reached to comment on the departures or about any board meeting.

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