NEW YORK — Shares of Gap Inc. are up about 6 percent since the beginning of the year after speculation swirled in the market last week that the company might put itself up for sale.

Neither Goldman Sachs, which supposedly was contacted to explore options, nor Gap have yet to confirm the speculation. The equity research arm of the investment banking firm, which operates separately from its financial advisory/investment banking services, reaffirmed its “sell” rating on the stock last Tuesday.

Goldman Sachs analyst Margaret Mager said in the research note that while “there are numerous strategic options, at current prices the upside from here is limited. Beyond a buyout, Gap could attempt to rationalize one of its units (e.g., Banana Republic) through a sale or public offering, or it could break the company up into multiple traded parts, but we see little hidden value in a breakup. We think a buyback or special dividend designed to return excess cash to shareholders is the most likely event.”

The analyst said the problems confronting Gap are “structural” and would challenge any management team. Mager said a financial restructuring or even a sale of the company is not a panacea.

Regarding a leveraged buyout, a financial buyer wouldn’t get much by way of assets. The company’s Gap, Banana Republic, Old Navy and Forth & Towne brands consist mostly of store leases.

In a subsequent report released last Wednesday, following executive changes at the merchandising and design teams at Gap and Old Navy, Mager said, “Bottom-line, these changes do not alter our view on the Gap stock.” The announced departures included Denise Johnston, president of Gap Adult, after just eight months on the job.

Mager said turnover at the midmanagement ranks at Gap has been occurring for several years, and that poor results typically lead to departures. She said high turnover creates stress at all levels and exacerbates the challenges. In Gap’s case, she expects poor results will continue into 2007 given the “turmoil in leadership.”

“The management turnover reduces the probability of an LBO in our view as it points to an unstable company that should not be leveraged. In our view, Gap cannot realistically explore strategic options until its business is performing better,” Mager concluded.

This story first appeared in the January 16, 2007 issue of WWD. Subscribe Today.

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