Enigmatic financier Edward S. Lampert has moved in on Gap Inc., taking a 5.8 percent stake that he could ultimately use to agitate for changes at the specialty retailer.

This story first appeared in the February 16, 2011 issue of WWD. Subscribe Today.

As of Feb. 3, Lampert, who orchestrated the combination of Sears and Kmart and serves as chairman of Sears Holdings Corp., had scooped up 35 million shares of Gap Inc. through various investment vehicles, including his ESL Investors hedge fund.

Word of the investment — which was disclosed in a Securities and Exchange Commission filing late Monday — pushed shares of Gap up 6.1 percent to $22.78 Tuesday, putting the value of Lampert’s investment at just short of $800 million. About 21 million Gap shares traded hands, more than twice the usual number. Shares of Sears, on the other hand, dipped 1.2 percent to $88.24.

The regulatory filing specified that the investment was not made to try to influence control of the company, but Lampert could change his stance and push Gap to revamp operations, perhaps lobbying for a more aggressive share buyback program.

The retailer had no comment on Lampert’s investment.

Even though retail stocks are near their all-time highs, relatively cheap valuations on many companies have made the sector open season for deep-pocketed investors. Activist William Ackman teamed up with Vornado Realty Trust to buy 26 percent of J.C. Penney Co. Inc.’s shares last year, and last month used that as leverage to get three slots on the retailer’s board. The investors can now lobby for change from within.

And relatively easy financing terms have led to a flurry of M&A deals, including for J. Crew Group Inc. and The Gymboree Corp.

Gap fits with Lampert’s reputation as a value investor, more so than reports that the hedge fund operator was considering a counterbid to TPG Capital and Leonard Green & Partners $3 billion deal to buy J. Crew. The San Francisco-based retailer, which operates the Gap, Old Navy and Banana Republic chains, weighs in with an enterprise value — the value of shares and debts minus cash — of $10.8 billion.

But despite its size, its multiple — or enterprise value divided by earnings before interest, taxes, depreciation and amortization for the last 12 months — is just 4.12. Limited Brands Inc., by contrast, has a multiple of 7.64 and Urban Outfitters Inc. trades at 10.41.

Same-store sales for the fourth quarter were flat, with Gap North America down 2 percent, Old Navy North America up 1 percent, Banana Republic North America up 1 percent and international down 1 percent. Earlier this month, as it reported January sales, the specialty retailer raised quarterly earnings projections to between $1.85 and $1.86 a diluted share, up from previous guidance of $1.77 to $1.82.

At the very least, Lampert has the opportunity to capture some of the upside potential in the stock.

It’s a longer shot, but if he attempts to one day buy Gap, there could be merchandise and real estate synergies.

Lampert has been aggressively rebuilding the team at Sears and Kmart and has charged his new merchants to modernize the assortments and build collaborations with brands for exclusives. Among the recent partnerships disclosed is UK Style by French Connection, a brand based in London, for the current spring season, and Sofia Vergara for Kmart, a sexier, more youthful line that will be launched in the fall.

And his 5 percent stake puts Lampert in a better position to negotiate possible merchandise tie-ups. He could also push the company to sell off some of its leases, which are generally in good locations. Gap has 3,082 stores, with outposts in North America, Europe and Asia. Almost all its locations are leased.

It remains to be seen if Lampert is interested in shaking up the management and the board at Gap, which has given chief executive officer Glenn Murphy virtual carte blanche in orchestrating a turnaround attempt. While Gap, under Murphy’s direction, has improved the balance sheet and cash flow and has built up its online portfolio with new brands, as well as its global presence primarily through franchising, the Gap brand is still suffering domestically, where many see it as having too many stores.

Lampert has shown willingness to go off the beaten path. In the past, he has suggested some of Sears’ popular brands, which include Lands’ End and Craftsman, might be sold at other retailers. He also brought Kmart out of bankruptcy, sold off stores and then used the retailer as a vehicle to take over Sears.

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