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Restructurings appear to be in the air at both Gap Inc. and Limited Brands Inc.

Gap is said to be looking to sell Banana Republic and perhaps the entire group, while Limited is considering a spin-off or sell-off of its Express and Limited Stores divisions, according to reports circulating around Wall Street since the New Year.

Gap officials declined comment Monday on the speculation, while Limited executives could not be reached.
But talk of big changes at Gap Inc. caused the specialty retailer’s shares to jump 7.25 percent Monday to close at $20.26 in New York Stock Exchange trading as investors mulled the possibility the San Francisco-based company would either sell all or parts of the firm.

The speculation was fueled by a report on CNBC that Gap had hired investment banking firm Goldman Sachs to help explore options. Goldman Sachs declined comment. Nearly 28 million shares traded hands on Monday, compared with a three-month average trading volume of nearly 6.8 million shares. Gap Inc. has a market capitalization of $16.42 billion.

If the Goldman Sachs report is true, the move could represent an admission by the Gap Inc. board that the business may be beyond its ability to fix it.

“Anything is fixable with the right vision. It’s all about the vision,” said one retail principal.

The hiring of Goldman Sachs would also indicate that Gap’s founding Fisher family might have had enough and is ready to cash out, after almost four decades. There have been more ups than downs, though the retailer has struggled for the last three years, with two years of failed efforts at a revival. The stock has also been weak, but a deal could bolster the price. The Fishers own about 37 percent of the stock.

It was the summer of 1969 when Don Fisher and his wife Doris opened the first Gap store in San Francisco. The chain grew into one of the world’s largest specialty retailers, with more than 3,000 stores and fiscal 2005 revenues of $16 billion. Fisher is 78 and chairman emeritus. His son, Robert Fisher, is chairman.

But Gap’s growth and impact on America’s casual dress code is largely due to Millard “Mickey” Drexler, who is currently chairman and chief executive officer of J. Crew Group. Drexler was pushed out by the board in 2002 after several slumping seasons, but some analysts believe he is exactly the man the company needs to get it back on its feet. The likelihood of Drexler returning to Gap is slim, however, considering he’s on a roll at J. Crew, which he turned around and took public last year in one of retailing’s most successful IPOs. He owns about 12 percent of the company.

This story first appeared in the January 9, 2007 issue of WWD. Subscribe Today.

One possibility is that Gap sells only its Banana Republic division, which has faltered the least of any of its core divisions. Selling the Gap chain and Old Navy might be more difficult, considering they have lost a great deal of cachet, traffic has thinned, and both are overspaced. Old Navy stores, on average, have 18,800 square feet, whereas Gap stores have 9,500 square feet. Rising competition from American Eagle Outfitters, Abercrombie & Fitch, H&M and J. Crew, among other chains, has sapped Gap and Old Navy’s market share.

While Banana Republic reported a 2 percent comp-store gain for December, Gap North America was down 9 percent and Old Navy North America was down 10 percent. The company also operates Forth & Towne and the Web site Piperlime.

Since the heyday of the brand in the Eighties and Nineties, the Gap DNA has changed. The company has shifted from being heavily merchant-product driven to one that has more systems, processes and financial drive. Lately, the company has been a revolving door for executives and a big discounter.

One financial source active in mergers and acquisitions didn’t believe all of Gap is for sale. “No way would the Fisher family sell Gap,” the source said. “It also needs work. What is being shopped is Banana Republic.”

Walter Loeb of the consulting firm bearing his name, observed, “I’m not surprised by the news. Gap [Inc.] needs to be restructured. Whether the Fishers want to sell is doubtful. However, Banana Republic is doing OK. It is salable.”

Loeb added that what Gap might need more than a sale is a change of management. “They’ve made lower level changes, but now the senior management has to be changed. The company announced that denim is a big thing for spring, but that’s not very helpful. It is an old story and Gap needs to be more inventive, with a new merchandising group that will give customers what they want.”

Richard E. Jaffe, analyst at Stifel Nicolaus, said deals for retailers involving private equity since 2000 have sold at an average multiple of 10.8. That would put a Gap price at around $22 and close to its current price.

Jennifer Black, president of Jennifer Black Associates, believes the individual parts of the company sold separately may be worth more than the firm as a whole. “I believe that a sale of the entire company is entirely possible. I’ve been saying that for the last year and the buyer could be private equity.”

Black also believes the company needs management change, particularly “a ceo with a vision.” She added that going private via a sale to private equity could be the way to go because “everything they do right now is under such scrutiny. With a brilliant ceo, it would be easy to work through the different fixes while the company is private. Once the divisions are fixed, they can be spun off,” she said.

“Gap has lost its touch,” said one specialty retail analyst, who requested anonymity. “They don’t know who their customer is really. Actually, their customer is now a bargain shopper and that is not who they are trying to market to.”

The Gap is being run by president and ceo Paul Pressler, a former Disney executive, who took the reins from Drexler. Last week, Gap unveiled poor holiday sales results and said “the management team along with the active involvement of our board of directors is reexamining our go-forward product and merchandising strategies and tactics.”

At Limited Brands, selling off its apparel divisions would help the market realize the value in the group’s highly successful Victoria’s Secret and Bath & Body Works units. In Limited’s 2004 annual report, chairman and ceo Leslie H. Wexner said Express and Limited would absolutely not be for sale. He started the company with a single store called Limited, which opened in Columbus, Ohio, in 1963, and the brand remains close to his heart. Limited is about a $500 million business, while Express is estimated at $1.6 billion in sales.

As of late, however, Wexner has been quiet about the Limited and Express apparel businesses and has emphasized in investor update meetings that the future of company is Victoria’s Secret and Bath & Body Works. He has said the group’s focus is on beauty and intimate apparel.

Moreover, Limited is no stranger to sell-offs and spin-offs. The company has a long history of shrewd restructurings and deals, including in 1995, establishing Intimate Brands (composed of Victoria’s Secret and Bath & Body Works) as a separate entity and recombining them into Limited Brands in 2002. Then there was the spin-off of Abercrombie & Fitch in 1998 and the sale of New York & Co. to Bear Stearns in 2002, among other deals involving divisions.

Express/Limited are forecast to have an operating margin of 0.4 percent in the current fiscal year, whereas Victoria’s Secret and Bath & Body Works are estimated at a combined 18.8 percent operating margin.

“We continue to expect the apparel brands to be spun off in early 2007, thereby enhancing the share price,” wrote Mark Montagna, analyst at CL King & Associates, in a report last week about December sales results at Limited Brands. For the month, Express was down 5 percent; Limited Stores was down 10 percent, while Victoria’s Secret was up 10 percent and BBW was up 5 percent. VS Direct had a 10 percent gain.

On Monday, shares of Limited Brands declined by 1.9 percent to close at $26.80 on the New York Stock Exchange. Nearly 7.4 million shares traded hands, compared with a three-month average trading volume of 2.9 million shares.

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