Tuesday, January 23, 2007

Color on news: Gap (NYSE:GPS)

Several firms are commenting on Gap (NYSE:GPS) after the co announced that its President and CEO, Mr. Paul Pressler, was stepping down immediately:

- Goldman Sachs notes Pressler's departure has been speculated about for over a year and is not a surprise given recent results. However, there is no easy fix for GPS. A new CEO will need great vision and the ability to attract talent in order to rebuild the leadership ranks. Assuming the right CEO is hired and a turnaround is even possible, it will take time to reconnect with consumers while facing skilled competition.

This as a necessary change for Gap, but firm's reservations remain numerous. The issues confronting Gap are structural and will challenge any CEO and/or new management team, at the same time that the shares are fully valued with little upside even if a turnaround takes hold, while downside risk is high in light of on-going market share losses. Moreover, today's announcement reaffirms their view that that poor results are likely to continue given the turmoil in leadership.

Gap shares could trade-up marginally on the news and then continue to trade around current levels as investors wait to see who succeeds Pressler and what new strategies will ensue. The prospect of new leadership provides hope, but does not eliminate the secular issues Gap faces.

- Morgan Stanley sees Pressler's departure as a big step in the right direction. They expect further changes to be announced in the next month or so, including a possible sale of one of GPS' divisions (most likely Banana Republic) or an LBO of the entire company. In terms of who could replace Pressler, they think Mickey Drexler is unlikely. However, they find it interesting that Vanessa Castagna, executive chairwoman of Mervyn's and former CEO of JC Penney's stores and direct business, announced her resignation from Mervyn's and Cerberus Capital Management this morning. MSCO thinks she would be a great fit for GPS and possess the "deep retailing and merchandising experience" the retailer so desperately needs.

They expect the stock to reactive positively to the news of Pressler's departure as well as the Board's willingness to make material changes. MSCO continues to believe the stock will hit the $23-$25 range over the near term. Additional upside catalysts include a sale of one of GPS'
divisions or a sale of the entire company to a private equity player.

Maintains Overweight.

- Citigroup says that although they believe the market has been looking forward to Paul Pressler's departure, they are less constructive on the departure given that no permanent replacement was named. Furthermore, given that a search is likely to take at least 3-6 months in firm's view, they do not believe that a new CEO will be in a position to meaningfully impact the business until at least the fall or holiday of 2008. Additionally, they believe the stock's current valuation has been supported on speculation of a LBO or management change; however, with Mr. Pressler's resignation, the risk they see to the stock is that it begins to trade on fundamentals which could put downward price pressure on the shares.

Notablecalls: Looks like the Fisher family run out of patience. I suspect that firing Pressler will ignite a series of events that will prove to be beneficial for the shareholders. At least in the s-t.

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