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Contributors: Douglas McIntyre Jon C. Ogg

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Wednesday, September 13, 2006

Gap Inc. Finally Catches a Break

Shares of Gap Inc. (GPS) are trading at over 2.4% this morning in pre-market trading at $17.50. There was an interesting call this morning as Lehman Brothers raised the stock to an Overweight rating from an Equal Weight and it gave GPS a $21 target.

The company noted some business improvements in segments such as denim and at Old Navy. It also is seeing some success in wovens and sweaters. The research note also points out that its markdowns and inventory management should help the company to recapture some of its lost margins. This research piece also noted that a management change could come soon if same-store-sales trends continue in the red. The note mentioned that the CEO Paul Pressler contract ends in September 2007 and he could leave before then.

The note didn’t signal a leveraged buyout or any interest from private equity firms potentially having interest in acquiring the company, but this name is one that has come up in many private equity takeover target screens out there. The key issues that act as hurdles are the fact that that the market cap is some $14+ Billion and its bruised image as a secondary concern.

Normally we don’t target specific brokerage calls, but this is actually the first real upgrade from a bulge bracket firm since April. Its 52-week trading range is $15.90 to $19.42, but this used to trade in the $20’s and was over $25 at one point two-years ago. Because this is one of the first positive brokerage research calls in some time from a bulge bracket firm, this could be expected to bring more active trading volume than normal. GPS was up marginally yesterday with the overall market, but it had already climbed about 3% from its lows in the last 5-days.

Jon C. Ogg
September 13, 2006

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