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Fleeing the Gap

In January, embattled Gap CEO Paul Pressler resigned after two years of declining sales that was topped off this past holiday with sales that further fueled speculation the company would be sold.

In a statement, Gap said its board and Pressler “mutally agreed” it was time for him to leave. Gap named Robert J. Fisher, son of its founder Donald Fisher, interim CEO while it conducts a search for Pressler's replacement.

The San Francisco-based company, which owns more than 3,100 stores under the Gap, Old Navy and Banana Republic brands, has been caught in a downward spiral since the spring of 2004. And, sales during the past holiday season saw an 8 percent decrease in comparable-store sales.

Earlier in the month, it was reported that the retailer had retained the services of Goldman Sachs to help it explore strategic alternatives, igniting rumors that the struggling chain would soon join a long list of private equity buyouts — a trend that has resulted in more than $55 billion worth of transactions in the retail sector since January 2005.

Gap Inc. declined to comment on the move, calling it “speculation.”

It would seem Gap is a prime candidate for a buyout, say analysts. The chain has posted negative same store growth for its Gap and Old Navy brands, but it boasts a healthy cash flow and has a limited amount of debt. Its stock is also depressed. The day after Pressler's departure Gap shares were trading at 63 percent below their record high of $52.88 in February 2000.

“The company has correctly identified the root of its problems and is headed in the right direction,” writes Morningstar analyst Joseph Beaulieu.

Gap Inc. has been trying to return its Gap stores to youth-oriented jeans and T-shirt basics and to move the Old Navy stores up from the low end of the market.

The company's real estate strategy, however, presents a problem — most of its 3,167 stores worldwide are leased and wouldn't offer investors the opportunity to capitalize on the sale of its properties — a preferred method of building up extra cash in such transactions. The company operates 2,692 locations in the United States.

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