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Gap downgraded to 'sell'
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November 28, 2001: 2:43 p.m. ET
Prudential initiates rare 'sell' rating, cites dismal holiday, 4Q outlook.
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NEW YORK (CNN/Money) - Prudential Securities downgraded shares of apparel retailer Gap Inc. to a rare "sell" rating Wednesday, citing a bleak holiday outlook for the troubled company and management's acknowledgement that there is no near-term fix.
Prudential analyst Stacy Pak lowered her "hold" rating to "sell," saying the company's sales are under pressure and existing customer traffic is largely driven by heavy discounting across all its units, including Gap stores, Old Navy and Banana Republic.
The downgrade sparked a sharp selloff in Gap (GPS: down $0.73 to $13.67, Research, Estimates) shares, which tumbled more than 6 percent on the New York Stock Exchange Wednesday morning.
Of some 25,000 Wall Street stock ratings compiled by earnings tracker First Call, only 402, or 1.6 percent, are "sell" or "strong sell."
Pak said in a research note that Gap is trading at 96 times its projected 2001 earnings and 36 times its projected 2002 earnings "making it by far the most expensive stock in our universe."
"I think a lot of people sort of are used to Gap being a premium company and sort of treating it like a Home Depot or a Kohl's or a Target, and maybe haven't looked at it really closely lately," Pak told CNNfn's Market Call Wednesday. (WAV 422KB) (AIFF 422KB)
A Gap spokeswoman said the company would have no comment on the downgrade Wednesday.
Gap ran into trouble earlier this year as its product offerings became too narrowly focused on the youth market, alienating its strong base of 20- to 30-year-old customers, analysts have said. Additionally, the company, along with other apparel chains, has struggled with the slowing economy as consumers shifted their spending to discount chains.
Faced with declining sales, the company slashed 1,300 jobs last summer and took a $30 million charge in the third quarter to pay for it.
The company's current position is a far cry from where it was barely a year ago, when analysts were singing the praises of CEO Millard "Mickey" Drexler's management style and forward-thinking fashion sense.
But the stock began to sour when the company proceeded with expansion plans despite steadily declining sales, which pumped up operating costs and cut into profits," analysts have said.
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On Nov. 15, Gap posted a third-quarter loss of $48 million, or 6 cents a share, before unusual items, blaming lower sales amid the sluggish economy and in the aftermath of the Sept. 11 terrorist attacks.
Though a narrower loss than the Street had expected, it was a sharp drop from the 21 cents a share profit it posted a year earlier. 
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