Gap shares surge nearly 10% on sale speculation

NEW YORK (CNNMoney.com) -- Shares of struggling apparel retailer Gap Inc. surged nearly 10 percent Monday after a news report said the company had hired Goldman Sachs to help it explore strategic alternatives, including sale of the company.

CNBC, citing unnamed sources, said the investment bank was hired prior to Christmas.

Gap (Charts) shares took off on the report, jumping 9.6 percent in afternoon trading on the New York Stock Exchange. Gap shares rose slightly more than 10 percent last year.

Gap spokesman Greg Rossiter said the company typically doesn't comment on rumors or speculation.

"However, we've had a relationship with Goldman Sachs since 1995. We also have ongoing relationships with other top banks as you could well imagine for a company of our size," Rossiter said.

It's no secret that San Francisco-based Gap has been plagued with a protracted string of sales declines at its namesake stores.The company operates more than 3,000 stores in the United States, including its Gap, Banana Republic, Old Navy, and Forth & Towne divisions

Last week, the No. 1 apparel seller posted December sales at its stores open at least a year - a key retail measure known as same-store sales - that tumbled 8 percent on top of a 2 percent same-store sales decline in November.

Further, Gap warned on its full-year profit, citing its sales shortfall over the crucial fourth-quarter holiday shopping period that accounts more as much as 50 percent of retailers' annual profits and sales.

Given the disappointing sales, profits and traffic trends, CEO Paul Pressler said in a statement last week that the company has initiated a review of brand strategies for both its Gap and Old Navy units.

Industry watchers have blamed Gap's woes on poor merchandising decisions and Pressler's inability to effect a turnaround at the Gap division. Some analysts recently commented that the time had arrived for Gap's management to seriously consider a change at the top - meaning a replacement for Pressler.

Mike Binger, portfolio manager with Thrivent Large Cap Growth Fund, said Gap is a good candidate for either a leveraged buyout or private equity money.

Binger said the fund sold its position in the Gap more than a year ago.

"As a public retail company, investors respect you if you continue to provide growth," Binger said. "Gap's not growing its square footage. In fact, it needs to close some stores to boost profits. Moreover its sales are sliding."

At the same time, what's attractive about the Gap to private investors is the company's brand recognition and its healthy cash flow position.

Gap generates more than $1.8 billion in cash flow from operations and the company has very little debt. However, it does have significant lease obligations since the retailer leases most of its store locations. It also has a very large market value of $16.2 billion.

"From a cash flow basis, private equity firms would want to harvest Gap's cash flow and improve profits by getting rid of unprofitable stores," Binger said. "People argue that Gap has lost its fashion focus. It did make some miscues but it's a very well-known brand and the fashion issue can be corrected. There's no question that the Gap is still a very relevant name in retailing."

Goldman Sachs declined to comment for the story.

--analysts quoted in the story do not personally own shares of the Gap.

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