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Gap Isn't Going To Be Bought? Really? Where Have I Heard That Before?
By Ian L. Cooper
For weeks, I sat here and told you not to buy Gap Inc., to instead go short the company. In fact, on January 10, 2007, I said, “If you’re going long on the troubled retailer on the near-term speculation, you’re going to lose money, plain and simple. Here’s a stock that just had a disastrous holiday season, marred by heavy discounting that did little to lift sales. Plus, even with a market cap north of $16 billion and low debt, weakening free cash flow for a potential buyer would be a bad move.
“The rumor was first begun on Monday, January 8, 2007 by a CNBC report that Gap turned to Goldman Sachs for ‘strategic alternatives’ advice. CNBC did make it a priority to point out that the Gap sale wasn’t ‘imminent,’ though. From here, we see further downside for the company solely on fundamentals. And, as it turns out, we’re not the only ones who thought so. AG Edwards, for one, sees downside of $15 on fundamentals, too. Gap can consider selling until the cows come home. But just because you put up the ‘For Sale’ sign, doesn’t mean you’ll get bids.”
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Again, we made it a point to tell you this on the 10th of January 2007 to protect you from the unlikelihood of Gap ever being bought out. First, no other retailer, especially Eddie Lampert and Sears, would buy this company because Gap doesn’t own any of its real estate. And two, considering Gap’s hefty market cap, you’re not likely to see many private equity firms laying down that kind of cash for a garbage company trading at eight times its value and losing market share.
And as it turns out, we were absolutely right. Gap fell after the departure of the company’s CEO, Paul Pressler, and news that they’re now in search of a new one. This officially squashes the private equity buyout speculation. In our opinion, Gap is fully valued here with very limited upside.
And, quite honestly, Gap will have a heck of a time refilling the CEO role. Whoever takes over will have to hit the ground running to save a company that’s done nothing but swirl in the toilet for the last seven years. It’s only a matter of time before Gap goes the way of the dinosaur. Go short.
Take care,
Ian L. Cooper, Editor, Early Alert Trader