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Monday Gap "Gap" Questionable
Dear American Capitalist Reader,
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.
Worse yet, Gap cut its annual earnings forecast for the third time in six months. It now expects to earn between 83 and 87 cents a share, a significant disappointment from its original forecast of $1.23 to $1.27 a share. With that news, who in their right mind is going to buy Gap Inc. at its current over-inflated premium? Sources do tell me that a private equity firm may be interested in buying Gap for $24 to $25 a share, but that may be a long shot, too. That $16 billion market cap may be too much for a private equity firm to bargain with. And it’s unlikely that a company like Kmart, Sears or Albertsons would be interested in buying the retailer, says my source, since Gap doesn’t own any of its real estate.
The rumor-fueled Monday buying spree was initiated 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. While it’s still not clear what Goldman Sachs is doing for the company, the retailer may be considering selling parts of its business, including Banana Republic and Old Navy.
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.
Take care,
Ian L. Cooper, Editor, Death Cross Trader and Early Alert Trader
