Denim and Dumber at Gap

Is it finally time to check out of Gap (NYSE:GPS)? The specialty retailer behind Old Navy, Banana Republic, and countless namesake incarnations may finally be ready to punch out for keeps. The stock shot up 7% yesterday as CNBC reported that the company was in talks with Goldman Sachs (NYSE:GS) to explore the "strategic alternatives" that often lead to a sale.

Shoppers have already come up with their own version of an exit strategy. Save for an anomaly in 2003, comps have failed to inch higher on this side of the millennium.

In other words, sales at a typical store are ringing up 24.2% lower than they did in 1999 -- and they'd have to soar 32% to get back to their 1999 level.

When was the last time you walked into a Gap? Exactly. The brand is rudderless. Old Navy has become little more than a pricier Target (NYSE:TGT). A promising Gap concept like the more upmarket Forth & Towne is too small to move the needle.

Clearly, Gap is broken. The real question: Can it be fixed? CEO Paul Pressler was hired away from Disney (NYSE:DIS) in 2003, but he hasn't been able to sprinkle brand-awakening pixie dust on the struggling retailer. Last month, I had even suggested that Pressler was one of four prolific CEOs on short leashes this year. He just hasn't panned out. Naturally, a buyout would nip his tenure in the bud.

The company has been aggressively buying back shares, which will make it that much cheaper for a private equity firm to snap up the retailer. And yes, as bad as things have been for Gap, it's still valuable. Even in its depressed state, Gap is squarely profitable, and it will produce $650 million in free cash flow this fiscal year. All of the years of sandbagging would make an uptick in comps in 2007 likely, too.

Whether or not Gap finds a buyer, a drastic makeover is imperative. That kind of seismic shift is usually better handled under new ownership. So step right up, prospective bidder. How much are you willing to pay for a broken empire that once dominated khakis and denim?

Gap and Disney are Motley Fool Stock Advisor newsletter selections. To find out why, you can take a 30-day free trial of the newsletter. Gap is also an Inside Value recommendation.

Longtime Fool contributor Rick Munarriz didn't step into a Gap or Banana Republic in 2006, though he did get dragged into an Old Navy once. He does own shares in Disney. He is also a member of the Rule Breakers analytical team, seeking out the next great growth stock early in its defiance. The Fool's disclosure policy is conservative, yet eye-catching.