NEW YORK — Two recent research reports took a bearish turn on Gap Inc. by questioning the leadership skills of the retailer's president and chief executive officer, Paul Pressler.
One of the reports also suggested a solution for Gap's softening sales would be to break it up. Two other analysts, however, maintained a more bullish outlook on the retailer, with one describing the negativity swirling around Gap as overstated.
In a research note earlier this month, analysts from Jennifer Black & Associates said Gap "may be on the cusp of a leadership change." The analysts also said they are not "ruling out the potential that Gap may eventually be broken up and sold in smaller pieces."
The analysts wrote in the Oct. 6 report, "We are beginning to question the leadership's ability to run a vertically integrated retailer. Currently Gap's team seems to be lacking the magic of a strong merchant, such as [former Gap president and ceo and current J. Crew Group president and ceo] Mickey Drexler."
The report, however, does not reflect Gap's Oct. 11 appointment of Charlotte Neuville as executive vice president of design and product development for the Gap brand, overseeing all aspects of product design and development for men's and women's. Neuville, who previously worked for New York & Co. Inc. for nine years and is a 20-year design veteran, replaced Pina Ferlisi, who left Gap the day Neuville's appointment was announced. Neuville's impact on the company's product offering is not expected to be seen until summer or fall of 2006.
The Jennifer Black & Associates analysts were unavailable for additional comment, but an Oct. 14 report from the firm previewing the Gap brand's holiday assortment said it "was dramatically more cohesive than what we have seen over the past few seasons."
Despite the appointment of Neuville, analyst Robert Buchanan, of A.G. Edwards & Sons Inc., said he is still not satisfied with Gap's management team. Buchanan said he would like to see a senior product person work alongside Pressler, rather than having heads of the company's three brands — Gap, Banana Republic and Old Navy — "hiring their own product heads and pretty much attacking the increasingly tough competitive set on their own."Buchanan said in the Oct. 14 research report that Gap's hiring strategy isn't working because "simply the wrong product people are being hired, by and large; reflective, we daresay, of a lack of fashion acumen at the divisional level and ‘at the top.'"
The analyst concluded that it's "starting to look as though Paul Pressler is the wrong person to run this fashion retailer," and he downgraded shares of Gap to "hold" from "buy."
A Gap Inc. spokeswoman said in an interview that the company is "confident in its long-term strategy and the direction we've set." She said Gap is "confident we're putting the right people in place to execute" the strategy.
Pressler — who joined Gap in September 2002 taking the place of Drexler — was formerly a top executive at Disney. Most recently, Gap saw consolidated same-store sales drop 6 percent in September, following a 9 percent drop in August. Trading at around $16 a share, Gap's shares are at a two-year low.
The Gap brand, which made up just over 30 percent of total revenues in the most recent quarter, is attempting to turn around its sales, but has said positive affects of a return to "fresh, casual American style" aesthetic likely won't be evident until the holiday season and will become most apparent in the spring. Old Navy scored big with tunics and peasant skirts in spring and fall, respectively, yet the brand has continued to post negative same-store sales. And Banana Republic had failed to adequately motivate its core customers by becoming too fashion-forward.
Howard Tubin, senior analyst at Cathay Financial, said in an interview that he has confidence Gap will return to product offerings that will better resonate with shoppers by using appropriate fashion to drive the businesses.
Of the Gap brand specifically, he said the fashion-driven strategy hasn't "gained a lot of traction but they're moving in the right direction."
Tubin did acknowledge, however, that Pressler "is not a merchant and he never was," adding, "ideally, if you look at successful apparel retailers, you'll see that there's probably a merchant at the top — or dual leadership, where one is a merchant and one is an operator."Despite the company's difficulties, Tubin does not believe Gap would consider selling off any of its brands. "I don't know why they would feel the urge to," he said, noting that Gap has gone through tough times in the past and did not choose to go that route.
"I think the brands are very strong, and they all have meaning in the marketplace," said Tubin.
SG Cowen & Co. analyst Lauren Levitan also thinks it's prudent to be patient on Gap's turnaround. She wrote in an Oct. 19 research report after meeting with Pressler and chief financial officer Byron Pollitt that concerns over Pressler's merchandise expertise "are over-stated."
In addition, Levitan wrote that thanks to "significant investments in and enhancements to IT infrastructure, inventory planning, and supply chain management, even a modest restoration of traffic and sales growth can produce a very leverageable situation."
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