By and  on July 27, 2007

Gap Inc. headed north for its new chairman and chief executive, tapping Glenn Murphy, a Canadian with strong retail turnaround skills but no fashion experience.

The announcement Thursday confirmed a WWD report July 16 spotlighting Murphy as the leading candidate.

Murphy, who starts at Gap next week pending receipt of his work permit, was chairman and ceo of the $8 billion Shoppers Drug Mart Inc., Canada's leading drugstore retailer, from 2001 to last March.

The 45-year-old executive turned around the drugstore chain, elevating its offerings with upscale makeup and cosmetics, among other products. He led the development of a large number of private label products, grew the footprint of the drugstores and instituted an advanced customer relations management system. Kohlberg Kravis Roberts & Co. owned Shoppers Drug Mart and took it public while Murphy steered the ship.

However, in terms of product, Murphy's areas of expertise are in food, health, beauty and books rather than apparel.

"I love retail because it means working with innovative and creative people," Murphy told WWD Thursday. "That was one of the reasons I was drawn to Gap Inc. I'm eager to immerse myself in the culture that makes Gap, Old Navy and Banana Republic such strong brands."

Murphy will be well paid by Gap, with a significant portion of his earnings tied to "sustained improvements" in the company's performance. He signed on for an annual salary of $1.5 million; a sign-on bonus of $1 million; a prorated target bonus for 2007, and annual performance-based bonuses targeted at 150 percent of annual salary.

For a three-year period, he also will receive four million stock options, and another one million shares dependent on the company's improved earnings over time. Gap estimated that Murphy's fiscal 2008 compensation, if performance targets are achieved, will reach about $12 million. Murphy said he plans to purchase 150,000 shares of Gap Inc. common stock in the next few weeks.

But he faces a monumental turnaround challenge, considering the magnitude and complexity of Gap Inc. and its divisions, and the company's ongoing sales slump.

The $16 billion, 3,100-unit Gap Inc. hasn't experienced sales growth for almost five years, and its Gap and Old Navy divisions have lost cachet, while the Banana Republic chain has been the least troubled. Competitors such as American Eagle Outfitters, Target, Abercrombie & Fitch and J. Crew have taken a large amount of business from the Gap brands. Much of Gap's woes are due to inconsistent product offerings and marketing and, in seasons where products were right, a lack of confidence in buying enough to satisfy demand.However, a Gap spokesman said Murphy has a track record for creating store environments that "resonate with customers and differentiate from competitors."

Responding to a query about Murphy's lack of fashion expertise, the Gap spokesman said the company has strong merchants and designers on board, citing Gary Muto and Patrick Robinson, president and executive vice president of design for Gap Adult and GapBody, respectively, and Michael Cape, executive vice president of marketing at Old Navy.

The spokesman added that Murphy in his previous retail assignments did "a terrific job working with category managers and people responsible for product."

Prior to Shoppers Drug Mart, Murphy had a 14-year career with Loblaw Cos. Ltd., which operates the Loblaws supermarket chain in Canada, where he held numerous senior management roles. In 1999, Loblaw acquired the Provigo grocery chain and Murphy oversaw the integration of the two businesses. He drove substantial improvements in the face of competition from big-box retailers. He also served as president and ceo of Chapters, a major book retailer in Canada with separate retail, online and distribution businesses.

Murphy was born in Montreal and is bilingual in English and French.

"He has a very good reputation. The guys at KKR think he walks on water," said Hal Reiter, ceo of Herbert Mines Associates, the executive search firm, which was not involved in the selection process. "The fact they couldn't find somebody from fashion retailing demonstrates the situation the industry is in with senior talent. There is a drought and those [few] people who are qualified are frequently tied up with non-competes and can't leave their current employers."

Reiter admitted Murphy will have a steep learning curve. "Any person who goes into the apparel business has to understand that the window closes seven or eight times a year with the seasons. It's different from selling produce. Also, the scope of Gap is dramatically different from almost any other company in terms of the amount of stores they operate. Anyone who comes in from a smaller business has to deal with this."

A.G. Edwards analyst Robert Buchanan, who on Thursday reiterated his "sell" rating of Gap shares, said, "I hardly think that the fashion world of retail that he is now in lends itself to on-the-job training. Clearly, Gap has the burden of substantial negative momentum, which means at this critical juncture it needs a strong leader who gets fashion retailers — and it remains to be seen how quickly Glenn Murphy can transition to the world of fashion. I don't think strong, well-qualified executives with fashion experience were lined up for the job. I guess you go with the next best — but I hope it does not mark a repeat with what happened with Paul Pressler at the helm."Pressler, who stepped down in January, joined Gap from Disney.

Mark Montagna, specialty retail analyst at C.L. King & Associates, said, "I think it is good to have the uncertainty gone. I think the stock market will react neutrally to Murphy's appointment. He has no apparel background." However, "Murphy has been successful in different retail formats, so he may be able to bring a creative mind that will reinvigorate Gap. But it seems all of the companies he had headed have been smaller and working from the ground up. It will be interesting to see how he handles a megaretail format. Gap may not be looking to him for merchandising, but for strategic vision and operating skills."

Like Murphy, Pressler was not a fashion merchant. He had some initial success on the job, strengthening the balance sheet, cutting costs and reducing debt, leading to improving profits for awhile. But ultimately, his lack of a fashion merchant's touch led to a sustained downturn in the business and his departure.

Since Pressler left, Robert J. Fisher, son of Gap founder and chairman emeritus Donald Fisher, has been serving as chairman and acting ceo. Robert Fisher will remain on the board. He said at the time that it was not his intention to stay permanently in the role and that the search committee's preference is to focus on a ceo who has "deep retailing and merchandising experience, ideally in apparel; understands the creative process, and can effectively execute strategies in large, complex environments while maintaining strong financial discipline." Aside from lacking the apparel experience, Murphy seems to fit the criteria sought by Gap.

But one retail ceo commented, "There is no way this guy can turn around Gap. It's been proven that people who run apparel retailers need to be apparel retailers."

But Gap, as if expecting there would be skeptics about the hire, said Murphy has more than 20 years of retail experience and has demonstrated the ability to consistently drive both top- and bottom-line results. Gap noted that Shoppers Drug Mart revenues increased 22 consecutive quarters year-over-year and its earnings per share doubled.

In a statement, Murphy said that at Gap, "alongside some of the most talented people in the apparel industry, we'll work to reestablish each brand's leadership position and set the company along a path of sustained earnings performance.""Glenn is known for being a decisive leader with great retail instincts who understands his customers," said Robert Fisher, in a statement. "He has revitalized major retail brands by offering new products and significantly improving the store experience. He's well qualified to return Gap Inc. to the level of sustained performance we all expect."

Gap's ceo search committee was led by independent Gap Inc. director Adrian Bellamy, chairman of The Body Shop International plc and Reckitt Benckiser plc. The committee also included Donald Fisher; Domenico De Sole, former Gucci Group ceo, and Bob L. Martin, the board's lead independent director and a former Wal-Mart Stores Inc. executive.

Shares of Gap gained 59 cents, or more than 3 percent, to $17.50 in after-market trading. Murphy's appointment was announced after the market closed. In regular trading, shares dropped 77 cents to $16.91.

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