Gap Inc. is looking for a merchant prince to work some retail magic.
The struggling, 3,100-unit retailer on Monday pushed out Paul Pressler, its president and chief executive officer, after a failed four-and-a-half-year effort to turn it around. Gap chairman Robert J. Fisher, son of company founder Donald Fisher, has been named interim ceo and president until a successor is found.
Adrian Bellamy, an independent director and chairman of The Body Shop International, will lead a subcommittee of directors conducting the search, which also will include chairman emeritus Don Fisher; Domenico De Sole, former president and ceo of Gucci Group NV, and Bob Martin, former head of Wal-Mart International.
The management change comes as Gap Inc. is said to be mulling a variety of strategic moves ranging from selling the entire company to the possibility of spinning off one of its brands, such as Banana Republic.
However, on Monday, when Pressler's departure was announced, speculation swirled a breakup of Gap was unlikely anytime soon. "They're not going to break it up," said a source close to the company. "Right now, they're looking for someone who can turn it around. The Fishers absolutely don't want to sell."
Retailers and analysts are predicting that it would take at least a year and a half to two years to turn around the business, because it could take months to find a new ceo, even longer to devise new strategies and then at least a year to overhaul the merchandise and marketing. Stores also need to be downsized, according to many observers.
Pressler's departure comes about eight months ahead of when his five-year contract was set to expire on Sept. 25. Under the terms of the contract, Pressler was paid $1.5 million a year with an initial bonus of $885,000 and a guaranteed bonus of $1.9 million, payable in April 2004. The contract stipulates that if Pressler was terminated "without cause" prior to the end of the five-year period, he would remain a non-executive employee of Gap Inc. for 24 months receiving his base salary and health insurance, as well as bonus payments.
The breaking point for Pressler came last fall and Christmas, when Gap failed to deliver respectable results even though it mounted one of its most expensive marketing campaigns ever, beckoning shoppers to return to the stores and using iconic Audrey Hepburn imagery to sell slim pants. After declaring disappointing December figures, the company earlier this month said the board and management would reevaluate merchandising strategies, in a statement that seemed to reflect disillusionment with Pressler.Pressler, a former Walt Disney executive who replaced Millard "Mickey" Drexler, did have some initial success on the job. He strengthened the balance sheet, cut costs and reduced debt, leading to improving numbers. Pressler is also credited with launching a fourth brand, Forth & Towne, and other growth initiatives such as recently introducing the Piperlime.com shoe Web site, as well as expanding Banana Republic into Japan and establishing some international licensing ventures.
But what appeared to be a turnaround in the making was short-lived, and eventually, the downturns outnumbered the upturns. It became apparent that Pressler's strategy was faltering and that he lacked the merchant's touch and fashion experience.
Gap said Pressler's departure was a mutual decision between the board and the executive. He also has resigned his seat on the board.
Robert Fisher said in a statement, "We want to thank Paul for the hard work and dedication that he has shown Gap Inc. over the past four years. Under his leadership, the company has meaningfully improved its operations, strengthened its balance sheet, greatly enhanced its online presence across the brand portfolio and improved its standing as a global corporate citizen. We appreciate all of his efforts and wish Paul every success in the future."
Pressler said in a statement, "I have enjoyed the opportunity to lead this iconic company over the past four years. It has been a pleasure to work with the management team and such talented people throughout the organization. Gap Inc. is a company with tremendous potential and I wish all the employees much success in the years ahead."
Pressler and Fisher were not available for further comment.
Pressler's departure triggers a challenging search, considering the magnitude of the turnaround effort involved, and the lack of merchant princes with vision around to take on such a project. Gap said 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."
Among the individuals that could be considered are Allen Questrom, former ceo of J.C. Penney and Federated Department Stores; Roger Farah, president and chief operating officer of Polo/Ralph Lauren; Paul Charron, former Liz Claiborne chairman and ceo; Matt Rubel, ceo of Payless, and Vanessa Castagna, former executive chairman of Mervyns. Ironically, the person many observers say Gap needs is Pressler's predecessor, Drexler, even though the chances of him deserting J. Crew and rejoining Gap are a long shot. Some say his way back into Gap could be via a takeover by Texas Pacific Group, J. Crew's major shareholder."When you think about Drexler, he is an inherent merchandising prince," said Terre Simpson, of the executive search firm bearing her name. "He knows exactly how to position merchandise and store strategy, and how to differentiate the store. That's what was exactly missing from Pressler."
Mark Montagna, analyst at CL King and Associates, said, "Paul Pressler's big problem was not enough retail experience, he was in charge of Disney stores, but when he ran it wasn't as focused in apparel as it is today. At that point, Disney was just a novelty, it was easy to roll out and it was actually overexpanded. Now Children's Place owns it.
"It's a big positive that Gap is going to look for someone [with] a deep retail background. Clearly they are focused on apparel."
For anyone who comes in, the turnaround process can be up to two years, Montagna said. "You need to develop an action plan, start it up, new merchandise [needs] to be ordered. You can be looking for two years from now before seeing the company recover. As an investor, that means there is a lot of risk. The positive is they certainly paid down the debt, and they have a healthy balance sheet, but a declining balance sheet."
In a research note from Marie Driscoll, analyst at Standard & Poor's Equity Research, she said, "We maintain that GPS' problem is not management, but rather sheer organizational size against more nimble competition, along with brand maturity and inconsistent positioning of the Gap brand. Regardless of who is at GPS' helm, we see store closings ahead and look for a radical about-face in the Gap brand, a return to the demographics that drove its success, Baby Boomers and Gen-X and their casual apparel needs."
"Creating excitement in a theme park or a novelty store is not the same as creating excitement in an apparel business that turns its inventory every six weeks," said one apparel executive with specialty retail experience. " It is very different than marketing characters or creative products whose product life lasts years. The Gap had all the vehicles and resources, it simply had no idea where to go. That comes from a merchant vision.""This is another page in the long history of non-apparel people who get brought in who understand product management and fail at running a retail company," said Isaac Lagnado, president of Tactical Retail Solutions. "Paul Pressler is a wonderful marketer, but apparel specialty is not the same as product management and not the same as Proctor & Gamble or General Foods.
"The business has to be broken up," said Robert Kerson of Kerson Partners executive search. "There are very few candidates that can run the mix of brands unless it's someone who would put it through a breakup. The individual brands could attract some very good merchants, but collectively, it's a very, very difficult assignment." Kerson said he believes Texas Pacific could go after Gap. "It's a natural fit because Mickey Drexler is there." Texas Pacific is the main shareholder of J. Crew Group. "I do think Gap needs someone who is very strategic and in addition has merchandising skills. It will not be another non-retailer. That simply does not work. If it gets broken up, you can fill the pieces with some talented merchants. Ultimately, it must get broken up."
"I believe the ceo search to replace Paul Pressler began before the announcement that he was let go. There is limited talent out there," said Christine Chen of Pacific Growth Equities.
"I suppose it's a good first step but I wouldn't uncork the Champagne just yet," said Joe Blue, an analyst at Morningstar. "The company still has at least two enormous tasks ahead: turning around Old Navy and figuring out what to do with the Gap brand. The path for Old Navy is more obvious. They moved too far downscale and need to pull themselves up."
Blue said Gap is playing in the highly competitive dressy-casual arena running into Banana Republic's turf. "They're coming up against J. Crew, which is looking really good these days," Blue said. "Gap has also been trying to compete for teens, but the teen space is far more competitive than it was five years ago."
Blue said interim ceo Fisher has credibility, having worked his way up managing stores and managing both the Gap and Banana brands. "However, they really need a merchant," Blue said. "No one comes to mind. I don't think anybody really knows what to think just yet."Gabrielle Kivitz, senior retail analyst at Deutsche Bank, said, "There may be some more shakeout of key people brought in by Paul [Pressler]."
— With contributions from Amy S. Choi and Sharon Edelson
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