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Drexler to Retire, Gap Speeds Search For the Next Savior

LOS ANGELES — “I’m very proud that I was able to dress America in great looking apparel and accessories for so many years. I don’t know if any company or brand could say that.” <P>So Millard “Mickey” Drexler,...

LOS ANGELES — “I’m very proud that I was able to dress America in great looking apparel and accessories for so many years. I don’t know if any company or brand could say that.”

This story first appeared in the May 22, 2002 issue of WWD.  Subscribe Today.

So Millard “Mickey” Drexler, 57, told WWD just hours after he announced that he will retire as president and chief executive officer of Gap Inc. as soon as the San Francisco-based firm’s board appoints a successor.

The announcement ended months of speculation about how long Drexler, long recognized as perhaps the most successful merchandiser in apparel industry history, could weather a gathering storm characterized by sales, earnings and stock prices that have been in something of a freefall for two years.

“I’ve always loved being close to merchandise, customers and the creative parts of our business,” Drexler said in a statement earlier. “In a company the size of ours, the broader demands of being ceo have pulled me away from the things I’m most passionate about.”

Board chairman Donald G. Fisher said he is looking for a replacement to “move us forward, create sustainable growth for Gap, Old Navy and Banana Republic, and drive long-term shareholder value.”

Fisher added he “respects Mickey’s decision to retire” and called him a “dynamic partner. His merchandising passion, creativity, and entrepreneurial instincts helped build three of the world’s most well-known retail apparel brands.”Its current struggles notwithstanding, the chain’s rise to financial prominence until 2000 coincides almost directly with Drexler’s tenure as ceo. Even before the establishment of Old Navy in 1994, the changes put into place by Drexler in the early part of his stay at Gap’s helm not only produced impressive increases in its sales, earnings and stock price but redefined specialty apparel retailing, bringing the idea of a vertical retail collection under a single brand name to the forefront of what had been a relatively catch-as-catch-can business and taking casual comfort to new prominence.

Drexler had a nearly uncanny ability to take the most basic sportswear items — jeans, khakis and T-shirts — and transform them into hot fashion. Based to a great degree on the merchandising vision created under Drexler’s direction, specialty apparel retailers began an ascendancy that wasn’t interrupted until the 2001 recession. And Gap, once the place hippies visited for their Levi’s jeans, surpassed Limited and all others to become the largest, and most widely copied, specialty retailer of its kind.

But the creativity and entrepreneurial instincts of the “Merchant Prince” have misfired over the last two years, as the retailer lost its sense of timing. It became ho-hum basic as the fashion cycle sped up, and then turned off its core customer by chasing trendy merchandise and creating a disorganized retail presentation with steeply marked down merchandise.

A spokeswoman said the news that Drexler had elected to throw in his khakis reached employees on Tuesday and, the chain’s struggles to overcome plummeting sales and marginal profits notwithstanding, came as a surprise to them. She denied a report that Jerome Jessup, executive vice president of product design and development for Gap brand, was also on his way out.

Hal Reiter, chief executive officer of Herbert Mines Associates, said his company was given the new search for Drexler’s successor.

“The search committee has asked us to recruit a president and chief executive officer who runs a world class company and has a very strong marketing background — we’re not necessarily looking at retail only.”

He said he’s going to a meeting Thursday in San Francisco with the board “and we’ll explain all the different options.” He declined to divulge who he is considering and said he hopes to appoint a successor “as soon as possible.” Drexler said in the phone interview that he was comfortable that Gap was “well positioned for the future. The brand has come to represent important aspects of American apparel.” He had no comment on his plans for the future or who might be well suited to be his successor, although he acknowledged that discussions about succession had been ongoing.

Speculation about Drexler’s successor had been rife for the better part of a year and, as reported, Gap said in January that whoever succeeded Ken Pilot as president the Gap brand would be a primary contender to take over as ceo once Drexler retired. Drexler took on Pilot’s previous duties as acting president of Gap brand. Herbert Mines had received that recruitment assignment.

Discussing Drexler’s successor, Kirk Palmer, chief executive officer of Kirk Palmer and Associates, an executive search firm here, said, “Those are such amazingly hard shoes to fill. I understand the board’s decision to move forward. He really did invent the store as the brand and the brand as the store. I’m still digesting this. The guy’s an icon.”

Among those in the industry who may be considered to succeed Drexler are Jeanne Jackson, former chief executive officer of Banana Republic and more recently head of walmart.com; Paul Charron, chairman and ceo of Liz Claiborne, Inc., Rose Marie Bravo, group chief executive officer of Burberry; Michael Weiss, president and chief executive officer of Limited Brands’ Express division, and Roger Farah, president and chief operating officer of Polo/Ralph Lauren. Dorrit Bern, ceo of Charming Shoppes, and Kathy Bronstein, ceo of Wet Seal, also are being mentioned in the continuing conversation about Drexler’s successor. His availability may be questionable, but J.C. Penney ceo Allen Questrom was described by numerous sources as someone who’d be perfect for the job as a veteran of turnarounds at Federated Department Stores, Barneys and, most recently, Penney’s.

Even before Tuesday’s announcement of Drexler’s retirement, American Eagle president and chief merchandising officer Roger Markfield, a Gap veteran himself, used an investor conference call to quash rumors that he would succeed Drexler at the troubled conglomerate.

While still the largest apparel specialty chain by far — its $13.8 billion in 2001 revenues easily outdistancing Limited’s $9.4 billion — Gap’s financial performance over the past couple of years has mirrored its fashion fallout.Gap has just completed something once considered unthinkable of the specialty apparel heavyweight — 24 consecutive months of comparable-store sales declines. On May 9, it marked the sad anniversary by reporting a dramatic 24 percent decrease in April same-store sales, its second largest monthly decline since November 2002 when it reported a 24 percent drop. Gap’s last comp increase came in April 2000. The April sales decline was ameliorated only somewhat by expectations of a far greater decrease, some, as reported, running as high as 34 percent.

And while the nation’s largest specialty apparel chain reported last Thursday that it eked out a profit of $36.7 million, or 4 cents a share, for the quarter ended May 4, it was still 68.2 percent lower than year-ago results of $115.5 million, or 13 cents. Gap last concluded a quarter in the black after the second quarter of 2001, nine months ago.

Sales slipped 9.1 percent in the quarter to $2.89 billion compared with sales of $3.18 billion in the comparable period last year and 17 percent on a comp basis compared to a 7 percent decline in the prior year. All three divisions comped downward — Gap, 20 percent; Banana Republic, 9 percent, and Old Navy, 18 percent. Sales productivity was also down to $77 per square foot from $96 in the 2001 quarter.

Shares closed prior to the announcement and did not reflect Drexler’s change in plans. Shares closed down 33 cents, or 2 percent, at $16 in New York Stock Exchange trading. Still shares are off 53.2 percent since Gap hit its 52-week high of $34.20 exactly one year ago, on May 22. Shares have traded as low as $11.12, reached on Sept. 27.

Drexler has reigned when Gap’s shares have traded as high as $76.63, on a pre-stock split basis, reached both on April 12, 1999, and again on Nov. 27, 1998. On an adjusted basis, shares closed at $50.54 and $33.66, respectively, on those dates.

Most analysts were surprised at the timing of the announcement because the worse seems to be behind Drexler.“I am disappointed that he elected to retire when the company was about to hopefully rebound,” Dennis Van Zelfden at SunTrust Robinson Humphrey said. “I thought a lot of him. He did a great job over the 19 years.”He went on to say that he believed the company could still prosper without him. He pointed out with Gap’s sheer size, standing at 4,199 doors, and with its merchandising plan put in place for the back-to-school season, there was hope that the company could be rejuvenated. His departure shouldn’t affect that plan, Van Zelfden said.

Still, some see the need for further caution ahead.Lauri Brunner at RBC Capital Markets said what worries her is that two people may be coming to the company — one to lead the company while the other to take charge of the Gap brand: “New ideas may not be in line with where the company needs to go from a merchandising standpoint. I don’t agree that Gap and all three of its brands are where they need to be.”

“I almost hate to see it happen now,” said Liz Pearce, an analyst with Wedbush Morgan Securities, citing a slight positive direction in this month’s comps. “Who can replace him? And do they divide his role up? It’s an enormous responsibility to bring someone from outside. He’s grown up at the Gap and made it what it’s been. I’m racking my brain to see who from the outside is up to that. Those are big shoes to fill.”

An analyst who requested anonymity said the decision sends a mixed message, both to Wall Street and to Gap’s 165,000 global employees, both of whom have been fed promises things will turn around for back-to-school.“If Mickey really believes back-to-school would be first sign of improvement, why is he leaving before seeing those results?” the analyst asked. “The Street has to react negatively because it will take the new person or his replacement a year to build the team and reposition things. And if they don’t hire someone for next six months, now you’re looking at year and half before the Street knows what the new ongoing concern will be.”

An investment banker lamented the rumor mill about who will replace Drexler will be impossible to control, and may have a negative effect on retail stocks.

David M. Gialanella, executive vice president of Cushman & Wakefield, a retail consulting company, said that, whoever takes over the top post, the industry shouldn’t write off the Gap.

“Whoever comes in and takes over is going to inherit a problem, but a remarkable opportunity,” he said, predicting it will take three years for the retailer to strengthen its financial position and turn around underperforming stores.”Pearce of Wedbush Morgan said she didn’t think Drexler was forced out. “If the board stepped in, there would have someone ready behind the scenes. I wonder if he just decided it was time to move on, get some fresh blood in there.”

“We’re looking for additional data points,” she said when asked what she was looking for in Gap’s performance. “But I do like some of the initial things we’ve seen. Their statement on white is very refreshing.”John Bakane, chief executive officer of Cone Mills Corp., of Greensboro, N.C., expressed disappointment at the news.“I hate to hear that. He’s been able to pull rabbits out of the hat for a lot of years,” he said.

He expressed confidence that the retailer would be able to find a good replacement for Drexler.

“I do know they have made some good hires lately,” he joked, in a reference to the chain’s recent appointment of Ken Girouard — a former Cone executive — as creative director for denim.

As far as the retailer’s continuing turnaround, he said, “In some of the core businesses, like denims, I think they are on the right track.”

John Heldrich, president and chief executive of the Atlanta-based Swift Denim division of Galey & Lord Inc. said he was surprised by the news.

“That’s pretty significant. I think that the Gap is a powerful retailer and I think that despite the difficult moment they’ve had, the moment being the last year, certainly I think they will rebound. I think they’re on the right path now to do that,” he said. “They recognize that they have a very strong and loyal customer base that was starting to erode and everything I see is they are focused on the right issues as they move more strongly into the core, basic Gap customer. They have to do everything possible to have that customer return to what they know and love.”

Drexler has been at Gap since 1983, when he joined the company as president of its Gap division after serving as president of Ann Taylor. Coincidentally, Gap began its divisional expansion that same year with the acquisition of Banana Republic, then a two-store safari apparel company with a recognizable catalog that featured hand renderings of its product assortment. Drexler became president of the company in 1987, when founder Donald Fisher moved to the post of chairman, and succeeded fisher as ceo in 1995. Gap’s recent troubles even took a toll on Drexler’s compensation last year. Originally set at $2.3 million, the same as in 2000, he voluntarily reduced it 10 percent in mid-year, winding up with salary of $2.2 million. Additionally, he received no bonus in 2001 after collecting $3.3 million in 2000. He collected no restricted stock awards last year. Deferred compensation totaled $601,634 versus $171,322 in 2000.

— With contributions from Scott Malone,Dan Burrows, Lisa Lockwood and Arnold J. Karr, New York, and Kristin Young, Los Angeles”