Pilot’s Successor Could Be Gap CEO

<CS:BOLD>NEW YORK -- In a dramatic move to revive its flagging performance and set up a succession strategy, Gap Inc. on Wednesday said it has launched a search for a new president of the Gap brand. Whoever gets selected will be a primary contender to...

NEW YORK — In a dramatic move to revive its flagging performance and set up a succession strategy, Gap Inc. on Wednesday said it has launched a search for a new president of the Gap brand. Whoever gets selected will be a primary contender to one day succeed Millard Drexler, president and chief executive officer of Gap Inc.

Ken Pilot, who has overseen the Gap brand in the U.S. and overseas as president of the division, Wednesday was shifted back to running Gap International. The move represents a reversal of Gap’s earlier decision to combine the U.S. and overseas operations into one and put Pilot at its head. Drexler now will head Gap in the U.S. until a new president is found. At one time, Pilot was a rising star and was even among those considered a potential Drexler successor.

Gap Inc. said it’s forming separate Gap U.S. and International divisions to create a sharper focus on improving performance at its flagship brand. At Gap International, Pilot will continue reporting to Drexler.

“We’ve operated Gap brand as a single global organization for almost two years,” Drexler said in a statement late Wednesday. “While that approach created some benefits, Gap faces challenges and opportunities in our U.S. and International markets that demand different management skills and levels of attention. Separate divisions and leadership teams will help us manage Gap brand more effectively as we work to improve results, better serve our customers and return Gap to long-term quality growth.”

Gap International has stores in the U.K., France, Germany, Japan and Canada, as well as store operations for Old Navy and Banana Republic in Canada. At the end of December 2001, Gap brand had 632 stores in those markets; in Canada, Old Navy had 17 stores and Banana Republic had 16 stores. The International division will have its own Gap brand merchandising team, but product design and marketing will be provided by the U.S. division.

“Our International markets represent an important part of our long-term growth strategies,”. Drexler said. “Ken will bring much more focused leadership to this area of our business.”

The Gap’s sales exceeded $13.6 billion last year.

This could have been the worst year in Gap’s long history. Gap Inc.’s comps started to turn negative in March 2000, with its division remaining in the red since December 2001. In addition, the retail chain just reported its first quarterly loss in at least a decade.

Comparable-store sales have been negative for nearly two years. Although comps for December at Gap division showed a remarkable turnaround from November and clearly were much better than expected, comping down a negative 9 percent, sales were aided by intense markdown in order to clear excess inventory. Still, the decline was much better than expected and, in some cases, doubling analysts earlier forecasts, causing a number of the watchdogs to issue a slew of upgrades and earning estimate increases for the fourth quarter. In November, comps at the unit were down in the mid-20s.

The company warmed to December results, saying it now expected its fourth-quarter loss would not exceed the 6 cents per share it previously forecast. Gap expects to announce fourth-quarter results Feb. 28.

Gap’s stock price also is trading a peep above its yearly lows. At Wednesday’s close, shares of Gap lost 31 cents, or 2.1 percent, to close at $14.26 on the New York Stock Exchange. That is only 28.2 percent better than its 52-week low of $11.12 on Sept. 27. It recorded its yearly high of $34.98 on May 17.

Throughout the year, Wall Street complained that Gap was at a structural disadvantage to compete due to its large chain size and long lead times as well as its strategy of increased fashion assortment.

Richard Jaffe with UBS Warburg said that Pilot “has not been the right guy for the job given the results. For the near term, I speculate Micky might step into the trenches and take a leadership role at the Gap division until a suitable heavyweight could assume responsibility. Who is the right guy? I believe it would be an internal candidate in the division that could come in with both strong operational and merchandising strengths that could be effective without rocking the boat — that is without upsetting the initiatives in place in merchandising and design.”

Hal Reiter, ceo of Herbert Mines Associates, is conducting the search. He declined to comment.

For the past two years, Gap has come under fire in financial and fashion circles for losing touch with consumers and missing fashion trends. Less widely recognized is the issue of succession. If the 57-year-old Drexler departed, there is currently no clear number two person on the team, and certainly no one of his stature inside the ranks to hold the reins. Given the retailer’s recent performance, building the team now seems even more pressing.

No one denies Drexler’s accomplishments. He’s considered one of the industry’s few merchant princes and deep thinkers, having revolutionized Gap into one of the world’s most recognized brands and widely shopped stores.

However, with the last two years showing deeply disappointing results, some observers speculate that Drexler may be losing his magic touch. Others say that after such a long run of success in the Eighties and most of the Nineties, a downslide was inevitable, and that Drexler just needs more talent on the team to back him up, that he’s been spread too thin, given the enormous growth of the corporation.

There also have been rumors that Jeanne Jackson could return to Gap Inc. She was ceo of the Banana Republic division from 1996 to March 2000 and made her reputation there, tastefully expanding the chain. But she left Banana to run Walmart.com, where she had less success, and last month left that job. Her name also has been rumored in connection with top jobs at other companies, such as J.Crew. Reportedly, she’s consulting to Texas Pacific, majority owner of J.Crew.

Strong merchants, with fashion and marketing skills, particularly those with experience running large specialty chains would have to be considered by Gap, leading the search inevitably to its primary competitor, The Limited Inc., which is stacked with top talent and has pirated plenty of executives from Gap. However, there could be noncompete restrictions in the contracts of many executives that Gap would otherwise consider. Among the best merchants at Limited is Grace Nichols at Victoria’s Secret Stores. There’s also Marie Holman-Rao, who heads up Limited’s central design operations in New York.