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The apparel business is tough everywhere, but was Gap Inc.’s chairman and chief executive officer Glenn Murphy tapped out of ideas?

This story first appeared in the October 9, 2014 issue of WWD. Subscribe Today.

On Wednesday, Gap Inc. let out a bombshell — that Murphy was leaving in February and passing the baton to Art Peck, a close associate who worked with the outgoing ceo for eight years in different roles at Gap Inc., and currently serves as president of the growth, innovation and digital division.

Murphy’s decision to quit Gap Inc. took the industry by surprise but it may not have been so sudden.

According to sources, Murphy, age 52, was interviewed for the Target ceo job, which he rejected, and was recently filled, suggesting some disillusionment about staying at the San Francisco-based retailer. Insiders said that Murphy would not make another long-term commitment to Gap after seven years on the job even though the Gap board wanted him to stay on.

Murphy would also be a candidate to become the next ceo at J.C. Penney Co. Inc. but that retailer is believed to have slowed down its search, with its current ceo, Myron “Mike” Ullman 3rd, stabilizing the business and initiating lots of changes.

Still other retail sources speculated that Murphy, formerly the ceo of Canada’s Shoppers Drug Mart who turned that business around and lacked any fashion retail experience prior to joining Gap, was becoming increasingly frustrated with the apparel business, which retailers across the board are currently struggling with, and that he was tapped out on cost-cutting and creating operational efficiencies, which he orchestrated to put Gap on a stronger financial footing and road to profitability.

Murphy also sharply reduced the domestic retail square footage by closing hundreds of weak doors while driving international expansion from 10 to 50 countries, including opening the first China stores and signing franchise agreements around the world; brought Athleta, Intermix and Piperlime into the portfolio as growth vehicles, and improved the supply chain for speed and better margins.

“He was wise enough to get out. There is nothing left to cut,” said one retail source.

There’s a prevailing sense that Murphy, while accomplishing a lot, is leaving without completing the assignment — restoring the prestige of the brand and its legacy for trend-setting design and marketing. In addition, as Murphy acknowledged Wednesday on a brief conference call with analysts, the first two thirds of the year, “I’d like to think I could have done better.”

Gap Inc.’s performance last month was weak, with sales flat versus the year ago’s minus 3 percent. By division, Gap was down 3 percent, Banana Republic was up 2 percent and Old Navy was up 1 percent for September 2014. Gap stock closed up 1.7 percent to $41.90 for the day, but fell 7.6 percent to $38.72 in after-hours trading following the news about Murphy’s departure and the company’s flat September comps.

Gap said it was a personal decision by Murphy to leave and cited an impressive six-year compounded annual growth rate on earnings per share of 17 percent and a total shareholder return of more than 160 percent.

“Today, Gap Inc. is a formidable global fashion retailer with a strong foundation in place for long-term growth, therefore making this an appropriate inflection point for me to pass the baton to a leader who will take our portfolio of brands to even greater heights,” Murphy said in a statement. “With consumer expectations rapidly evolving, Art is the right leader at the right time to build on our success and ensure a compelling experience for our customers across both our physical and digital channels.”

With the appointment of Peck, who’s 59, Gap has an insider who worked closely for years with Murphy and knows the company inside out, making for a smooth transition. The downside is that while Peck led the North American division for Gap brand in 2011 and 2012, he’s not considered a merchant and Gap in recent years has been plagued by merchandise issues.

Peck has held a variety of brand, strategy and operational roles since joining the company in 2005 and has most recently been working on omnichannel and digital strategies, and guiding the emerging Athleta, Intermix and Piperlime brands.

Previously, he headed the outlet business for Gap and Banana Republic, and earlier he led global strategy and launched the first franchise markets. Prior to joining Gap Inc., he spent more than 20 years at The Boston Consulting Group, where he rose to senior partner, with a focus on consumer technology, media and entertainment; consumer products, and retail.

Demonstrating a concern for the product, Peck said, “Our success will be based upon presenting brand-right, emotional product to our customers, both in stores and online. Building upon the foundation Glenn has established, we will be focused on continuing to execute our strategy to drive long-term shareholder value.”

Gap Inc. also said that Bob Fisher, who has a 35-year history with the company founded by his parents, will become non-executive chairman, and Peck will join the board. The Fisher family is Gap’s largest shareholder, owning 26.4 percent of the stock.

“I consider this to actually be a really good day,” Murphy said in the conference call Wednesday. “I am able to pass the baton in the new year to someone I have worked side by side with for close to eight years now. The board has done a magnificent job planning for succession….Like any responsible board, we started thinking about the future, as we looked to 2020….Philosophically, anyone with their handprints on the long-range plan also needs to be there for the execution. I am just not able to make a personal commitment to make this next round of long-range planning and strategy. The board would like me to stay and that flatters me.”

Murphy said Peck has “overexceeded my expectations and the board’s expectations on every single assignment I have given him” and that “this is a future ceo that knows the culture.”

Peck said Gap Inc. is positioned to win, citing the company’s “incredible brands and incredibly talented team.” He cited continued global growth, continuing to “embrace and invest” in the digital strategy and furthering improvements in the supply chain as priorities. He also said he “steadfastly believes in stores and steadfastly believes in digital” as the future for the company.

One industry observer said that while Murphy gets credit for turning around Old Navy, he was focused more on cutting costs than innovation.

“You’re seeing an evolution where retailers are starting to recognize that their future talent is housed in their digital arms, not necessarily their classic brick-and-mortar arms,” said Leslie Berglass, ceo of executive search firm Berglass + Associates.

Berglass pointed to Neiman Marcus Group, where John Koryl was president of the direct business, but then took on the same responsibility for the namesake chain’s stores and online operations.

“It was unexpected,” said Janet Kloppenburg, analyst at JJK Research, of Murphy’s departure. “I saw Glenn in July and we talked about long-term strategies. I think he has done a really great job in transforming the company. And he did set some goals for the longer term about reaching higher operating margins, approaching those of H&M and Zara. I think we were all optimistic that he [put] plans in place to do that.”

Kloppenburg pointed to the company’s efforts to shorten lead times and create a sourcing structure with a quicker response time.

Elaine Hughes, president of executive search firm E.A. Hughes & Co., noted that “Glenn was not a conventional choice for the ceo role and came under fire from Wall Street for not showing results fast enough. However, his strategic approach to reviving the business’ profitability proved Wall Street wrong.”

Hughes said Peck’s recent roles at Gap have “provided him with the experience to navigate through the complexity of the hyperglobal environment of tech-induced consumerism. Product is important, but the environment and mechanism to satisfy the customer are critical. Art gets that.”

“In his last two assignments — Shoppers Drug Mart and now Gap — Glenn’s done extremely well for shareholders and has been well compensated for generating exceptional returns,” observed Antony Karabus, ceo of HRC Advisory unit of Hilco Global. “He’s absolutely one of the best retail ceo’s I’ve ever known and he’s leaving the company in a very strong position and probably worked directly with the board to get the right successor in place. You look at the stock price and profitability versus what he inherited and it says a lot. You look at buying Athleta and what’s been done with it, of international growth and the radical growth of distribution points, what he’s done with real estate and the cost structure, the investments in design and omnichannel. He came into apparel in 2007 and people wonder how a Canadian drug and grocery retailer could pull this off, but he’s done a terrific job. The short-term problems at Gap division don’t really make a dent in that.”

Murphy was not available to comment.

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