NEW YORK — When word came around on Wednesday that Ralph Lauren was handing off the chief executive officer role of his namesake company to Old Navy’s Stefan Larsson, the investment community was stunned. In the wake of the event were stock upgrades, downgrades and surprised reactions.
This story first appeared in the October 1, 2015 issue of WWD. Subscribe Today.
Lauren revealed the management change after the market closed on Tuesday. On the first day of trading on Wednesday, Wall Street praised the appointment of Larsson by sending shares of Ralph Lauren Corp. up 13.5 percent to close at $118.12. The 52-week high is $187.49 and the low is $103.29 — a level reached only the day before.
But while investors cheered the addition at Lauren, they were less happy about the impact Larsson’s loss will have on Gap Inc. Analysts noted that the retailer’s turnaround was pinned to the success of Old Navy. Analysts said under Larsson, the value-driven Old Navy brand had three consecutive years of profits and added nearly $1 billion in sales. It’s unclear whether the company can maintain its success without him, they added.
As a result, shares of Gap Inc. fell 5.7 percent to close at $28.50. Its 52-week high is $43.90, and the low is $27.64.
UBS equities analyst Michael Binetti downgraded Gap to a “sell” from a prior “neutral rating.” He has a 12-month price target of $25 from a prior target of $40. Binetti said Larsson’s departure “reduces our conviction that Old Navy can maintain its momentum — and that the disciplined processes Larsson brought to Old Navy will be successfully transitioned” to the other brands. The analysts see Gap’s turnaround as being “unclear.”
Piper Jaffray analyst Neely J.N. Tamminga downgraded shares of Gap to “underweight” from “neutral” and cut the price target to $28 from $34. Tamminga sees profits at the company sliding for fiscal 2015, and cites executive turnover as a lingering issue. Analysts at Telsey Advisory Group also see turnover as problematic.
The Telsey analysts said the announcement of Larsson’s departure was a surprise, “and the market viewed him as an important talent that contributed significantly to Old Navy’s ongoing success. However, over the last 12 months, the company has seen a significant amount of turnover among its leadership ranks.” The turnover included chief executive officer Glenn Murphy’s resignation last year, and a shuffling of other positions at the corporate level and at the individual brands as his successor as ceo, Art Peck, installed his own team.
The Telsey analysts maintained a “market perform” rating on Gap’s stock, but reduced the price target to $34 a share from $41.
For Ralph Lauren, UBS analyst Binetti upgraded the stock to a “buy” from a “neutral” and pegged it with a $128 price target, which is down from a prior target of $133. Binetti described Larsson’s appointment as a catalyst for growth at the brand given the view that he will be “optimizing operations quickly.” The lower price target, the analyst said, is due to current industry trends and not specifically the appointment.
Barclays analyst Joan Payson already had Lauren’s stock at “overweight,” and left that rating unchanged. She said the change “marks another major step in the company’s ongoing transformation and reorganization” after years of license acquisitions, including transitioning to a global brand structure, omnichannel investments and cost reductions.
Payson said, “We are looking forward to seeing Mr. Larsson’s updated perspective on the business,” noting that a plus is his experience in women’s fashion in the affordable segment, since the company is “attempting to build a larger business [in women’s wear] to complement its high concentration in men’s wear.”
Payson said another plus was Larsson’s retail experience, which includes a long stint at H&M. Ralph Lauren’s retail businesses “will be critical to ensuring the global growth of the Polo and Ralph Lauren brands as they both begin to redefine their channel and pricing architectures going forward,” the analyst said.
Nomura Securities’ Robert Drbul has a “neutral” rating on Ralph Lauren. The analyst said he expects Larsson to “bring fresh perspective, clear leadership and a product focus to the company, which we view positively.” Drbul said succession at the company has been a key question over the past several years, and that the announcement removes significant uncertainty.
Drbul also said Larsson’s skill set “will complement that of Chris Peterson’s, as the former is very product-focused, which should help drive newness, with the latter having more corporate and strategic experience.” Peterson is president of global brands and reports to Larsson under the new structure.