Ailing fashion leader forced to take stock

The Baltimore Sun

SAN JOSE, Calif. -- The Gap Inc., the troubled retailer in search of a new chief executive officer, is running on autopilot.

Spring clothing is on the shelves. Its back-to-school assortment is already set. Planning is well under way to choose hot items for Christmas.

So, even if the San Francisco clothing company gets a new top executive tomorrow, customers wouldn't see merchandise changes for at least a year.

On Monday, after a dismal holiday shopping season that followed months of tepid results, the Gap dumped Paul Pressler as chief executive.

To find a new leader, Gap's board of directors has created a search committee that includes representatives from the luxury and discount retail worlds.

What does the company and a new CEO need to turn Gap around?

Gap officials say there's no timetable for their search, naming Robert J. Fisher, son of founder Donald G. Fisher, as interim CEO.

They're also conducting a strategic review of Gap and Old Navy stores, which constitute about 80 percent of the company's sales. Results of that examination will be released by March 1.

But industry experts say they're already behind.

"They have 18 months to fix the problem" before investors revolt, predicted Marshal Cohen, chief industry analyst with NPD Group. "It's critical they get somebody to hit the ground with both feet running, not somebody who takes time to ramp up. They don't have that long." Turning Gap around, Cohen said, will take a chief executive "who really understands the marketplace beyond the traditional way of doing things, and can get in front of the trends rather than chasing them, which is what's happening."

The search for a CEO likely will take three to six months, according to Citigroup Investment Research analyst Kimberly Greenberger. "We do not believe that a new CEO will be in a position to meaningfully impact the business until at least the fall or [December] holiday of 2008," she said.

But analysts say the new CEO needs more than speed; the company also needs to make tough moves, among them:

Close some Gap stores. Some stores are too close to one another, cannibalizing sales, said independent retail analyst Jeff Green of Mill Valley, Calif. He said 100 to 300 of the 1,300 U.S. Gap stores could go.

"What they figured is that with increased brand recognition, it would increase overall sales for every store, and that didn't quite turn out that way," Green said. He also advocates selling Old Navy because the discount clothing chain's large stores - on average 12,000 square feet - could attract retailers already operating big-box shops.

Shutter its non-core operations. Forth & Towne, a specialty store for women over 35 with 19 national locations, would be first to go. It was launched in 2005.

"It's gone through a fortune, and it's not doing anything," said Howard Davidowitz, chairman of Davidowitz & Associates, a national retail consulting and investment banking firm.

Sell some or all of the company. Vera Van Ert, specialty store analyst with Telsey Advisory Group, said if Gap did that, it should first take the company private, so drastic and expensive changes could be made.

"What wouldn't be a crazy idea is to take the Gap out of the public domain, spin off Old Navy and concentrate on retooling Gap," Van Ert said. "It would be expensive to get out of their leases and no shareholder wants to see some massive charge. If it did it out of the public eye, it would be easier to execute some of these things."

Hire a visionary leader. "You've got to have somebody who can be a merchandiser, provide leadership and attract the kind of talent necessary to turn this thing around," said Michael Appel, managing director of the retail and consumer goods practice at Quest Turnaround Advisors in New York.

Identify the right merchandise. "If you don't put a product on the shelves that the customer finds appealing, they have a lot of other choices," Appel said.

Gap continues to be profitable, but its results are under pressure. Revenue has failed to advance for seven consecutive quarters, and profit has slipped for five quarters in a row.

Although its upscale Banana Republic subsidiary squeezed out a 2 percent gain during the holidays at stores open at least a year, Gap and Old Navy - the biggest part of the company - languished.

Same-store sales, a key indicator of a retailer's health, fell 8 percent in November and December compared with the previous year.

Two other small operations - month-old online shoe business Piperlime and the year-old Forth & Towne - are too new to be more than a minute part of the business.

Despite Gap's current ills, the storied company holds an allure, said George Whalin, president of Retail Management Consultants, a retail consulting firm in San Marcos, Calif.

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