A Prescription for Success at Gap?

I can understand the investor excitement following Gap's (NYSE: GPS  ) big news last night. The beleaguered retailer has finally hired a new CEO, and that's got to be a relief, not to mention a step in the right direction.

However, when I heard of the company's choice, my first thought was: Gap, what drugs are you on? Not just because it's darn near impossible not to make that joke -- Gap's new man is a drugstore executive, after all -- but also because I think some of us were hoping for a more fashion-centric choice.

The retail edge   
Gap has hired Glenn Murphy, a veteran of Shoppers Drug Mart, which is the largest drugstore chain in Canada. Murphy will serve as both chairman and CEO.

Gap's press announcement said Murphy has 20 years of retail experience under his belt, and he has been selected because of his retail turnaround experience. According to Gap, Murphy has "successfully reinvigorated" retail brands in food, health and beauty, and books, but for those of us who are a little more critical, it's easy to wonder where the heck fashion apparel is on that list.

Granted, Murphy is much closer to home, given that Gap's last CEO, Paul Pressler, was hired right out of an entirely different industry -- he came from Disney (NYSE: DIS  ) . However, it's still a far cry from Gap's other well-known former CEO, Millard (Mickey) Drexler, who now heads up hot retailer J. Crew (NYSE: JCG  ) and has the reputation for savvy fashion sense.

Murphy announced he was leaving Shoppers Drug Mart in January, having been at the helm since June 2001. The press announcement regarding Murphy's departure quoted him as saying, "Secure in the knowledge that an effective successor was in place, I found myself thinking about the next stage of my own career, one that will see me pursuing opportunities outside of Canada." Well, Gap certainly fits that bill.

Granted, Murphy did hit a home run during his tenure at Shoppers Drug Mart; that press announcement credited him with "leveraging Shoppers' leadership position in pharmacy, re-invigorating the brand with the introduction of a new store model, and ... adding innovative products and services focused on the company's core offerings in health, beauty, and convenience."

Indeed, a quick glance at key statistics for Shoppers Drug Mart shows that the company reported double-digit earnings growth (around the mid-teens) for the past couple of years, with comps growth in the mid-single-digit range. However, earnings growth has been slowing just a tad since it reported a 23% increase in earnings per share for the fiscal year ended January 2004. But yes, it still looks much better than Gap's last couple of years.

The perks of leadership   
The lack of a permanent CEO since January hasn't given investors much reason to feel incredibly optimistic about Gap. It's nice to think the retailer might get an infusion of inspiration from a new, excited CEO who's up for the challenge of turning Gap around.

Gap's press release said Murphy will purchase 150,000 shares of Gap in the next few weeks. That's a nice touch. Of course, before we get too warm and fuzzy, a quick peek at Gap's latest proxy reminds us that in 2004, the company adopted stock-ownership requirements for the leadership team, and the CEO minimum is ... 150,000 shares, although CEOs do have five years to rack up that amount. (Pressler may have owned more than 1.3 million shares, according to the 2004 proxy statement, but that was an anomaly -- the latest Gap proxy showed he owned 5,000 shares, and at one point it struck me as rather strange that eBay's (Nasdaq: EBAY  ) Meg Whitman, once a Gap board member, owned more shares than Pressler did at the time.)  

I couldn't resist taking a peek to see whether Murphy's deal is a little sweeter than Pressler's. Both were hired on with $1.5 million in base salary. Murphy also receives a $1 million sign-on bonus, while Pressler got an initial bonus of $885,000 back in 2002. (Ah, inflation.) And naturally, there are millions in stock options and the ability to make additional money through performance-based bonus plans -- par for the course for both gentlemen.

I find it noteworthy that Gap is handing the chairman role over to Murphy. Founder Donald Fisher functions as chairman emeritus, and his son Robert Fisher previously functioned as chairman, a separate function from CEO. (Robert Fisher has been acting CEO since Pressler's departure.) The company amended its bylaws on July 24 to eliminate the requirement for a non-employee chairman -- an interesting development since, these days, many governance activists have been pushing to separate the titles at many companies. Plus, the Fishers are Gap's founding family, so handing over more control to the new CEO is rather striking.

Cautious optimism
On my last check, Gap's shares had gained almost 5% on the news. I can see why Gap shareholders might breathe a collective sigh of relief that the search for a new CEO is over. However, while Murphy's retail turnaround expertise is a plus, you could definitely interpret his lack of fashionable apparel experience as a potentially big minus. If he is able to surround himself with executives who have the right merchant expertise and vision, perhaps that makes for a happier outlook as he focuses on turnaround strategy. But we'll have to wait and see.

There is reason for more optimism than there was last month or last year, perhaps, but with emphasis on the cautious kind. I'll be watching with interest for signs of revitalization in Gap's beleaguered brands, which so many consumers seem to have forgotten over the last couple of years. Success still isn't a foregone conclusion.

Here's some more on Gap:

Gap, eBay, and Disney are Motley Fool Stock Advisor recommendations. Gap has also been recommended in Motley Fool Inside Value. Try either service on for size -- it's free for the first 30 days.

Alyce Lomax does not own shares of any of the companies mentioned.  


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