Thursday evening, Gap Inc., injected a massive amount of uncertainty into its future when it let its chief executive go.
Art Peck is out after 15 years at the company and nearly five years in the top post, and just months before the company is supposed to spin off the best-performing brand in its stable. Peck was terminated "without cause," according to a filing with the Securities and Exchange Commission Thursday.
Robert Fisher, son of Gap founder Don Fisher, has taken over as interim CEO. The company also said in the filing that Bobby Martin, an operating partner at investment firm The Stephens Group, will serve on the board as lead independent director while Fisher is interim CEO.
For an apparel giant that for years has failed to leverage what was once an iconic place in casual fashion, however, it may have been its best move in years. Several analysts in the hours after the late notice characterized it as long in coming.
"Only time will tell if Art Peck's departure is a good thing or a bad thing," Ray Hartjen, marketing director of RetailNext, told Retail Dive in an email. "But, I do think it signals hope for the brand. Incremental change is not going to cut with respect to the Gap. It needs transformative change — big, bold, and fearless. Any resumption of the same ol', same ol' is a slow death spiral, and a death by a thousand paper cuts."
The limits of business acumen
Gap Inc. remains an apparel powerhouse, with $7.7 billion in worldwide sales in just the first half of this year. But the company has steadily slipped from its 1990s fashion perch, reached after merchant prince Mickey Drexler took it from a regional West Coast denim retailer to a global juggernaut, largely due to troubles at its namesake brand. It was Drexler who devised Old Navy as a way to fend off denim assortments being developed by the likes of discounters like Target and who brought Banana Republic into the stable to capture fans of higher-end brands like Ralph Lauren.
But that success was tarnished as a parade of so-called business geniuses and consultants (including Peck himself, who worked at Boston Consulting Group before he went to Gap) took over, without much regard for the merchandise, analysts say. In the second quarter of 2019, in a familiar report, net sales fell 2% to $4 billion and net income fell to $168 million from $297 million in the year-ago quarter, with comp declines at all three brands. As the company announced Peck's abrupt departure Thursday, it also reported that comparable sales deteriorated in the third quarter as well: 7% at Gap, 4% at Old Navy and 3% at Banana Republic.
"Since that time, they have not had a merchant," Ilse Metchek, president of the California Fashion Association, told Retail Dive in an interview. "They brought in — I'm sure they’re lovely people and one business brain after another — but no one who looks at the product. That’s really the issue here. There’s no one for the past 10 years who’d re-examined the product. Gap was all by itself — where Zara is now or H&M is now. Every kid went to the Gap — they had that market to themselves, before Uniqlo, before Aeropostale, before Urban Outfitters. When you had the Gap at its peak, frankly, they had no competition. The whole industry waited for Gap colors. So now they’ve stayed still while all the others have emerged."
That was a theme that arose from several experts. Mark Cohen, director of retail studies at Columbia University's Graduate School of Business, worked for Don Fisher during Gap's early days, when it was still mostly a purveyor of Levi's, including iterations of the jeans that couldn't be found at department stores.
"This is really a damn shame," he told Retail Dive in an interview, noting that Gap depends on constant discounts of 40% and higher to lure customers. "The Gap is a catastrophe that should never have occurred. You could reconcile its demise if people had stopped wearing jeans. American Eagle is selling a million pairs of jeans a week. Gap should never have ceded the space. The Gap traded its quality and price point down to Old Navy and lost its differentiation, which is just a crime. It should have remained the heart and soul."
Add to those trends that Levi's, a 166-year-old company, has retaken its position as a quintessential American brand. "Levi's has a very smart CEO, who is a merchant, and he knew that Levi’s needed to push into the contemporary world," Metchek said.
Along with its once-strong denim offer, Gap, as an apparel leader, could have seized the athleisure trend when it was first sparked by Lululemon, according to both Cohen and Thomai Serdari, professor of luxury marketing and branding at New York University's Stern School of Business. Instead, the company acquired Athleta, isolating its star brand further.
"Rather than being the brand that examines, questions, and reimagines what the American lifestyle calls for in terms of basic apparel, the Gap became a retailer of basic apparel," Serdari said in an email. "These are two completely different value propositions. The former requires leadership well attuned to creative practices whereas the latter (as it already happened) survives for as long as operations are made more efficient and inventory turnover is accelerated through discounts."
In short, these experts say, business acumen isn't enough. Shuttering stores (Gap early this year announced a plan to shrink its namesake's footprint by a third, in order to ditch the failing mall model and focus on e-commerce), cutting costs and even centralizing supply chain and other operations to the uber-efficient extent that Gap Inc. has, doesn't get the job done. It's a message to the industry to "develop and support the creative talent" in business and financial matters, rather than lean on business leaders who don't possess the necessary craft, Serdari warns.
"It is time for the fashion industry to invest in the creative talent who can translate contemporary Zeitgeist into the next big hit while also allowing the brand to evolve," she said. "Groom these people for executive leadership positions, invest in the next Mickey Drexler who will help your brand pivot into the next phase of American lifestyle."
Some less fashion-oriented, more investment-minded analysts are saying much the same thing, with several seeing Peck's departure as an opportunity, if possibly the last one the company will ever have.
"We think the Board is making a mistake in searching for its next great operator as CEO," Roxanne Meyer, managing director at MKM Partners, wrote in a client note Friday. "It is perplexing to us that the Board desires an operator in the CEO seat. There have been nothing but operators since Mickey Drexler's time, and with the exception of hiring the right merchant leader to fix Old Navy, operators haven't helped to revive [Gap Inc.'s] brands. If brand DNA is not there, advancing technology is meaningless. In our opinion, simply put, in this late stage for [Gap Inc.], an operator could be the final axe, unless the goal is to spin-off Athleta or shut the majority of stores."
Similarly, Wedbush analyst Jen Redding in a Friday note said her team views "Art Peck’s indifference to design and product as responsible for much of the current brand erosion," with his absence giving the board "an opportunity to revive Gap if it finds the right design-driven leader with a powerful vision to bring the brands back from the brink of fading permanently."
If Art Peck's job is a casualty of the company's ongoing misfortune, the planned Gap-Old Navy divorce may be a casualty of his exit. The company says that nothing has changed. In a statement emailed to Retail Dive Friday, a Gap Inc. spokesperson said, "The board continues to believe in the strategic rationale for the planned separation, and the preparation for separation continues as planned." The board is meeting next week as previously scheduled, and "any additional perspective" will be provided during the company's Nov. 21 earnings call, the spokesperson also said.
But analysts, including Wedbush's Redding, who said her team understood the plan to be Peck's own pet project "likely because he saw it as a way to extend his career," questioned whether it would go forward, with some saying that it shouldn't.
The company has long touted the synergies inherent in its highly centralized back operations, the product of that business acumen, which would crumple in a split, noted Credit Suisse analyst Michael Binetti. Then there's the fact that Gap didn't mention the spinoff plans when it announced Peck's termination, he said.
"We continue to believe the pending spinoff of Old Navy will prove to be destructive to equity value," he also said in a client note on Friday. "Our negative view has been based on [Gap Inc.] trying to build a narrative around the value unlock of separating the portfolio of brands…after a years of building a narrative around the significant synergies and the intrinsic value of the integrated brand platform."
But the company is in a tight spot either way, he also said. If it abandons the plans it will be more difficult to persuade the market that Old Navy does belong in the fold, after all. Yet if it goes forward, it's unlikely to be able to make up for the lost efficiencies, according to Binetti.
It's a mess, yet an opportunity, if a narrow and fleeting one. "You can do business in our business if you know who your customer is and you don’t stand still," Metchek said. "The question will be: How do you develop a chain of stores that people gravitate to, that has a look to it that applies itself to Los Angeles, Chicago, New York, and Boise, Idaho."