CEO Wanted: Gap's Search for a Savior

Now that Paul Pressler is leaving the helm, the apparel retailer faces more than just slumping sales. Can Gap find a new leader to turn it around?

by Louise Lee

With the departure of its embattled chief executive, apparel giant Gap Inc. now faces the tough task of finding a new leader among a narrow group of potential candidates, even as it struggles with ongoing merchandising and sales problems.

On Jan. 22, San Francisco-based Gap said Paul Pressler and its board "mutually agreed" that Pressler will leave his posts as president and CEO. Pressler, who joined the company in 2002, will also leave the board. The company made the announcement after the close of trading; in after-hours trading, Gap (GPS) shares rose 2.46% to $20.39.

It isn't clear how Pressler's departure fits into Gap's search for a possible buyer. Two weeks ago, there were reports that the retailer had hired investment bank Goldman Sachs (GS) to explore strategic alternatives, including a possible sale (see BusinessWeek.com, 1/8/07, "Gap on the Block"). Pressler's departure does "clear the decks" for a potential buyer, says analyst Mark Montagna of C. L. King. But he adds that any acquirer could do its own executive housecleaning if it so chose. So it appears, Montagna says, that, "Gap is going down all avenues at the same time, letting itself get shopped around and also running the business, although without Paul Pressler."

Same-Store Sales Slump

Gap officials declined to comment on whether the company is up for sale. A spokesman said board members and Pressler weren't available to comment. He also said Gap's board has not retained a recruiting firm for the CEO search; instead, four board members will conduct the search. No deadline has been set for the completion of the search, he said.

The news of Pressler's departure comes just over a year after Gap founder Donald Fisher, amid analysts' speculation that Pressler would be replaced due to poor performance, publicly called him "the right person to lead this company." But Gap's sales and earnings performance continued to deteriorate through 2006, culminating in a dismal holiday season. Sales at stores open at least a year, a key measure for retailers, fell 8% in December (see BusinessWeek.com, 1/5/07, "Sales Gap at the Gap"). For all of 2006, so-called same-store sales fell 7%, the fallout of stocking fashions that didn't resonate with shoppers. The company has cut quarterly earnings estimates several times in the last year.

Gap has also suffered numerous executive departures in recent months, including the resignations of two top executives in the Gap and Old Navy divisions less than two weeks ago.

Industry Outsiders Need Not Apply

In the four years of Pressler's tenure, Gap learned the hard way the risks of hiring an executive from outside the apparel and fashion industry to lead a company whose fortunes turn on getting hemlines, colors, and fabrics just right. In 2002, Gap went out of its way to hire a nonretailing CEO, bringing in Pressler, who was the head of Walt Disney's (DIS) amusement parks and hotels.

But Gap is now swinging back the other way and said in a statement that it's aiming to hire a CEO "who has deep retailing and merchandising experience ideally in apparel, understands the creative process and can effectively execute strategies in large, complex environments while maintaining strong financial discipline." Gap "is saying, 'Okay, we won't get another Paul Pressler,'" says executive recruiter Kirk Palmer. "That's the message they want to give, and that's good. That's what they should have done the last time they filled the job."

Yet Gap's criteria, combined with its hulking size, knock out countless job candidates and could make it hard to fill the job, say analysts and executive search consultants. "Run down the list of the top 100 retailers, and I'm not sure a lot of folks are right for the job," says Palmer. "The list is short."

Wanted: Visionary

At $16 billion in annual sales, Gap is the largest of the specialty apparel retailers. Many retail executives running smaller operations either aren't qualified to or wouldn't want to try to turn around such a troubled giant, says another veteran headhunter. Additionally, many apparel retailing executives have clauses in their employment contracts forbidding them to jump to a competitor such as Gap.

Analyst Jennifer Black, of Jennifer Black & Associates in Portland, Ore., says that "the biggest thing Gap needs is a visionary." According to Black, Gap "needs someone like a [former Liz Claiborne (LIZ) CEO] Paul Charron," who successfully oversaw the growth of that apparel giant's brand portfolio and retail strategy. Other industry insiders say Polo Ralph Lauren (RL) Chief Operating Officer Roger Farah could be considered a candidate. A Polo spokeswoman says Farah is not interested in leaving Polo and no one has approached him about the Gap job.

As Gap searches for a CEO, shareholders and employees shouldn't expect any significant changes in Gap's business. Robert Fisher, the son of Gap's founder and the company's nonexecutive board chairman, will serve as president and CEO on an interim basis, and "you just don't want to make any major changes before you have a permanent CEO," says analyst Montagna. Until that happens, Gap will likely keep trying to sell its familiar jeans, tops, and skirts, often at painfully generous markdowns.

Lee is a correspondent in BusinessWeek's Silicon Valley bureau
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