Gap’s Management Changes Aren’t Enough

There was almost an exciting headline on the tape at 12:30 called "Gap Inc. Announces Senior Management Changes at Gap and Old Navy Brands."  Gap Inc. (GPS-NYSE) is making management changes in the design and merchandising divisions at its Gap and Old Navy brands.

Denise Johnston, 47, president of Gap Adult, is leaving the company effective January 12. A search for her replacement will be conducted, and Gap Brand North America President Cynthia Harriss will oversee the adult business until a successor is named.

Gap named Karyn Hillman as senior vice president of merchandising for Gap Adult. She has been with Gap since 1991 and in the Banana Republic unit for about 5 years.

Old Navy’s Executive Vice President of Product Design, Ivy Ross, 51, will leave the company effective January 17. In the interim, the design team will report to Old Navy President Dawn Robertson.

Here is the problem, the company has already hired Goldman Sachs to explore strategic alternatives and that is going to make it a difficult decision for someone to step in because they could be marched out the door as fast as they came in.  Paul Pressler should have left the company as his news years resolution and THEN the company should have announced it hired Goldman Sachs.  Now they are in a quagmire that is even worse than before, and this is another example of why Pressler was one of my 10 CEO’s that need to go.

The Fisher family needs to determine who is in their best interest and who is the best for shareholders.  Mr. Pressler may be a good guy personally, but he hasn’t been the answer for Gap and didn’t have the right background.  Now the company has driven away customers to other spots in such droves that they will have to have many consecutive seasons of cool merchandise before kids and younger adults change their minds to go back to the company to buy their clothes.

As far as a buyer is concerned, now the prospects are for a turnaround company buyer and it will have to be a big one because Gap has a $16 Billion market cap.  It also has very few plots of dirt to sell, meaning there is not a huge hidden real estate play underneath the company since it leases stores.  So what you can probably expect out of a strategic alternative is that Goldman Sachs will try to break the company up.  Gap has a face to save, Banana Republic is still salvageable, and the Forth & Towne brand looks like it can be saved.  Old Navy is so lame that the clothes aren’t even cool for people sneaking across the border, so they need to spin that off or if not just turn it into dollar stores where they can sell the rejects and returns. 

When I conducted buyout analysis for Gap as an overall cashflow story (stock was around $17 then) and turnaround story it was really hard to make the math work out to where anyone would dare pay over $20.00 per share for it.  Even there it was hard to know if the company would go for a deal, and the Fisher’s (founding insiders) have such a large stake that they could block any deal if they wanted to.  There is also a huge risk that the company starts to decide to take the US-Auto model by thinking they can shrink themselves into better companies, but then you’ll see the earnings and cash flow story gone because of huge losses.

So the prospects here with the stock trading at $19.78 are most likely a break-up or a "take-under buyout."  Pressler is on borrowed time and he knows it.

Jon C. Ogg
January 10, 2007