Gap Loses OLD NAVY Skipper…. It Should Spin This Dog Off (GPS)

February 19, 2008 by Douglas A. McIntyre

Gap Inc. (NYSE: GPS) is losing its President of its Old Navy brand.  Dawn Robertson, 52, is leaving Gap effective immediately, and Tom Wyatt of the Gap Outlet division will become acting president while a search for a permanent replacement is conducted.  This was said to be a mutual decision…. Do you believe it was mutual, and more importantly does it even matter? 

We don’t usually like to bash a brand nor do we like to bash people.  We noted prior management changes were not enough, and this is no different. The problems at Gap and at OLD NAVY were not caused by Dawn Robertson and the new CEO Glenn Murphy has no fault here either.  We panned Paul Pressler as one of our first CEO’s THAT NEED TO GO, and all of these officers are inheriting what his regime left behind.  It is very unlikely that the OLD NAVY brand will miss her after 16 months.  For that matter, she probably won’t miss it either. 

If any president in corporate America wants to run any brand out there, the chances that it would be OLD NAVY might be as little as 1 in 1000.  This is the cheapie brand for Gap.  Glenn Murphy should take this as an opportunity here.  He is still a new CEO there and frankly he could get away with anything short of a capital crime if it would fix a company and fix a brand.  Gap didn’t do well with its more upscale womens fashion line Forth & Towne so it closed it.  But OLD NAVY is so cheap that acts as a mental drag to even a casual apparel store like Gap and Banana Republic. 

We doubt seriously that Gap would jettison its brands or break itself up.  But the one brand that could make a difference is for it to unload its cheapie brand.  It could go out and strike new design contracts for say the 2010 product lines and run as an independent company.  Jim Cramer last year used to say "GAP WILL BE TAKEN PRIVATE IN A YEAR!" before the private equity meltdown happened.  The problem is that Gap’s market cap is over $14 Billion as of now, and private equity firms are having a hard time borrowing even a couple billion dollars.  It has also been a dead stock and longer-term shareholders who had gotten used to making 10% and 20% in share appreciation year after year may want more than just an at-market buyout.  We have had this up for review in the Special Situations letter, but it has yet to make the cut.

OLD NAVY in North America generated a same store sales drop of -8% this January, and -10% in January 2007.  The problem isn’t the economy, it’s that this OLD NAVY brand is complete garbage and barely appeals to the lowest rungs of society.  This brand is so bad that it is extremely difficult not to address it with offensive language.  Go get your new president, but make it a challenge that a CEO or president would actually want.  The job ad could read "Crummy company about to spun-off, needs brand improvement, major stock options package, needs visionary."

Gap was already weak before the September 11, 2001 put another nail in its coffin.  While shares did recover from those lows, the reality is that Gap stock has been dead money for almost 5-years.  We noted long ago about needing a headcount cut and brand revamping.  This would even allow the company to stop wasting its cash on share buybacks when it needs the cash for its brand.  There is an opportunity to jettison its cheapest brand here, and it might actually make a difference to shareholders. 

We are looking mostly at the North American stores for comparison here.  As of November 3, 2007, there were 1,188 domestic and 90 Canadian GAP brand stores.  There were 997 domestic and 65 Canadian OLD NAVY brand stores.  When you consider that BANANA REPUBLIC had 519 location in the U.S. and 30 in Canada, you can see why we would note a potential powerful "unlocking value" here.

Jon C. Ogg
February 19, 2008