At least part of the reason for that upgrade was that the well-known retailer recently hired a gentleman by the name of Glenn Murphy to assume the role of CEO.
Citi apparently believes that Murphy can turn the company around. Murphy certainly has a tall task ahead him. After all, Gap and Old Navy stores have been reporting negative single-digit same store sales results. (For related reading, check out Analyzing Retail Stocks.)
The company's Banana Republic concept is coming off a good month (same store sales were up 6%), but it continues to face stiff competition from Abercrombie & Fitch (NYSE: ANF) and Aeropostale (NYSE: ARO), as well as the major discounters such as Wal-Mart (NYSE: WMT) and Target (NYSE: TGT), which have been aggressively pushing their back-to-school sales initiatives.
Let's take a look at Murphy's background for some insight into his abilities.
Murphy has been in retail for about 20 years. Most recently, he served as CEO of Canada's largest drug store chain, Shoppers Drug Mart (TSX: C.SC). During his tenure there, the company turned in 22 straight quarters of rising revenue, and its per share profit roughly doubled. In addition, he helped to grow the company's store base by about 20%, to roughly 1,000 stores.
Prior to his stint at Shoppers Drug Mart, Murphy headed up a company called Chapters, now Indigo Books & Music (TSX: C.IDG), one of Canada's largest book retailers. His performance while there, however, has not been extensively chronicled.
In any case, those who have met and worked with Murphy seem to agree that he has a sharp mind and a knack for knowing what works and what doesn't at the retail level.
Time to try a new style?
Despite his past successes, however, there's an important question that should be addressed here: Where is Murphy's background in apparel?
I have little doubt that Murphy will work to cut costs to the bone, especially during his first few months on board. But can he drive revenue? I'm not so sure. Remember, when it comes to drug stores, the merchandise mix is generally pretty straightforward. In other words, cold medicines and shampoo don't go out of style.
Apparel is a different ball game. Not only does a company have to get the style right, but it also has to be good with timing to ensure that inventories are sold by the end of the season - otherwise, a company will be hit with a load of carrying costs, or be forced to mark wares down at the expense of margins in order to move them.
Of course, there is a host of other problems that Murphy will face as well. For example, can he gain an understanding of each of the company's concepts and make each of them work?
The Good News
There are, however, are some signs that Murphy is the right man for the job. In particular, I am impressed by reports that state that he intends to purchase some 150,000 common shares over the next few weeks in order to demonstrate his confidence in the company's long-term prospects.
I am also impressed by reports that suggest that, as part of his compensation package, he will receive some 4 million options, about half of which will be at a premium price. He is also eligible for a target award of company shares, but that is contingent upon his ability to deliver improved earnings over time. In other words, Murphy appears to have adequate incentive to enhance shareholder value. (To learn more, read Mapping Out The Stock Options Landscape.)
The Bottom Line
Murphy may have the skills to turn Gap around, but he may not be the panacea initial press reports are making him out to be. After all, he faces an enormous uphill battle given the ever increasing competitiveness of the apparel business and Gap's apparent waning popularity among consumers.
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