Gap Making News For All The Right Reasons

By Will Ashworth | September 18, 2012 AAA
The news on September 17 was extremely positive. Gap (NYSE:GPS) CEO Glenn Murphy has found a chief of design, Rebekka Bay, for its namesake brand at a time when good news seems all around the once-suffering specialty retailer. Gap has its groove back and that means trouble for competitors everywhere. For shareholders, it means a stock price that for once is going up instead of down. What does it mean for the future? I'll have a look.

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Glenn Murphy
Glenn Murphy, the former CEO of Shoppers Drug Mart, Canada's largest drug store chain, was hired slightly more than five years ago. Murphy was assigned the difficult task of turning around the underperforming retailer made famous by Millar "Mickey" Drexler, current CEO of J. Crew and the mastermind behind Gap's original success, and quickly solidified its profitability. However, sales growth remained elusive until earlier this year. In fact, in the five fiscal years since Murphy's been at the helm, Gap's same-store sales have decreased on four occasions, including 2011.

A fan of both Murphy and the Gap, I wrote an article last June providing the wily veteran with some tips on fixing his company. My recommendations included selling Old Navy (too much real estate) and seriously expanding its Athleta brand. On the former matter, he's hired Stefan Larsson, the former head of global sales for H&M, who starts in October. It's not a sale but at least they've brought in someone who knows fashion retail on a global basis. Thankfully, on the latter point, Murphy's put the pedal to the metal, expanding Athleta at breakneck speed. Murphy hung in there while critics blasted the company for lacking any fashion sensibility. It appears the hiring of Rebekka Bay as Executive Vice President for Gap Global Design puts all those doubts to bed.

Marketing and Merchandise
In order to be successful in retailing today, you need excellent product combined with good marketing. Gap's 1969 line of premium jeans demonstrates that it's fully capable of designing good products but it then needs to market those products to customers in such a way that they feel an affinity with the brand and keep buying. That's easier said than done. Gap's tried to regain its relevancy for years.

In February 2011, it hired Seth Farbman as chief marketing officer for the Gap brand, its first CMO in company history. Farbman brought an ad man's vision for what people want to see from the brand and working in conjunction with Ogilvy & Mather, his old firm, have been able to bring back the fun image it once had. To further emphasize marketing and design, Gap's hired advisors such as Narciso Rodriguez for Banana Republic and Jill Stanton for Old Navy. Some analysts believe that Gap is currently a "buy" with a $36 price target. How can you argue, given the positive moves that it is making? You can never have a deep enough bench.

The Bottom Line
Since Murphy's hiring on July 27, 2007, Gap's total return is about 120% compared to an approximate 6% return for the SPDR S&P 500 (ARCA:SPY). If it keeps making smart hiring decisions and delivering better earnings, there's no reason its stock can't challenge those all-time highs of the late 1990s. Gap is on a roll that may not stop anytime soon.

At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.
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