Gap dumps CEO who was unable to steer retailer out of sales funk

Tuesday, January 23rd 2007, 6:20 am

By: News On 6

SAN FRANCISCO (AP) _ Gap Inc. was already struggling when it brought in Paul Pressler as chief executive more than four years ago. Those troubles look even more daunting as the clothing retailer ushers Pressler out the door with a $14 million severance package that leaves him in a lot better shape than the company he departs.

Pressler's exit, announced late Monday, follows a dismal holiday shopping season that worsened the decay that has been eroding Gap's sales since the spring of 2004.

The deepening problems have dragged down a retailing icon that owns 3,100 stores under the Gap, Old Navy and Banana Republic brands.

Pressler, who became Gap's CEO in September 2002 after leaving his previous job running Disneyland, repeatedly promised to bring back shoppers during the past year, to no avail.

The recurring disappointments had already convinced many investors that Pressler should be fired. In a Monday statement, Gap said its board and Pressler ``mutually agreed'' it was time for him to leave.

``It was a tough environment when Pressler arrived and things are even tougher now,'' said retail industry analyst Jennifer Black.

San Francisco-based Gap named Robert J. Fisher, the son of founder Donald Fisher, as CEO on an interim basis. The younger Fisher has previously held several top jobs at Gap and has been the company's nonexecutive chairman since May 2004, when he stepped into his father's shoes. The elderly Fisher, Gap's largest shareholder, remains chairman emeritus and will participate in the search for a new CEO.

After Gap's latest letdown during the holidays, more investors began to bet that the company would be sold to a deep-pocketed buyout firm interested in engineering a turnaround.

The speculation intensified earlier this month amid reports that Gap had hired investment firm Goldman Sachs to explore ``strategic alternatives'' _ financial jargon often used when companies are about to throw out a ``for sale'' sign.

The shake-up could signal Gap's intention to remain independent. Given Gap's problems and an estimated $20 billion sale price, several analysts doubted the company's ability to attract a buyer.

In a statement issued Monday, Robert Fisher made it sound as if Gap will try to fix its problems on its own.

``During this important transition period for our company, the board of directors and I are committed to working with our employees to enhance our focus on ... reinvigorating our brands and charting a new course for the future that will deliver strong returns for our shareholders,'' he said.

The Fishers hold the key to any possible sale because they own more than 25 percent of the company's stock.

Gap shares fell 10 cents to close Monday at $19.90 on the New York Stock Exchange, then gained 50 cents in extended trading after Pressler's departure was announced.

Although she considers a sale of the entire company unlikely, Banc of America Securities Dana Cohen said Gap might auction off Banana Republic, the one part of its operations where sales have been rising recently.

A sale of Banana Republic might fetch about $2.5 billion, Cohen estimated. Alternatively, she believes Gap could raise about $500 million by spinning off the brand in an initial public offering of stock.

After nearly 30 years of steady growth, Gap's fortunes began to sag in 2000. The malaise led to the departure of Gap's longtime leader, Millard ``Mickey'' Drexel, and Pressel's arrival from Walt Disney Co., where he oversaw the world's best-known theme park.

Gap bounced back during Pressler's first 18 months on the job, and he won high marks for closing poorly performing stores and instilling more financial discipline. Those improvements, coupled with the recent speculation about a takeover bid, helped boost Gap's stock by about 60 percent during Pressler's tenure.

But Pressler never demonstrated a great deal of fashion sense or the ability to hire people who did _ a shortcoming that damaged Gap's brand as more shoppers defected to merchants that offered more hip choices or lower prices.

``The back end of the house was something that Paul did a phenomenal job,'' said Bobbie Lenga, managing director of the retail practice at executive recruiter Russell Reynolds Associates. ``But he is not a strong product person. Product is what drives the business.''

Lenga expects Gap to have a tough time finding a dynamic new leader because turning around the company will be an extraordinarily difficult assignment.

The possible candidates include Vanessa Castagna, who has engineered turnarounds at two department stores: J.C. Penny Co. and Mervyns. Castagna is scheduled to leave her current job at Mervyns on Feb. 1.

Lenga believes Paul Charron, former CEO of Liz Claiborne Inc., could be lured out of retirement to run Gap.

Coming off a lackluster 2005, Pressler vowed to turn things around in 2006 and projected earnings in the same range as the previous year.

Instead, Gap's deterioration worsened as the year progressed, prompting Pressler to lower his earnings guidance three times.

The final straw apparently came earlier this month when Pressler warned that Gap's profit for fiscal 2006 will end up about $300 million, or 40 cents per share, below the target he set at the year's outset. The company plans to release the official results March 1.