Gap CEO Will Have to Fight for Street Cred - TheStreet

Gap CEO Will Have to Fight for Street Cred

The clothing chain's hiring of a Canadian drugstore exec raises eyebrows on Wall Street.
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Gap's (GPS) - Get Report new chief executive will have to overcome much skepticism on Wall Street that a Canadian drugstore leader can heal an ailing U.S. apparel chain.

Gap's shares were up more than 5% Friday on news that the company's exhaustive six-month search for a CEO had finally come to an end. Late Thursday, the San Francisco-based retailer named Glenn Murphy, former head of Canada's Shoppers Drug Mart, to its top spot.

While the appointment puts to rest all the speculation leading up to it, and consequently eases the tension on Wall Street, Gap must now quell doubts that Murphy can pull the lumbering giant out of its two-and-a-half-year sales slump.

Several analysts question why Gap chose a man with no apparel experience when its previous CEO, Paul Pressler, had been roundly criticized for the same thing.

Pressler, who came to Gap in 2002 after an illustrious 15-year career at

Disney

(DIS) - Get Report

, improved the apparel chain's operations but never had a handle on how to fix the merchandise. He left Gap in January and was replaced by Bob Fisher, son of the company's founders, while the board searched for a permanent CEO.

"The last time

Gap selected a skilled manager with no apparel history, it didn't end well," wrote Todd Slater, an analyst for Lazard Capital Management, in his research. "While we hate to cast aspersions on the board's pick before getting to know the guy, the gut merchant in us wonders why this time will be different, especially given a more challenging competitive landscape."

Gap's three chains -- Gap, Old Navy and Banana Republic -- have been battling retailers from all sides. The company's namesake competes with trendier brands like

Abercrombie & Fitch

(ANF) - Get Report

and

American Eagle

(AEO) - Get Report

. Old Navy goes up against rivals like

Target

(TGT) - Get Report

, which in recent years has bolstered its clothing offerings by bringing in big-name designers. Banana Republic is Gap's one shining star, but it is also the company's smallest division.

Gap spokesman Greg Rossiter defends the decision to bring Murphy aboard, saying he "brings a set of skills and track record in retail that for the board really established him as a standout candidate."

Rossiter points out that Murphy's retail-related background far exceeds Pressler's. At Disney, Pressler spent three years operating a limited number of stores with small square footage, in contrast to Murphy, who headed up the largest drugstore chain in Canada, with more than 1,000 stores.

"The experience is dramatically different," Rossiter says.

Although Rossiter admits that Gap, with more than 3,000 stores, is much larger than Shoppers Drug Mart, he says anyone would be hard-pressed to find a CEO to run a comparable-sized company.

"There is no company our size, and so there's no one who would have that capability," Rossiter says.

Some observers had hoped Gap would install another Mickey Drexler, the company's legendary former CEO who led the retailer through years of prosperity.

Drexler had been hailed as a fashion genius, but even he eventually hit a rough patch at Gap when the company grew too big. He is now the CEO of

J. Crew

(JCG)

, which is enjoying strong sales under his leadership.

Few believed Drexler would actually return to Gap, given the bitter end to his career there. And finding another apparel merchant proved to be a difficult endeavor, given a lack of available and experienced executives ready to take the reins.

There are handful of examples of executives who have come to the apparel sector with no related experience and done well. For instance, former

Liz Claiborne

(LIZ)

CEO Paul Charron was previously an executive at

Procter & Gamble

(PG) - Get Report

. Robert Polet came to

Gucci Group

after 26 years at

Unilever

.

Murphy does come to Gap with extensive retailing experience, having spent 20 years in food, health and beauty and books. At Shoppers Drug Mart, Murphy grew the company's market capitalization from about C$3 billion to over C$10 billion.

Christine Chen, an analyst for Needham & Company, says she would have preferred to see someone from the apparel side to lead Gap. Nonetheless, she cut Murphy some slack.

"The positive is that even though he's from a drugstore background, he seems to have a strong merchandising background," she says.

Jennifer Black, an independent retail analyst, says she is impressed that Murphy has stated his intentions to purchase 150,000 shares of Gap common stock in the next few weeks.

"He's putting his money where his mouth is," Black says.

Murphy's transition as CEO may be eased by some of the changes already put in place by Fisher. In the six months that Fisher led Gap, he undid some of Pressler's work and appointed longtime company veterans into key positions, such as moving Banana Republic head Marka Hansen to the position of Gap division's president. Others, like Dawn Robertson, the head of Old Navy, came to the company last year, bringing 30 years of apparel experience, mostly in department stores.

Analyst Richard Jaffe of Stifel Nicolaus, said that under Fisher, each of the divisions have been given more autonomy.

"This change will likely take some pressure off Murphy in the near term, and longer term perhaps offset his lack of apparel retailing expertise," Jaffe wrote in a research note.

Murphy will be paid handsomely for his efforts, but a significant portion of his compensation will require sustained improvements in the company's performance. He will receive an annual salary of $1.5 million; a sign-on bonus of $1 million; a pro-rated target bonus for 2007; and annual performance-based bonuses targeted at 150% of his annual salary.

Shares of Gap recently were up 96 cents to $17.87.