Updated from 4:40 p.m. EDT

Just when it looked like

Gap

(GPS) - Get Report

was ready to turn the corner, the fraying retailer faces another setback.

To the surprise of people who follow the company, CEO Mickey Drexler said Tuesday he would step down once the company finds a new chief. Citing a need for new leadership, Gap said it will seek to "find a successor as quickly as possible." Drexler, 57, has been CEO since 1995.

Observers say the timing of Drexler's announcement is interesting, given that the company has recently hinted that its longstanding turnaround efforts are at last bearing fruit. While sales and earnings remain weak, company executives spoke positively in a recent conference call about the company's return to basic fashion. But the departure of the widely respected CEO could set that all back, analysts say.

"I think it probably delays" the turnaround, says Jeff Klinefelter of U.S. Bancorp Piper Jaffray, who has an underperform rating on the stock and whose firm doesn't have a banking relationship with Gap. "Now there will be a major distraction, and possibly a loss of productivity as people worry about their jobs. New CEOs tend to bring in their own people."

"I think it casts more uncertainty on the outlook," adds Kindra Devaney, who covers the company for Fulcrum Global Partners. (She pulled her sell rating on Gap in late March, though she doesn't advise investors to buy the stock. Her firm does not have an investment banking business.) "Either it's not turning around as quickly as they hoped, or they are worried that a new person stepping in when it does turn around would be a disruption."

After dropping 2% in regular trading, Gap shares slid 91 cents to $15.09 in postclose action on Island. Gap shares have lost more than half their value over the last year as the onetime retail trendsetter stumbled.

Long Run

Drexler presided over a long run of success at the San Francisco-based retail chain, which runs the Gap, Old Navy and Banana Republic chains. He came to Gap in 1983 as president of the Gap division. In 1987, having led Gap beyond the $1 billion sales mark and introduced the successful GapKids concept, he was named president of parent Gap Inc. In 1994, he directed the launch of Old Navy.

But recent years have seen the company's stock plunge amid a 25-month string of same-store sales declines. The company has repeatedly shuffled managers at its divisions in an effort to stem the decline, but so far it hasn't succeeded in finding a formula that works. Gap said it expects to name a president of its flagship Gap brand this summer.

With Drexler at the helm for the time being, the Gap division has embarked on yet another gingerly turnaround in the last few months, pinning the success of its efforts on a back-to-basics push. The company, which has been widely criticized for fashion mishaps such as pastel-colored leather pants, has resumed pushing the khakis and oxford shirts that made it famous.

Though there have been signs of progress -- the company last week posted a surprising first-quarter profit and said Tuesday that May sales were declining at a slower clip than the first quarter's 17% -- investors remain lukewarm on the stock.

"It's like a double-edged sword for the stock," says Klinefelter. "Major shakeups can be positive for a stock, but at the same time he's probably the most successful specialty apparel retail CEO of the last couple decades. He's going to be hard to replace."