The wall of worry is back up at
, and for investors who scaled it once, the prospect of another climb is daunting. For the intrepid, however, the potential rewards of sticking with the stock could be high.
Two years into the reign of CEO Paul Pressler, the clothing chain's turnaround story has stalled, and speculation is rampant that the former
executive plans a return to the magic kingdom when Michael Eisner abdicates his throne.
The stock is down 16% this year, a period during which the S&P Retail Index is up 8.4% and the
is roughly flat.
Pressler's departure, however, remains a long-shot, several analysts say, noting that better candidates exist to fill Eisner's shoes. If he stays put, there's good reason to believe the company's shares have seen their worst days, and the
could easily zip back up.
"From a career standpoint,
Pressler has just embarked on something, and there's some momentum going," said Adrienne Tennant, an analyst with Wedbush Morgan Securities. "From a self-fulfillment standpoint, he is starting to see some of the fruits of his labor."
Lackluster results for its second-quarter have knocked Gap's shares down 25% since they peaked on June 23 at $25.66. Gap posted its first quarterly earnings decline in two years on Aug. 19, with net income down 7.2%. Same-store sales fell 1% in both August and September.
At $19.50, near the low end of its 52-week trading range and about 13 times next year's earnings estimates, Gap looks cheap, particularly if recent trends can be reversed -- and Wall Street believes they can. As things stand, Gap's profits are expected to rise more than 17% in fiscal 2006 and nearly 5% in 2007, according to consensus estimates reported by Thomson First Call.
"Gap was facing some tough comparisons in the last quarter, and the back-to-school season was a bit of a disappointment for everyone," said Morningstar Analyst Joe Beaulieu. "I don't really expect them to gain ground as quickly as they had been, but I think all their stores are on the right track."
Beaulieu sets his fair price for Gap shares at $26, reflecting his expectation that the company's annual earnings growth should approach 15% over the next five years. He said speculation about Pressler's departure is a genuine concern on Wall Street, but other analysts say the smart money has him staying.
"He's got his own thing going on at the Gap now, and he hasn't been at it for very long," said Jeff Bagley, portfolio manager with McCabe Capital Management. "I think it's unlikely that he would pack up and leave in the middle of it."
Pressler's first 18 months on the job were an almost unqualified success. Gap reversed the falling sales trend of 2000 to 2002, when it allegedly lost touch with consumers. Margins have also recovered. The company said recently it expected to reach the low end of its target of operating margins in the mid-teens, between 13.5% and 16.4%, for the full year.
And despite the recent travails, the stock is up 37% since its 2002 bottom, going from $9 to a recent $19.50. That gain followed an equally sharp decline, from above $50 in December 2001.
Pressler's guiding hand helped Gap post its highest cash flow in nine years for the 12 months ended July 31. He pulled it off by rejecting the philosophy of his predecessor, Mickey Drexler, whose dictatorial management style made it hard for Gap to adapt to changing fashion tastes. Pressler reversed 28 months of falling same-store sales and fattened margins that had shrunk 13 percentage points to 2.4% in the space of a decade.
Many believe he would be loath to leave the job half-finished.
"The easy part of the turnaround has likely been done, and now the more difficult steps, like supply chain and inventory management, lie ahead," said Wedbush Morgan's Tennant. "The high-hanging fruit is probably the rest of what needs to be harvested now, so this is certainly a critical time for the company."
On one front, Pressler is on the precipice of a key achievement at Gap. Having spearheaded efforts to restore Gap's credit rating by building up a cash pile and paying down debt, an upgrade is now considered imminent.
"It sounds like they may get back to an investment-grade credit rating soon, which would be very favorable," said Brian Gilmartin, portfolio manager with Trinity Asset Management.
To be sure, Pressler is a good fit at Disney, a fact that gives Gap investors great pause. He has a reputation as someone who can build consensus, a quality in short supply under Eisner. Pressler was well-enough liked to lure a host of Disney people to join him at Gap, including the retailer's current chief financial officer, Byron Pollitt.
"Eisner was really an autocrat," said Gilmartin. "He had his mitts in everything. The more they move away from that management style, just the fact that it's a change will probably have a positive result."
Still, the list of possible Eisner successors includes some of the biggest names in Corporate America. Besides Iger, Pressler is up against moguls like Mel Karmazin, the former president and chief operating officer of
; Meg Whitman, another former Disney executive who is now the chief executive of
; Peter Chernin, president and chief operating officer of
; and Terry Semel, chairman and chief executive of
Harold Vogel, of Vogel Capital Management, said Pressler's "hat will be thrown in the ring," but he doubts that Disney's board of directors view him as a frontrunner.
"I think his name will be mentioned, but I don't think they'd be quick to offer it to him," Vogel said. "It's a possibility, but it's far from being probable. The job at Disney has so many facets that it's very difficult to find someone with all the right attributes."
Recently, Gap announced it would test a new store concept next year aimed at women over 35, an initiative that is expected to be its next big growth driver. With a major advertising campaign featuring Sarah Jessica Parker and Lenny Kravitz in high gear, there is a sense that the company is preparing for its second wind.
"If he left now and they bring someone else in, that would be a major negative," said Gilmartin. "It's more turmoil that they don't need, particularly at such a critical time."