Gap Gets Hammered by Cost Increases

Wall Street Journal
By Elizabeth Holmes

Gap Inc. warned that raw-materials costs are rising faster than expected—and faster than it can raise prices—creating a squeeze that will eat into the company's profit this year.

The country's largest apparel retailer by sales, which is struggling to turn around its namesake brand's long-suffering North American operations, delivered the sobering outlook while reporting a 23% drop in profit for its fiscal first quarter. Shares tumbled 15% after hours.

Gap said costs per item will be up 20% in the second half of the year, an increase it won't be able to pass on to shoppers in full. The cost pressure is highest at its Old Navy and outlet businesses.

"I'm obviously disappointed at the numbers we are giving today," Chief Executive Glenn Murphy said on a conference call to discuss the results.

Apparel retailers across the board are facing big gains in the price of materials like cotton and rising labor costs in manufacturing centers like China, but the seriousness of Gap's disclosures caught investors by surprise. Shares dropped to $19.74 after finishing slightly higher at $23.29 in 4 p.m. composite trading on the New York Stock Exchange.

The company, which has had to discount aggressively to move its clothes, also reported swelling inventories, reducing its leverage to raise prices. "We have every intention to be less promotional," Mr. Murphy said Thursday. "That's our goal."

Gap reported profit of $233 million, or 40 cents a share, for the quarter ended April 30, down from $302 million, or 45 cents a share, a year earlier. Sales fell 1% to $3.3 billion, while sales at stores open at least a year, a key measure of a retailer's health, fell 3%.

The company's gross margin narrowed to 39.6% from 42.1%.

For the full year, Gap now sees earnings of $1.40 to $1.50 a share, down from the $1.88 to $1.93 it forecast in February.

By contrast, Limited Brands Inc., which owns Victoria's Secret and Bath & Body Works, said in a conference call Thursday that rising cost pressures this fall wouldn't cause its gross margin to narrow.

Limited has kept a tight rein on discounts and inventories. Late Wednesday, it reported a 47% jump in fiscal-first-quarter profit and raised its outlook for the year.

Gap's inventory per store grew much faster than sales, up nearly 10% at the end of April, which it attributed in part to decreased business in Japan after the natural disaster there.It expects inventory per store to be up in the mid-teens at the end of July.

One of the company's biggest challenges is turning around the domestic division of its namesake brand, where inconsistent product has been a drag on sales. Earlier this month, the company removed its top designer, Patrick Robinson. In February, the company replaced the North American brand president.

Gap has focused on expanding abroad to offset weakness in North America, most recently announcing agreements with franchise partners to expand to Serbia and the Ukraine. Over the past five years, Gap's franchise network has expanded from two countries to 24, with locations throughout the Asian-Pacific region, Europe, Latin America and the Middle East.

Retailers Fall Short as Shoppers Cut Back

New York Times
By Bloomberg News
Published: May 19, 2011

Falling sales and rising costs have an effect on the first quarter for Sears and Gap,

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Retailers Fall Short as Shoppers Cut Back

Fall Into The Gap -- Critical Makeover Begins As Retailer Bleeds Red Ink

CEO Leads The Scramble Ahead of Make-or-Break Holiday Season, Specifically in Women's Tops.

Wall Street Journal
By Elizabeth Holmes

Gap Inc. chief Glenn Murphy has just five months to stop years of bleeding at its namesake brand.

It's a tall order for a brand that has resisted a decade's worth of attempts to turn it around. For Mr. Murphy, having replaced the brand's president and top designer in the last few months, his goal of getting Gap back on track will all come down to a make-or-break holiday season, in the works now.

"I have a much higher sense of urgency," Mr. Murphy, in his first interview since taking the job in 2007, said of the year it typically takes to see results after ousting a designer. "This brand is just too damn important to not see that kind of effort being put forward."

With the Christmas clock ticking, the top priority is fixing a single flaw: women's shirts, a key driver of repeat sales that Gap has fumbled for years.

Mr. Murphy, 49 years old, has won praise for improving operations and profitability at the company, which also operates Old Navy and Banana Republic. But he has yet to improve sales at the Gap brand's roughly 1,000 U.S. stores, which have shed more than $1.6 billion in annual sales since 2004, a 32% drop.

Gap reports earnings Thursday. Earlier this month, it flagged weaker sales and "significantly" lower merchandise margins for the quarter, which ended in April.

The brand is stuck in American retail's hollowed-out midsection, which consumers have been abandoning for years as they split their dollars between cheap basics and must-have luxury items. In its diminished state, Gap North America accounts for just a quarter of the company's total revenue. Mr. Murphy, however, needs it in good shape to support his main effort, which is expanding Gap overseas.

The turnaround has become a quagmire of sorts for a CEO who has long preached the importance of speed to his executives, pushing to cut bureaucracy and get clothes to stores faster.

Last year, Mr. Murphy found that a product designed and produced at the company's Los Angeles denim lab was being shipped to a distribution center a few hours away before being shipped back to a test store in Los Angeles.

"Are you serious?" Mr. Murphy said during a visit with employees there. A few phone calls later, he had eliminated the excess step. He told the design team to "make it and walk it over to the store."

Despite that emphasis, Mr. Murphy stood by the Gap brand's top designer, Patrick Robinson, for several years even as evidence piled up that he was having trouble replicating his success with jeans, which the brand re-launched in fall 2009, in the rest of the line.

By the time Mr. Murphy finally let Mr. Robinson go this month, stores were locked into the designer's merchandise through the end of the year because of long apparel lead times. That is forcing Gap to scramble to improve the assortment before the holidays, which account for 30% of its sales.

Mr. Murphy, who readily acknowledges Gap's merchandise for women has become "dull," is an unlikely candidate to turn the fashion problems around.

Unlike former CEO Millard "Mickey" Drexler, the "Merchant Prince" whose eye for product led Gap to its iconic status, Mr. Murphy had no apparel experience. The Canadian joined Gap after spending six years at the helm of Shoppers Drug Mart Corp., a Canadian chain of more than 1,000 drug stores. Prior to that, he ran a Canadian bookstore chain.

Instead of an industry expert for CEO, Gap got a detail-oriented operator who wears through 15 pairs of shoes a year marching through high-speed store visits several times a month. Executives advise newcomers to pack food for the tours, as Mr. Murphy prefers walking-and-eating to stopping for lunch.

He joined a company that for more than a decade had contented itself with churning out T-shirts and khakis on lead times of several months, while so-called fast-fashion labels knocked off runway styles in weeks, at a fraction of the price.

Mr. Murphy has worked to cut down those long lead times, which he said increased the risk of missing a trend and prolonged the consequences of a merchandising mistake. He has cut the time it takes to get finished product back from factories by a third. The company also set up a new production fast lane, cutting turnaround time to less than four months for some key items.

Those improvements are now being put to the test. Mr. Murphy has spent most of the past few weeks in New York with the Gap team, working to fill holes in the fall assortment set to hit stores in August. The holiday deliveries, the first of which hit stores in early November, are a greater focus.

Not all of the product needs to be overhauled, says Mr. Murphy, citing promising trends in its kids and baby division, as well as improvement at its Gap Body and men's segments. Denim, a key part of Gap's assortment, has also performed well for both men and women.

Women's tops are a different story. Perched in the foyer of a large Gap store in San Francisco, Mr. Murphy complains about the "dusty, makeup colors," including pale pinks and beiges, that were selected for Gap's tops. While trending in fashion magazines, they don't fit with what Mr. Murphy calls the "optimism" of the brand. They aren't always flattering, either.

Another troubling sign on racks now: rows of T-shirts with cap sleeves, a cut that highlights the back of the arm, an area of insecurity for women.

"Not good," Mr. Murphy said as he surveyed the racks of T-shirts and tanks. "That's got to change. That's got to change now."

Sears -- Where America DOESN'T Shop

Life Not So Well Spent At Sears and Kmart

Fortune
By Kit R. Roane

Eddie Lampert has long been known as a value-investing wizard. So why has he sucked the life out of Sears?

Things have been so bad for so long at Sears Holdings Corporation, which includes the iconic brands Sears and Kmart, that shareholders could be forgiven for doing a double-take when The Wall Street Journal came out last week with Lampert's latest mea culpa, under the headline "Tears for Sears," a line that has been recycled by the Journal and others almost as often as Lampert has delivered mea culpas.

Watching the company's performance under Lampert is even more vexing considering how his laser focus and tough love have worked wonders at other holdings, such as AutoZone. The management at Gap Inc. is probably shaking in their summer shoes wondering which Lampert will be visited upon them now that he's acquired a 5.6% stake there.

They better hope it's not the dark lord laying waste to Sears, whose marketing tagline about the joys of shopping there -- "Life Well Spent" -- seems increasingly ironic. Investors have Sears' earnings to look forward to next week. But they've already been given the wind-up: same-store domestic sales have declined 3.6% in stores open at least a year, and an expected profit for the April quarter is turning into a loss of between $1.35 and $1.81 a share. Although Lampert says that continuing unemployment and other macro issues hurt Sears' performance, he admits, "In many of our businesses, even in a tougher environment, we ought to be doing a lot better."

Few would disagree. Gary Balter, an analyst for Credit Suisse, was blunt in his response, telling clients that the results signal "increasingly dire prospects for Sears."

Sears and Kmart were struggling well before Lampert took control of the chains. The rise of Wal-Mart, Target, Home Depot, Lowe's, Best Buy, and most recently Amazon, were making them competitively irrelevant. The problem is that, under Lampert, retail performance at the combined companies appears to have gotten worse.

Last week, Sears' new CEO, Lou D'Ambrosio, outlined what the company calls a "high-level plan" for improving performance. The former tech company executive, who has no retail experience, will be focused on leveraging Sears' "underleveraged brands and assets," according to Kimberly Freely, a Sears spokesperson who responded via email. And "[m]ost importantly, providing an extraordinary customer experience in store, online and at home!"

There's no time like the present to get moving on improving that experience. But it's hard to see the company's latest promises as a eureka moment sure to pull Sears out of its retail tailspin.

While many things have been re-tooled in the past (CEOs and chief marketing officers, to name two) and other changes are being floated (most recently finding a new home state that might offer Illinois-based Sears a cheaper tax deal), Lampert still seems more interested in juicing per-share earnings through stock buybacks (another one was just announced) than he is in rebuilding his brands, particularly the once-storied Sears.

"There's the occasional blip -- Eddie Bauer, Sears Blue Crew, new Kmart fashion brands -- but that's about it," says Wendy Liebmann, CEO of the consultancy WSL/Strategic Retail. "If not for Kenmore, one wonders where the business would be at all."

Steve Hoch, a marketing professor at the University of Pennsylvania's Wharton School, is even less charitable. Asked about Sears Holdings, Hoch pauses for a second, then says, "What an atrocity that is, just unbelievable. The stores look like they are from the Eastern Bloc."

In Hoch's view, Lampert made a crucial miscalculation by treating Sears and Kmart, which were merged together in 2005, as distressed real-estate plays instead of extremely challenged retailers that would need to expand in order to survive. "He thought he could basically squeeze blood from a stone," says Hoch, noting that Lampert has raised prices and reduced spending in order to increase current profits at the expense of future growth.

"The investment thesis for retail is very simple. It is one word and one word only: growth." He adds, "The people who have made money in retailing all have a growth story."

For example, when KKR bought Dollar General in 2007, they spruced it up, gave the stores a new look, brought in retail veterans and invested in the company's private label program. Then, after an ambitious expansion, they took it public in 2009. Growth remains the name of the game, and retailers being targeted by private equity players and hedge funds tend to have a good niche, a good story and room to expand.

There's plenty of activity brewing in the retail space, it's just passing Sears by. Tween Brands was bought by Apollo Capital Management for $157 million in 2009. Gymboree was taken private by Bain Capital in a $1.8 billion deal last October. This March, TPG Capital took J. Crew private for a second time (the private equity shop previously took over J. Crew in 1997, and made a killing when it later sold its shares to the public in 2009). Several retailers, including Limited Brands and Ross Stores, made it on UBS's buyout target list last month.

Lampert was reportedly interested in J. Crew as well, but investors have most recently focused on the February disclosure that he's nibbling on the Gap, which includes brands such as Banana Republic and Old Navy. The retailer's stock shot up more than 5% on the news, then quickly fell last week after the company reported disappointing February same-store sales.

The hedge fund guru hasn't laid his icy finger on Gap yet, so it's hard to blame him for that retailer's problems. But Lampert's interest may mean he still hasn't learned much from the Sears' disaster. Sure there might be value in Gap, but where's the growth? As Hoch puts it succinctly, "there are too many Gaps already."

Gap Future Scrutinized as Designer Exits

by David Moin
From WWD Issue 05/06/2011

The $14.7 billion Gap Inc. needs a big fix — and it requires a lot more than just replacing chief designer Patrick Robinson, who was ousted Thursday.

Retail analysts and fashion experts came down hard on Gap after Robinson’s fate was disclosed, stating the chain needs further downsizing, management changes, product improvement and design coordination with merchandising, and a fresh vision for the overall business.

They also said Gap has become “tired, commoditized and driven by price” and needs to be reinvented. Brands like Abercrombie & Fitch, Gucci and Coach have done it, they reasoned. Why can’t Gap?

“They need brilliant marketers and merchants who understand who the customer is, where the customer is going, like a quarterback throwing the ball down field. They’re playing the game at the line of scrimmage. There hasn’t been anything new,” said one retail source.

The Gap division alone “could be turned around in less than a year, depending on the supply chain logistics,” added retail analyst Jennifer Black.

Others suggested Gap is not without top talent that could be redeployed, citing John Ermatinger, who is in charge of Old Navy International and is considered a rounded executive who understands denim, manufacturing and product development, store rollouts, and is commercial, as well as Mark Breitbard, executive vice president of GapKids and Baby.

“Anything can be turned around, but this is a huge, massive effort.…It’s not just Gap. It’s fixing Banana, Old Navy, moving start-ups, international, franchising. This is a very deep story. But at the end of the day, it’s about the chief executive,” said one competitor, pointing to Gap Inc. chairman and ceo Glenn Murphy, who has headed the retailer since August 2007.

Yet Robinson’s departure creates some challenges for the retailer, since he has been the face of the brand since 2007, conducting fashion previews and media interviews, and had been entrenched in the organization and was in Murphy’s good graces until recently. Murphy turned around Shoppers Drug Mart in Canada, and has kept a low profile in the industry. However, Robinson brought Gap into the glitter of the fashion world, which reached its peak last year when Gap sponsored the Costume Institute gala at the Metropolitan Museum of Art.

“Patrick should have left long ago, but there were politics” that prolonged his stay, said the retail source, without elaborating.

After several years of stabilizing the group’s operations and improving cash flow, Murphy now appears to be moving aggressively to address systemic weakness in Gap Inc.’s various operations. Earlier this year, he reorganized the Gap North America organization, installing Art Peck as president to succeed Marka Hansen, and naming Pam Wallack executive vice president of a new Gap Global Creative Center in New York. “They waited for Pam and Art to be in place” before showing Robinson the door, said the source, who explained why Gap products have generally not resonated with consumers recently. “If you take a pure designer and give him a lot of freedom, it’s not going to work, especially in a mass-driven business. You need someone who is commercial and understands who the customer is. Ralph Lauren is not [just] a designer. Calvin Klein was not [just] a designer. They are brilliant merchants.”

“It’s not just about replacing Patrick Robinson. It’s how that talent is integrated into the organization,” said Les Berglass, chairman of Berglass+Associates, an executive search firm. “Having design report in, independent of the merchandising function, does not lead to commercial success. In fact, the most successful retail design leadership comes from the merchandising function. The best two examples are Michael Alexin at Target and Lizanne Kindler at Kohl’s. Both run huge design departments that generate billions of dollars in volume. Both were raised as merchants.”

Robinson did have some commercial successes, developing fitted cargo pants and directing the reinvention of the denim business under the 1969 banner, thereby strengthening Gap as a denim lifestyle brand. While still responsible for denim development, it seemed he was stripped of some of that responsibility last year with the formation of a Los Angeles denim design team, headed by Rosella Giuliani, who reported to Robinson and now reports to Wallack.

“I love Patrick as a designer,” said Shelda Hartwell-Hale, vice president of Directives West consulting office. “He’s so full of life, so talented. He’s got this contemporary, forward vibe. Some seasons at Gap he was great, but there were always highs and lows.”

She said Gap has recently displayed some “great” career items, improved men’s offerings and a strong white presentation, has done well with 1969 denim and its classic, vintage inspiration, and gets it when it comes to layering. Asked where Gap falls short, she advised further brand building off the strengths of 1969, a better balance to the assortment via more woven tops and taking a “deep dive into classifications.” For fall, retailers will emphasize ethnic, multicultural statements, perhaps Moroccan or Navajo, with water colors, embroideries, print mixing and tribal influences. While expressing hope that Gap follows suit, Hartwell-Hale noted, “They have not been cohesive with what is happening out there.”

With the executive upheavals this year, Murphy seems to be more product-focused, as well as putting a lot of weight into international expansion with franchises and company-owned stores and Internet growth. Earlier, he was focused on expense cutting, improving the financials and making the product pipeline more efficient.

Though ceo Murphy has been criticized for not having a fashion merchant’s touch, analyst Black described him as “really sharp,” particularly with downsizing Gap and Old Navy stores for greater productivity and in many cases relocating GapKids and Gap Body into Gap Adult boxes. “Old Navy on Pine Street in Seattle looks amazing. The merchandise is effectively displayed.” She also said she likes Murphy’s approach to international expansion, typically done with launching Gap online in different countries. “His priorities are changing, but one thing he has been doing for a while is downsizing the fleet,” she said.

Still, as a concerned retail executive said, “Cash on the balance sheet is a wonderful thing, but it doesn’t necessarily indicate the future of a brand. The Gap has a strategy problem, not just a product problem,” said a retail executive.

Gap Dismisses Its Design Chief as Sales Falter

New York Times
By Stephanie Clifford
Published: May 5, 2011

Gap’s retail sales in North America have been trending downward, with same-store sales in March down 9 percent.

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Gap Dismisses Its Design Chief as Sales Falter

Patrick Robinson Out at Gap

by David Moin
Posted Thursday May 5, 2011
From WWD.COM

Patrick Robinson, executive vice president of Gap Global Design for Adult and Body, is out, the company said today.

“After spending the last three months in New York with the creative team, I’ve made the decision to make a change within our Gap Adult design team,” said Pam Wallack, head of the Gap Global Creative Center in New York.

A search for Robinson’s successor has begun. In the interim, Wallack will provide day-to-day management of the design teams, and has asked Jennifer Giangualano, senior vice president of kids and baby design, to provide leadership and direction on adult design.

Rosella Giuliani, who heads the brand’s design office in Los Angeles, will continue to oversee Gap’s 1969 denim product line, reporting directly to Wallack.

“Patrick has been a dedicated and passionate advocate for Gap brand and our customers over the last four years, and we’re grateful for his hard work, especially related to our 1969 denim,” said Glenn Murphy, chairman and chief executive officer of Gap Inc. “Our leaders of the new Gap Global Creative Center are taking the necessary steps to compete and win around the world.”

Robinson joined the Gap in 2007 to try to revive the look but had little success. He’s not only been the top design and creative force for Gap but also the most visible, and often served up for media interviews and fashion previews.

The California-born designer with a laid-back hip demeanor worked for Giorgio Armani, Anne Klein, Perry Ellis, and Paco Rabanne, was a graduate from the Parsons School of Design, and a Vogue rising star in 1996. But he couldn’t make his magic work at Gap. Products have been widely regarded as uninspired and often quickly marked down.

News of his departure was not totally surprising considering Gap’s problems in North America generating traffic and experiencing negative sales results. While the cash flow and the balance sheet have been strengthened, and international operations are showing promise, the performance in North America by Gap has been inconsistent.

Gap International Reorganized

by David Moin with contributions from Samantha Conti
From WWD Issue 04/20/2011

Twenty-five years after opening its first overseas store, Gap Inc. has shifted its expansion into high gear and will combine the four international operations into one in London headed by Stephen Sunnucks.

The four overseas units — Europe, Japan, China and franchising — will soon be under the umbrella of the International division in London, as the San Francisco-based apparel chain hankers for a larger slice of the $1.4 trillion global apparel market.

While Gap’s domestic stores are struggling, the performance overseas has been strong for several reasons: the product appears new and novel to consumers abroad; foreigners may not like U.S. politics but crave American brands, and Gap stores overseas are newer and fresher looking than many of those in the U.S.

“Bringing our four international business units under the leadership of a proven global retail executive like Stephen Sunnucks allows us to leverage resources, operate consistently and grow the business at an accelerated rate,” said Glenn Murphy, chairman and chief executive officer of Gap Inc.

Sunnucks, who joined Gap five years ago, will oversee company-owned and franchised stores in Europe, the Middle East, North Africa, Asia-Pacific and South America — a total of 530 stores in 32 countries. He is credited with growing Gap and Banana Republic in Europe as well as franchise operations.

Gap also said that John Ermatinger, currently president of Gap Inc.’s Asia-Pacific region, will shift to overseeing Old Navy International, with the first priority to roll out the chain in Japan by the end of 2012, a tough assignment considering the recent devastation in the country. The company operates more than 150 stores in Japan and most recently opened a flagship Gap in Ginza. “We now have the international infrastructure in place to launch Old Navy in a cost-effective manner in new markets through our range of channels,” Murphy said. Old Navy currently operates stores in the U.S. and Canada and is sold online in more than 80 countries.

“I don’t think this is the be-all and end-all, but there is a good rationale for this,” Richard Jaffe, Stifel, Nicolaus & Co. retail analyst, said of the international reorganization. “It’s a way to coordinate some of the efforts, focus and streamline, and is indication of management’s commitment to push a little harder on international by putting one person in charge to make it happen.”

“Don’t underestimate how serious Glenn Murphy is about international and franchise stores,” said another analyst, who requested anonymity. “It’s the only way to populate the world. You’re not going to put 20 stores in the Philippines and manage it yourself. These small countries are not worth it. But China is so damn big, it’s worth it there,” where Gap is opening company-owned stores. “Reorganizing international under one guy makes sense. It gives a clearer direction, everyone knows who the boss is, and Murphy knows who to call when he has to. It gives you greater efficiency.…In America, the Gap brand is stale. But overseas, there is some sort of halo around it.”

Gap International accounted for $1.9 billion of the retailer’s $14.7 billion in total sales last year. Gap’s goal is to build international and online sales to at least 30 percent of total revenues by 2013, from 22 percent last year, with China envisioned as the major component. Gap Inc. launched its first company-operated international store in the U.K. in 1987 and sells online in 90 countries.

Sunnucks said he intends to keep the international operation “very lean and very leveraged” and would not expand its London offices or the management structure. “We’re very much working with the team from today but growing the number of stores,” he said.

He added that the reorganization would be completed over the next few months. There will be four regional managing directors reporting to him: Sonia Syngal, previously head of international outlets, will lead the European business; Redmond Yeung will continue as president of Gap China business operations; Stefan Laban, who joined the company last year, will be managing director of franchising, and Robert Frank, a 20-year Gap Inc. veteran, will serve as managing director of Japan. Gap said the restructuring will not lead to any manpower reductions.

In the year ahead, about 190 store openings worldwide are planned, with about 10 in China, including Shanghai, Beijing and Hong Kong, and another 10 in Italy, including one in Rome. Gap plans to double the number of franchise stores to 400 by 2015. Gap outlets will open in Italy this year and China next year. The Gap Global Creative Center in New York was formed last year, to improve the look and quality of products and execute one vision for Gap brand around the world.

Competition is “fierce” in Europe, Sunnucks said. “In each of the markets, we’re facing a set of global competitors — such as Zara and Uniqlo — and local ones, the tried and trusted retailers.”

Gap Cuts Outlook, Due to Japan

Wall Street Journal
By Lauren Pollock

Gap Inc. said its fiscal-first quarter earnings will fall short of Wall Street forecasts as the recent natural disasters in Japan will hurt its profit in the period. The casual-apparel retailer also reported weak same-store sales for March.

"Our overall March performance was impacted by the tragic events in Japan, as well as the Easter shift into late April," Chief Executive Glenn Murphy said. "Our company has operated in Japan for more than 15 years, with over 150 stores today, so the devastating earthquake touched all of us at Gap Inc."

The earthquake and tsunami in Japan will shave 4 cents off earnings in the quarter ended April 2, Gap said. Analysts polled by Thomson Reuters were recently looking for 44 cent a share.

Gap on Thursday reported that same-store sales for March slipped 10%, following an 11% increase the year before. The Street was looking for a 7% decline. At the Old Navy division, same-store sales slipped 12%, while Gap North America posted a 9% slide.

In February, Gap said its fiscal fourth-quarter earnings rose 3.7%.

Gap Seeks to Freshen Itself as a ‘People’s Brand’

New York Times
By Stuart Elliott
Published: April 7, 2011

Its brand somewhat adrift, Gap has appointed, for the first time, a chief global marketing officer. The executive, Seth Farbman, comes directly from Ogilvy & Mather Worldwide.

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Gap Seeks to Freshen Itself as a ‘People’s Brand’

Gap, Ann Inc. CEOs Receive Pay Hikes

by Arnold J. Karr
From WWD Issue 04/06/2011

Glenn Murphy’s sacrifices in 2009 came back to him with interest in 2010.

Murphy, chairman and chief executive officer of Gap Inc., saw his overall pay package grow 18 percent last year, to $5.9 million from $5 million in 2009. After he voluntarily reduced his salary 15 percent, or $225,000, in 2009, it returned to its regular level of $1.5 million in 2010. And in appreciation of both his stewardship of the San Francisco-based firm and his willingness to earn less “given a highly uncertain business environment,” Gap’s compensation committee awarded him a special bonus of $635,000.

Although his nonequity incentive plan compensation was cut by slightly more than half to $1.7 million, he was granted $1.8 million in stock awards, versus none the year before. He received no option awards in 2009 or 2010. Other compensation expanded 18 percent to $281,000 from $163,000.

Because of fluctuating stock prices and vesting schedules, stock and option awards aren’t necessarily realized by the named executive officer, but companies are required to include them in the compensation tables when submitting proxies to the Securities and Exchange Commission, as Gap did on Tuesday.

Last year, Gap’s profits increased 9.3 percent, to $1.1 billion, while sales rose 3.3 percent, to $14.66 billion, and improved 1 percent on a same-store basis.

In a another SEC filing Tuesday, Ann Inc. reported that Kay Krill registered a 13.4 percent increase in total compensation last year, as her bonus and stock awards followed the company’s earnings trajectory upward.

Krill, president and ceo of the company previously known as AnnTaylor Stores Corp., earned a total of $10.3 million last year, up from $9.1 million in 2009. Her salary was unchanged at $1.2 million, but her bonus grew 18.9 percent to $5.2 million, from $4.3 million, and the sum of her stock and option awards was up 14.5 percent to $3.9 million, from $3.4 million, despite a 30.4 percent decline in option awards to $1.2 million.

Krill’s “other” compensation dropped to $16,000 from $101,000 in 2009. Last year, car service accounted for just under $10,000 of that total, down from $36,000 in 2009, and the reimbursement for taxes in connection with car service, nearly $29,000 in 2009, was waived entirely.

The proxy highlighted the recent improvement in Ann’s performance, noting that while its operating profit rose 352 percent and its stock price was up 74 percent last year, the total compensation for all “named executive officers, including the ceo,” was up a far more modest 11 percent and the ceo’s total compensation grew 13 percent.

In the fiscal year ended Jan. 29, the company swung to a profit of $73.4 million from a net loss of $18.2 million in 2009, while revenues increased 8.3 percent to $1.98 billion.

The Retail Megadeal Is On The Rise Again

by Evan Clark
From WWD Issue 03/28/2011

Not only is the retail mergers and acquisitions market continuing to heat up, but the megadeal is back on the table.

Certainly there’s enough money out there for both deal size and valuations to balloon.

Chris Meyer, director at McKinsey & Co., said private equity firms have as much as $100 billion that could be invested in retail.

“It’s a big number,” he said. “The funds are feeling pressure to put that money to work.”

And growth is the order of the day.

“If you believe that growth in consumer spending is going to be muted versus what it was during the last decade, retailers are going to figure out how to compete in what is essentially a share war,” Meyer said. “Folks are going to pay a premium for those assets that have some real growth potential in them.”

It’s hard to compare one deal with the next on overall size — retailers have a varying number of stores, different management teams, brands and so on. To level the field, bankers look at multiples, which typically are determined by dividing a company’s enterprise value — the value of its stock and debts minus cash on hand — by earnings before interest, taxes, depreciation and amortization for the previous 12 months.

In specialty retail, the $3 billion acquisition of J. Crew by TPG Capital and Leonard Green & Partners equated to about nine times EBITDA, while Gymboree Corp. went for about eight times, according to Thomson Reuters. That means that Aéropostale Inc., one of several companies that has been said to be a buyout candidate for months, is still attractive from a valuation perspective. Its stock is trading at a multiple of 4.12 times, so a buyer could pay current shareholders a healthy premium and still come in below the range established by the other deals in the sector.

There are plenty of companies with relatively low valuations in the sector. Gap Inc., for instance, trades at a multiple of 4.62 times. In February, Sears Holdings Corp. chairman Edward S. Lampert revealed that he had bought 5.8 percent of the company, or 35 million shares. (For more on current multiples across retail, see chart below.)

All the action is being spurred by a number of factors. The recovery is on surer ground, stock prices have come roaring back and financing is easily available. So observers believe multiples are bound to head up, as will the size of the deals.

“I don’t see any reason why there isn’t a $5 billion to $10 billion deal out there,” said David Shiffman, investment banker and managing director at Miller Buckfire & Co. “Because of the Fed policy, as it relates to interest rates, money is incredibly cheap and we’re back to seeing financial packages that look like they did pre-crash. Absolute levels of leverage are beginning to creep up as well.”

Just look at AT&T Inc., which last week secured a $20 billion bridge loan from J.P. Morgan to acquire T-Mobile.

“Deals like that excite the marketplace,” Shiffman said.

And the market had already proven to be rather excitable. So far this year there have been 53 retail buyouts in the U.S. totaling $9.31 billion — well ahead of the $1.61 billion in deals seen a year earlier, according to Dealogic.

“I don’t think there’s been a better time, really, for the M&A market,” said investment banker Elsa Berry, head of Houlihan Lokey’s cross-border consumer coverage. “It’s a unique time. Never before have you seen companies pile up so much cash. If you’re a public company sitting on a ton of cash and you’re not deploying it somehow, shame on you. You know what happens to those guys, they’re not independent for long.”

Companies across the spectrum are on the move. Walgreen Co. inked a deal to buy Drugstore.com, Revlon Inc. bought the Sinful Colors brand and Nordstrom Inc. acquired online private sale firm HauteLook Inc. for $270 million. In Europe, LVMH Moët Hennessy Louis Vuitton agreed to buy Bulgari for $6 billion and has been slowly amassing a stake in Hermès, which now stands at 20.2 percent.

Still, big deals can bring big challenges and the market still seems far from the days when rumors of a $100 billion buyout of Home Depot seemed credible enough.

To make a big deal work, the target company has to be in expansion mode to be worthwhile.

“There are still a number of companies to consolidate,” said Gilbert Harrison, chairman of Financo Inc. “One of the problems that you have to take a look at if you’re going to look at any of these companies seriously is, ‘What is the growth rate?’ If the company can’t continue to grow at 12 to 15 percent a year, there’s going to be a greater difficulty in getting payback. The bigger the company is, the harder it is to do that.”

And not all fashion mergers are Master of the Universe stuff.

Middle-market apparel producers — who usually count their sales in tens of millions of dollars, not hundreds of millions — are also busy consolidating, buying up friends and enemies as they cope with changing retail realities.

“They used to say, ‘I’m in Macy’s and J.C. Penney.’ Now they’re saying, ‘I’m in T.J. Maxx and Burlington [Coat Factory] and Stein Mart and the regionals,’” said Jack Hendler, president of Net Worth Solutions Inc. “There’s an overabundance of production. They’re looking to buy because they lost volume over time. Organic growth really does not exist unless you’re some mega-brand, a Polo, a Calvin [Klein], a Nike. Anybody else has extreme difficulty getting more shelf space and the only way they can do it is by making an acquisition.”

Hendler said more of the smaller companies need to be absorbed, making for larger, stronger vendors that can work more effectively with retailers.

“There are still companies that are clearly doing well and have found a niche and have an identity and keep remodeling and keep reenergizing their product categories,” he said. “Some of them have recognized that they’re unique, but are also getting tired of the difficulty in the market place. A number of healthy companies with real EBITDA [earnings before interest, taxes, depreciation and amortization] are looking for acquirers.”

Already some buyers and sellers have connected. In January, Kellwood Co. bought contemporary sportswear brand Rebecca Taylor and Perry Ellis International Inc. acquired Rafaella Apparel Group Inc. from Cerberus Capital Management.

The Rafaella deal includes $80 million and 106,564 warrants to purchase Perry Ellis stock. That makes for a multiple of about six times.