Art Peck isn’t wasting any time at Gap Inc.
Although he doesn’t officially take the reins of chief executive officer until February, succeeding Glenn Murphy, Peck is showing his impatience with the retailer’s ongoing lackluster performance by shaking up its management. On Thursday, he named new heads for the Gap and Banana Republic divisions.
Jeff Kirwan, 48, for the past three years president of greater China for Gap Inc., will become global president for Gap brand in December. He succeeds Stephen Sunnucks, who will leave the company on Dec. 19, after steering the growth of the brand to almost 50 countries over the past decade.
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Andi Owen, 49, who currently leads the Gap Outlet division, will become global president for Banana Republic on Jan. 5. She succeeds Jack Calhoun, who will depart in February. He led the brand for eight years.
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The decisive action by Peck, coming just a month after he was named incoming ceo, was triggered by the prolonged disappointments at both Gap and Banana Republic.
Last quarter was no exception. Comparable-store sales at Gap Global were down 5 percent and Banana Republic’s comps fell flat for the period ended Nov. 1.
On the other hand, Old Navy Global reported that its comp sales rose 1 percent, which is hardly impressive but indicative of the long term trend of Old Navy outperforming the other two core divisions. Old Navy has been fueling the lion’s share of Gap Inc. profits by selling much cheaper clothes and having superior marketing and margins. Gap Inc. also operates Athleta, Piperlime and Intermix.
“I was impatient to get the team in place for 2015,” Peck said during the conference call covering the executive changes and Gap Inc.’s third-quarter results. The executive changes were “based on my deeper experience and knowledge of the company and its executives,” Peck said.
“Jeff has been building our China business,” he added. “He’s a great leader, a very balanced executive, somebody who gets our brands and gets brand building.
“Jeff and I have a high degree of urgency. We need to get the aesthetic righted for the brand.”
The corporate profit picture during the third quarter was good, despite the sluggish sales. Net income rose 4.2 percent to $351 million from $337 million in the year-ago period. The increase was largely attributed to good expense and inventory controls amid the challenging retail landscape. Operating margin was 13.9 percent versus 14.5 percent in the year-ago quarter.
Inventory dollars per store were down 2 percent at the end of the third quarter, below previous guidance of being up in the low single digits. Also, there was reduction in capital expenditures for Gap stores, with remodels getting held back, in response to the challenging operating performance.
Looking ahead, diluted earnings per share for fiscal 2014 are expected in the range of $2.73 to $2.78, including the gain on a $39 million asset sale. That’s down from the previous projection of $2.95 to $3 made in Q2 back in August.
The margin for the full year is seen at 12.5 percent compared to 13.3 percent last year.
Earnings per diluted share were 80 cents, versus 72 cents a year ago, representing an 11 percent increase, and a penny above the Wall Street consensus.
But total sales slipped 0.1 percent to $3.97 billion from $3.98 billion a year ago, while comparable-store sales were down 2 percent versus a 1 percent increase last year.
“A company like Gap Inc. with our six brands, I don’t think anybody ever thinks we should negative comp. It just makes no sense,” Murphy said during the conference call. “We had a much better quarter done by the finance team…I have told everyone on the commercial side of the business that we need to do better.”
Old Navy was stronger than any of the other brands, and there was particular dissatisfaction with Gap’s women’s business, and e-commerce overall, which only saw 5 percent growth in third quarter, versus 20 percent a year ago. Gap Inc. is rolling out in-store online ordering, which could lift e-commerce sales and conversion rates. “It is intended to instantaneously change the conversation from ‘we don’t have it’ to ‘I can get it to you,’” Murphy said.
On the more positive side, the San Francisco-based specialty retailer cited its growth in China with Gap brand and Old Navy, the expansion of Athleta in the U.S., and stepped up omnichannel services, as highlights. Murphy also cited some bright spots at Gap brand, including Gap baby, Gap fit and the outerwear. Looking forward, Murphy said the corporation has “an improved assortment and our customer communications are the best I’ve seen put forward for the holiday season.”
But the team is hoping for a better year ahead and to begin it with a fresh start and some new leadership. Murphy said he encouraged Peck “to put together a winning combination of new or existing executives” so Gap can strive to be “the leading global apparel company around the world.”
Murphy expressed confidence in Marissa Webb, the creative director of Banana Republic. “I really feel strongly that she is going to position Banana Republic strongly for the future.”
Regarding Kirwan, Murphy said he will be “very much focused on the China business,” which includes Old Navy and Gap stores.
“We’ll start 2015 with a management team comprised of both established executives and the next generation of brand leaders ready for the next generation of customers,” said Peck, noting that there will be transition periods for the executives helping to guide the company through the holiday period to reduce disruption.
He credited Owen for being “fluent across multiple disciplines in the business” growing up in the field organization, transitioning into merchandising and having experience in the online, specialty stores and outlet channels.
According to Peck, both Owen and Kirwan have delivered consistent performances. “Consistency is a very important word for me. It starts with exceptional product that we [should] deliver consistently, season after season. Consistency is a critical issue.”
Another critical issue will emerge next month. As Peck said, in December and January, the teams will “really align our priorities.”