Just how dysfunctional is The Gap Inc. (GPS)? One significant clue lies with the first few pages of the company’s annual report or 10-K document it recently filed with the Securities and Exchange Commission.
Normally, such a report would start with an upbeat letter to shareholders from the CEO. Gap’s report is unique in that it immediately devotes three pages with over 60 bullet points listing all of the things that could go wrong with the company including:
- The risk that inflationary pressures continue to negatively impact gross margins or that we are unable to pass along price increases
- The risk that we or our franchisees may be unsuccessful in gauging apparel trends and changing consumer preferences or responding with sufficient lead time
- The risk that we may be unable to manage or protect our inventory effectively and the resulting impact on our gross margins, sales and results of operations
- The risk that we fail to manage key executive succession and retention and to continue to attract qualified personnel
One gets the sense that Gap is warning shareholders to buy and own the stock at their peril. And for good reason: all of these things listed above have actually happened over the past two years, especially the last point about hiring and retaining top executives.
Suits Are Calling the Shots
Hard to believe, but Gap has not had a CEO since July 2022, almost one year ago. And worse yet, the retailer does not seem close to hiring one.
In perhaps one of the most creative spin jobs ever attempted, chairman Bob Martin, who’s acting CEO, says that the dozen months of anarchy and dysfunction following then-CEO Sonia Syngal’s firing are actually good.
“When I took the role of interim CEO in July, I did not expect to still be speaking to you on our first-quarter earnings call,” Martin recently told analysts during a conference call, “but this only underscores how strongly the board is committed to appointing the right person as our next CEO, one who has passion, strong vision and customer obsession that will take this company forward.”
Martin has good reason to feel optimistic. As interim CEO, he will earn $1.4 million this year plus a potential bonus that could double that salary, according to SEC filings. That’s a nice payout for what’s essentially a glorified temp gig. As executive chairman last year, Martin earned a base salary of $750,000 plus a potential bonus.
Not that Martin isn’t working hard. Under his temporary leadership, the company is diligently attempting to restructure its operations so that it can make quicker decisions.
For example, Gap has eliminated 25% of jobs at corporate headquarters, saving the company $550 million a year. The retailer said it reduced management layers to 8 from 12. And Gap said it will place both inventory and merchandising under one leader.
“We are actively improving our operating model to unlock creative muscle, heightened accountability, and empower talent by removing bureaucracy, complexity, and outdated processes while also reducing cost,” Martin said. “These changes are pivotal in restoring our strengths and priority around design, innovation, style, and trend.”
That sounds good on paper. But major restructuring and endless CEO recruitment usually means lots of consultants and executive search firms who like to charge hefty fees, said Burt Flickinger, managing director of Strategic Resources Group in New York. They have every reason to drag this out, he said.
“The suits, not people who actually know retail, are truly running the show now at Gap,” Flickinger said.
Gap Already Faces Tough Economy
Adding further misery to Gap’s predicament, this year has proven especially hard for retailers, especially specialty apparel players like the Gap. Wary of inflation, consumers have cut spending on discretionary items like clothing and related accessories.
Indeed, Gap in the first quarter reported that comparable store sales fell 3% compared to the same period last year. In 2022, Gap said comparable sales plummeted 7% following a gain of 6% the previous year. Free cash flow turned negative and profit margins fell.
In other words, Gap picked the worst time to not have a CEO.
“Sales continue to fall, which means the value of their assets — store leases, inventory — are also declining,” Flickinger said. “There’s no end in sight.”
