Why Gap Inc’s Shares Tumbled When Its CEO Announced Retirement

October 29th, 2014 by Trefis Team
-0.09%
Downside
21.20
Market
21.18
Trefis
GPS: Gap logo
GPS
Gap

Shares of apparel major Gap Inc (NYSE:GPS) stumbled by more than 10% recently after it reported weak September sales results and announced that its CEO Glenn Murphy will retire from his position. The company recorded a year over year decline of 1% in its September revenues, while its comparable sales dropped 3% as compared to the year ago period. [1] Over the past couple of years, Gap Inc has been resilient in the otherwise edgy retail environment in the U.S., but its September results suggest that its performance is faltering. The company even said that its Q3 margins will remain under pressure due to its heavy traffic driving promotional activities.

If this wasn’t enough to trouble investors, Gap Inc announced that its current CEO Glenn Murphy has decided to retire from the company at the end of the fiscal year. [2] The market reacted somewhat negatively to this news as Mr. Murphy had played a pivotal role in reviving the retailer’s sales during his seven year tenure. The timing of Glenn Murphy’s retirement announcement wasn’t ideal as he did it just when the company was beginning to lose its growth momentum. The simultaneous reports of Mr. Murphy’s retirement announcement and Gap Inc’s disappointing September results had a negative impact on investors’ confidence in the company.

Our price estimate for Gap Inc is at $51.86, implying a premium of more than 40% to the market price.

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See our complete analysis for Gap Inc.


Glenn Murphy joined Gap Inc in 2007, when the financial crises in the U.S. had aggravated the company’s long-standing growth problems. Under his tenure, the retailer made a dramatic comeback with effective execution of design improvement strategies, online growth and global expansion. During his seven years with Gap Inc, the company’s earnings per share grew at a compound annual growth rate (CAGR) of 17% and with a total shareholder return of 160%. It made significant progress on Chinese expansion, and entered 40 new countries while Mr. Murphy held CEO’s position. Gap Inc even acquired a couple of brands during his tenure that are doing very well at present. Hence, his exit from the company has made investors skeptical, which is evident from the fact that Gap Inc’s last week stock price fall was its biggest decline in over three years. [2]

Gap Inc’s president of Growth, Innovation and Digital division, Art Peck, is set to succeed Glenn Murphy beginning February 2015. Mr. Peck has worked closely with Mr. Murphy during the company’s revival phase, and hence will most likely follow his footsteps. However, he may not be able to gain significant investor confidence in the near term, given that investors liked Glenn Murphy better as Gap Inc’s CEO. Nevertheless, Art Peck has a strong background and has been performing well since he joined the company back in 2005. His current responsibilities include developing the omni-channel and digital strategies, and nurturing smaller brands such as Athleta, Intemix and Piperlime. Considering that these business prospects hold tremendous long term potential for Gap Inc, he can be regarded as the best choice to succeed Glenn Murphy.

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Notes:
  1. Gap Inc Reports September Sales Results, Gap Inc, Oct 8 2014 [↩]
  2. Gap Inc.’s Glenn Murphy to Pass Reins to Digital Leader Art Peck as Next Chief Executive Officer, Gap Inc, Oct 8 2014 [↩] [↩]