Gap shares slump to 52-week low after losing Old Navy executive

1 Oct 2015 | Author: | No comments yet »

Meet Stefan Larsson, the Old Navy exec who’s taking over at Ralph Lauren.

Blue denim, stars and stripes, polo, Bruce Weber images of huskies and preternaturally permatanned all-Americans frolicking in wooded glades (for summer) or snowy mountains (come winter). Ralph Lauren, the founder and largest shareholder of his namesake company, stepped down from his role as CEO Tuesday, but he wanted to assure employees that the move doesn’t mean he’s going to take any less of a day-to-day role at the fashion retailer. “I will continue to lead it today as I have for almost 50 years,” wrote Lauren in an employee-wide email that was shared with Fortune. “I am not stepping down, nor am I stepping back.

Passing the torch to a Swede with an MBA, the Bronx-born Lauren, 75, praised his successor’s “fresh and exciting global perspective” and triumphant track record.Gap Inc GPS -5.69% shares fell sharply (nearly 6%) on Wednesday following news that the retail star behind the tremendous renaissance of its biggest brand, Old Navy, was heading to Ralph Lauren RL 13.56% to become CEO.NEW YORK: American designer Ralph Lauren, who built a fashion powerhouse on luxury designs inspired by country club chic, announced that he is stepping down as chief executive officer and named the head of Gap Inc’s populist Old Navy brand to the position. I am stepping up.” Stefan Larsson, the former global president of Gap’s GPS -5.69% Old Navy who effectively turned the low-budget brand around, will become the company’s new CEO.

Both will come in handy at Ralph Lauren, where profits have plummeted 10% in the last year, the stock is down 40% since last year and revenue is down 5.32% since last quarter. Stefan Larsson, who took the helm at Old Navy almost three years ago after a long stint at fast fashion retailer H&M, oversaw a transformation that helped the brand respond more quickly to new fashion so it could better compete with the likes of his alma mater and Forever 21 and have the ability to drop lines that are flopping.

Yielding 1.7%, shares remain 37% below their 52-week high of $187.49. “A new CEO could be the needed catalyst to put Ralph Lauren back on the path to margin expansion and accelerating EPS growth,” argues UBS analyst Michael Binetti who upgraded Ralph Lauren stock to Buy from Neutral today. The Swedish executive also deftly managed to mix fashion with lower-priced clothes, winning away market share from rivals including Target TGT 0.87% and Walmart WMT 1.66% . Larsson is “a proven agent of change.” Barron’s made the case this month that the maker of the ubiquitous “Polo” shirt would see its stock rise more than 20% in the next year (see Feature, “Ralph Lauren at a Discount,” Sept. 19).

Larsson introduced a new, quicker, and more flexible manufacturing model that sister brands Gap and Banana Republic are trying to replicate to return to growth. Ralph hasn’t left the building though: he’s staying on as executive chairman and, most importantly, chief creative officer, meaning it’ll still be Lauren’s visions of dandy tailored menswear, and the red, white and blue-billowing chiffon gowns that sail down his catwalk on a biannual basis.

It could be ‘fast fashioned’ like H&M for its own stores and also department stores.” “I don’t presume Larsson’s appointment means a drastic styling change,” said analyst Paula Rosenblum of Retail System Research. “They picked him because he’s the best talent in the interest of profitable growth.” Of course, Lauren “is not going anywhere,” Loeb reminded. For many items, Old Navy rolls out pieces in small batches to test demand before mass-producing them, works more closely than ever with suppliers, and accommodates new trends by keeping a stockpile of fabric on hand. The creative stuff is what we’re supposed to be enamoured with in fashion – all that frothy stuff – but Lauren has been tied, intrinsically, to his business from the get-go. The fashion icon will have a seat on the board of directors and, “will continue to actively drive the company’s vision,” the company said in a statement.

And no one can argue with Larsson’s success—in 12 of the last 14 quarters, Old Navy has posted comparable sales growth, while its siblings have languished. Odeon Capital analyst Rick Snyder said the company had grown to a size where it needed more “systems and controls.” The change in CEO “is just a natural progression,” Snyder said. One of the few creative directors of a global brand who, until this week, did double duty as CEO, too (the few others including Christopher Bailey, of Burberry, and Giorgio Armani), Lauren is undoubtedly America’s most successful fashion designer ever; but not necessarily its most talented. Milton Pedraza, a fashion industry analyst at the Luxury Institute, said Larsson’s appointment follows a trend of luxury brands hiring leaders from mass-market companies in recent months. And Old Navy added $1 billion in annual sales over four years, a major reversal from the declines of previous years. “Old Navy is our proof point on making structural change in our … processes to achieve better product more consistently season after season,” Gap Inc CEO Art Peck told investors back in June at the company’s investor meeting. “Old Navy is demonstrating that it’s possible.” Peck has touted Gap Inc’s efforts to fix Banana Republic and its namesake brand, whose comparable sales have fallen for six quarters in a row, and he said that results will start being apparent in 2016.

He cited the appointment of Grita Loebsack, a former vice president at Unilever Plc, as CEO of Kering’s emerging brands, which include Stella McCartney and Gucci. But for now, investors are anxious about anything that could slow Old Navy’s momentum or impede positive change at Gap’s other major brands. “The move adds to near-term uncertainty as Old Navy’s strong performance has supported earnings amid Gap/BR brands’ recent struggles,” Baird Equity Research analyst Mark Altschwager wrote in a research note in which he lowered the price target on the stock. The change was motivated not by aspiration, but annoyance: motivated when his older brother Jerry, then a reserve in the US Air Force, grew tired of humorous mispronunciations at roll call. Lauren’s fashion empire includes some 25 brands including Polo, Club Monaco and Denim & Supply, and the company makes clothing, accessories, furniture, home decor items and footwear under its labels. Having majored in business in high school, and worked at a fusty New York department store and Brooks Brothers, Lauren decided to design some ties – appropriately, for a company called Beau Brummell, under that Polo name.

He sold half-a-million dollar’s worth in the first year (the company’s turnover is now £5bn) and, buoyed by that success, took backing from a Manhattan clothing manufacturer, Norman Hilton, to expand into a full menswear collection. His decision to hand over the reins to an outsider acknowledges that a more seasoned hand is needed to expand overseas and into new merchandise markets. Lauren’s designs drew inspiration from elite and exotic realms including East Coast prepsters, the Wild West, colonists on African safari and czarist Russia. His designs, of gently tweaked classics – wide shirt collars, wider suit lapels – caught a fashion moment, just as his vibrant ties inspired the “big tie” fad of the late Sixties.

In 1974, he cemented his appeal, designing Robert Redford’s wardrobe for The Great Gatsby (more of those wide collars and lapels) and also featured in his own advertising campaign, clad in his now habitual distressed blue denim and cowboy boots (he’s only 5ft 5in). But Wall Street’s patience came to an end this year as the company found itself struggling against heavy discounting by rival retailers and a strong U.S. dollar that dimmed the spending power of foreign tourists shopping on U.S. soil.

This fiscal year, which ends in March 2016, revenue is expected to dip with income from continuing operations falling 15% to almost $597 million and per-share profit falling 12.3% to $6.91. His bright colors and bold clothing became staples for some New York gangs, and rappers such as Kanye West and Lil Wayne have mentioned Lauren and his designs in their rhymes. He and his wife Ricky’s peripatetic lifestyle oscillates between a grand stone mansion in Bedford (great for tweeds), a place in the Hamptons (great for white linen and striped seersucker), and the 17,000 acre Double-RL Ranch in Colorado (great for denim). He has also named a bestselling bag after his wife, while his son David heads global advertising and marketing, sitting on the company’s board – and at the right-hand of Julianne Moore at Lauren’s spring/summer 2016 show. In 2013, the company recently pledged to restore the Ecole National Superieure des Beaux-Arts in Paris; in 1999, it financed the restoration of the original “Star-Spangled Banner”, now on display at the Smithsonian.

Lauren continues to control 81.5 per cent of the company’s voting rights – so we can rest assured he approves of Larsson’s appointment. “My job is to think always about the future of our company and how to move it forward,” commented Lauren – not in person, but via a press release, issued as the fashion crowd shift to Paris for the last leg of the European collections.

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