BizWeek: Gap, Paul Pressler

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FEBRUARY 26, 2007

    THE CORPORATION

      

Paul Pressler's Fall From The Gap

Hailed on his arrival, the former CEO is now viewed as "the wrong guy at the wrong time"

      

When Paul S. Pressler arrived as the chief executive officer of Gap Inc. (GPS ) in the fall of 2002, he was exactly what the board wanted--or at least what it thought it wanted. The polished, good-looking Disney veteran was a hard-nosed operations wizard, not a dreamy fashion junkie. He seemed to be just the man to restore discipline to the floundering company. But over the next four years, Gap's performance came apart at the seams. On Jan. 22, Pressler resigned.

The immediate post-mortem analysis: He was a numbers guy who didn't appreciate the nuances of the fashion business. That's true, but it's only part of the story. Pressler's problems involved more than just a few bad bets on colors and styles. According to 12 former employees interviewed by BusinessWeek, he also bungled some of the very things that were supposed to be his strengths, including cost-cutting campaigns, human resources initiatives, and supply chain streamlining efforts. One ex-employee characterizes Pressler's tenure as "total system failure."

Pressler's management shortcomings were particularly visible at the company's most important division: its flagship Gap brand. The story of his failed effort to fix this once-proud chain, insiders say, is a classic demonstration of what can happen when a talented man is handed the wrong mission. "He is a skilled leader and he understands how to build a team, but unfortunately he didn't build a team for the particular challenges Gap faced," says a former insider. "Maybe he was the wrong guy at the wrong time."

Gap wouldn't comment for this article. "We've said what we have to say on Paul's departure and are moving on with the business," said company spokesman Greg Rossiter. At the time Pressler left, board Chairman Robert J. Fisher said that the company "improved its operations, strengthened its balance sheet, greatly enhanced its online presence...and improved its standing as a global corporate citizen" under the ex-ceo's leadership. Pressler didn't respond to repeated requests for comment, including a list of written questions.

In the wake of Pressler's departure, Gap is still reeling. Companywide, sales at stores open at least a year fell 7% in the most recent fiscal fourth quarter, which ended Feb. 3. Full-company earnings for 2006 are expected to decline 33%, to $739.8 million. Although shares ran up significantly following Pressler's arrival, increasing from about $10 a share in the fall of 2002 to more than $24 during the summer of 2004, they have traded in the $17-to-$20 range ever since. Now frustrated investors are waiting for a big strategy pronouncement the Gap has promised to deliver on Mar. 1. Some hope the board of directors will put the entire company up for sale.

That's a steep fall for a retailer that, just a decade ago, seemed perfectly attuned to American tastes. When the workplace went casual in the 1990s, Gap was at the ready with big selections of khaki pants. When fleece vests were popular a few years later, Gap had them in a rainbow of colors. Everyone seemed to own a classic Gap pocket T-shirt or two. Yet the brand, always a symbol of affordable style, also appealed to fashionistas. Actress Sharon Stone wore a black Gap mock turtleneck to the 1996 Oscars. Supermodels donned white Gap jeans and shirts on the cover of Vogue magazine in 1991.

Between 1989 and 2001, companywide sales rocketed from $1.6 billion to $13.7 billion. Those stunning results were driven in part by the breathtaking success of the Old Navy chain's inexpensive wares. At the same time the Banana Republic chain--which in 1989 shed its original safari theme in favor of a more sophisticated, urban aesthetic--also sizzled.

ALIENATING LONGTIME CUSTOMERS
But by the end of 2001, the Gap brand and Old Navy were suffering sharp growing pains. Under Millard S. "Mickey" Drexler, the company's ceo at the time, the two chains overexpanded. Long-term debt ballooned from $780 million to $2 billion in 2001. Simultaneously, the usually trend-savvy Drexler oversaw a series of fashion missteps, in particular veering toward super-hip clothes that alienated longtime customers. Earnings sank, and in 2002, Drexler was pushed out.

   Along came Pressler. A 15-year Walt Disney Co. (DIS ) veteran, he had risen to the chairmanship of the company's amusement parks and resorts unit. By nature a methodical thinker, say people who worked under him at Disney, Pressler embraced market analyses and other research to help him understand consumer spending patterns. He also imposed strict cost controls that irked his creative staff. "At Disney, he never had to deal with the creative, qualitative side of design," observes Steve Roukis, managing director at Matrix Asset Advisors, which holds about 2 million Gap shares.

Gap could not have been happier with its new leader. "Paul knows how to lead creative, customer-focused organizations," said Gap founder Donald G. Fisher in a statement announcing Pressler's hiring. Once at Gap, Pressler, who wore neat jeans, jackets, and a ready smile, came across as a likable and approachable manager. "Anyone who's ever met Paul agrees he's a nice guy," says a former Gap insider.

So the honeymoon began. At the start, Pressler had the benefit of excellent timing: Clothing designed during Drexler's final year on the job was starting to appear in stores and did well. Sales rose at the Gap brand, and companywide, for more than a year. Earnings shot up, too. Pressler went on a hiring spree, bringing in a handful of former Disney colleagues, including Chief Financial Officer Byron H. Pollitt Jr., who paid down debt and restored the company's credit rating to investment-grade status. Pressler also hired another ex-Disney co-worker, Eva Sage-Gavin, to lead human resources.

It was Gap's longstanding corporate culture that caught Pressler's attention early on. At the time, the no-nonsense corporate mantra was "Own it, do it, get it done." But Pressler thought this ethos didn't sufficiently promote collaboration. He set out to promote a new environment built around the slogan "Purpose, Values, and Behaviors." Among the catchphrases were bromides such as: "Explore, Create, and Exceed Together." Pamphlets promoting communication and teamwork landed on employees' desks. Posters and banners trumpeting the bland new slogans went up around headquarters.

In the beginning, "people were very receptive" to the effort, says Alan J. Barocas, the company's former senior vice-president for real estate. "It was embraced." But eye-rolling started as the initiative began consuming a lot of time. Former employees say they had to sit through countless meetings, workshops, and role-playing seminars where Pressler and his hr executives discussed the new culture. Many staffers felt they were wasting their time in get-togethers that didn't address the crucial matter of creating and marketing clothes. "hr was out of control," says a former insider.

Over the next couple of years, employees also felt bogged down in what they thought were unnecessary meetings with cfo Pollitt. With Pressler's blessing, Pollitt demanded highly detailed presentations that explained minutiae managers thought were far too detailed for a cfo, such as the margins on individual products or the costs of decorative trims. Confabs with Pollitt were "the antithesis of being creative and nimble. It was talking about the work vs. doing the work," says a former employee. Gap said that Pollitt declined to comment.

Despite Pressler's expertise and comfort with the operational side of the company, some of his initiatives in that area also backfired. In 2003, he kicked off a plan to remake the retailer's supply chain. One goal was to combine fabric purchases across all three of the company's brands, which had previously used separate suppliers. Pressler wanted to cut costs and speed the flow of merchandise from drawing board to store shelf.

But the effort stumbled. Since all three brands sell jeans made of denim, in late 2003 they began purchasing it together. But the big buying deals yielded denim of a single quality, weave, and weight. That meant all three brands were limited to one kind of fabric even though, with their different audiences, they needed to be able to offer an array of jeans. And with all that denim ordered in advance, there was less incentive for designers to keep their eyes open so they could jump on the next great style. Jeans made with material from the pooled purchases ended up largely falling flat, and the joint purchasing effort was abandoned.

RAISING EYEBROWS
As part of the supply chain revamping, Pressler also tinkered with the way the Gap brand produced clothing samples. These prototypes had long been made at studios in Manhattan's Garment District. But Pressler moved sample-making to Asia, where the company's many suppliers are located. With that change, designers had to create patterns, ship them to Asia, get the samples back, make changes, and ship them back to be remade. While making samples in Asia was cheaper than in New York, it delayed the process and "made you less nimble," says a former insider. Aggravating matters, the company instituted a new cost-cutting rule: No overnight shipping to Asia without high-level approval.

The summer of 2004 brought a pivotal change. Pressler reassigned Gap brand head Gary P. Muto to lead Forth & Towne, the new store aimed at women older than 35. While he searched to fill the hole at the top of the namesake division, Pressler led the Gap brand himself. The move raised eyebrows among employees, who worried about his lack of experience in apparel.

Their fears were confirmed. The Gap brand needed someone to referee when designers disagreed with the merchants, a common occurrence at retailers everywhere. Designers constantly push the limits toward edgier styles; merchants must make sure that whatever lands in their stores sells to the brand's mainstream audience. While Pressler encouraged designers and merchants to work together, "there was no tiebreaker.... He made it clear that he didn't want to be that person," says a former employee.

OFF-THE-MARK MARKET RESEARCH
Even more frustrating were Pressler's contributions during line reviews, where designers present clothing samples for a future season, and "store-set" meetings, where store-design staff show proposed merchandise displays. According to former employees, Pressler's suggestions were frequently phrased as questions. Typical of one: "Do you think it would be better to move the denim to the middle wall?" Afterwards, "meetings would end, and no one had a clue what he'd said," says one former insider. "We all had opinions, and it would be a bicker and a fight. All hell would break loose."

The first clothes produced under Pressler's leadership of the Gap brand started to reach shelves in the spring of 2005. But even supported by an advertising blitz fronted by actress Sarah Jessica Parker, the brand's sales fell 4% that spring and summer.

One sore spot was Pressler's directive to use the findings of the research staff, known as the consumer insights group, that he had created. Some designers and merchants didn't believe that the group's output--which included findings from consumer focus groups, polls, and surveys of customers and store employees--was particularly useful in the fashion business, because consumers aren't good at predicting what they'll buy in the future. "Paul didn't know how to interact with the design team, who didn't react to the science being imposed on them," says an ex-employee.

The constant disagreements delayed determining final designs. Ideas for any given season ping-ponged back and forth. Entire collections were made, and altered, and then reworked, sometimes several times over. With no decision-maker, "we'd go back and forth, and change, and redo, and then we'd be out of time" before orders had to be placed or stores would have empty shelves, says a former insider. In the 11th-hour crunch, staffers would end up falling back on lowest-common-denominator items, bland styles that they hoped would please everyone but risked pleasing no one. Last August, for instance, Gap heavily promoted the good old safe T-shirt, hawking it as "the ultimate vehicle for self-expression." The campaign didn't reverse the brand's ongoing sales decline, which that fall clocked in at 7%.

Meanwhile, the search for a Gap brand head was dragging on. Pressure to fill the job was mounting. A presentation to Wall Street analysts on Apr. 21, 2005, was fast approaching, and a gaping hole in the executive lineup wouldn't go over well. Three days before the meeting, Pressler announced his choice: Cynthia Harriss, a former Disney colleague he hired 14 months earlier to lead the Gap Outlet unit, representing a sliver of the company's total sales.

Harriss had little big-time fashion experience. She'd worked for Disney's retail stores for five years before moving to its resorts business in 1997. While she had worked for 19 years at Paul Harris Stores Inc., a Midwestern apparel chain, its annual sales were well under $1 billion, compared with the Gap brand's $5 billion. Arun Daniel, senior consumer analyst at ing Investment Management (ING ), which holds about 1.3 million Gap shares, considers the promotion of Harriss to be one of Pressler's critical mistakes. "He needed a strong No. 2 in merchandising," says Daniel. "Cynthia Harriss was an operations person."

Under Harriss, the Pressler-style management of the brand continued through the rest of 2005 and beyond, say former employees. "She made no decisions," says one. "She defaulted to Paul, who made no decisions." (Harriss declined requests to comment.)

The clock was ticking. By the end of 2005, speculation was widespread that Pressler, who'd won the nickname "Dead Man Walking" on Wall Street, would soon be on his way out. Chairman Fisher, though, publicly supported Pressler, calling him "the right person to lead this company." Nonetheless, industry watchers predicted that 2006 would be Pressler's last shot at a turnaround. Sales declines at the Gap brand were widening, reaching an 8% drop in the first quarter of fiscal 2006.

The tumult dragged on. Ad campaigns came and went, including last fall's commercials for black pants that used footage of Audrey Hepburn. They failed to reverse the sales declines that Wall Street had come to expect. In November, the company's credit rating dropped back into junk territory, and holiday sales for the Gap brand plummeted 9%.

It came as no great surprise when the company said Pressler and the board "have mutually agreed that Mr. Pressler will step down from his position." And it didn't come as much of a surprise when the company spelled out the qualifications for its next ceo: Gap is now seeking an executive who sounds like the opposite of Pressler, one with "deep retailing and merchandising experience, ideally in apparel," and who "understands the creative process."

   The search is still under way.

     

By Louise Lee

Comments

[annie]

I knew Cynthia when she was little big time fashion in the midwest. She was so driven. Cld you forward her my phone number & email?? 310 827-3133 anni12345@msn.com I'd love to talk to her.