Fixing Gap Inc.: What It Will Take
Can Richard Dickson bring Gap Inc. out of the dark?
The San Francisco-based Gap Inc. for the last two decades has been plagued by executive turnover, flip-flopping on merchandise direction, insufficient product innovation, not being successful enough in bringing younger generations back to the Gap and Banana Republic brands, and overextending in malls and main streets, leading to the closure of hundreds of stores.
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Repeatedly, the question has been raised: “What should Gap brand stand for?”
That is the question the 55-year-old Dickson now has to answer. On Wednesday, Gap Inc. said he will become president and chief executive officer on Aug. 22, filling a position that had been vacant for a year since Sonia Syngal abruptly departed, and Bob Martin, executive chairman, stepped in as interim CEO. It’s been a long and challenging search process.
Gap Inc. clearly is hoping that Dickson, who has been on Gap’s board since November, can bring some of his Barbie magic to the struggling retailer. He was president and chief operating officer at Mattel and as such was instrumental in strategizing the craze around the 50th anniversary of Barbie and the blockbuster “Barbie” movie released in theaters last week. Though recruiting its new CEO took a long time, Gap’s timing of its announcement couldn’t have worked out better given the success of the film.
Before Mattel, Dickson was president and CEO of the branded businesses at Jones New York. While there, the company acquired a string of brands that were put under Dickson’s purview. He led global design and development, including marketing and merchandising, wholesale, retail and e-commerce. He was also involved in product launches and attempting to revive Jones, but the Sycamore private equity firm bought Jones New York, shut it down, sold the rights to Authentic Brands Group, which brought it back online and to a handful of department stores currently selling the brand.
While Dickson didn’t experience the level of success at Jones that he did at Mattel, his appointment bodes well for Gap Inc., given his background. He’s a brand guy, transformational, and has product experience. At Mattel he led a portfolio of global brands, overseeing innovation strategy, design and development, brand marketing and franchise management. He developed and launched the Mattel Playbook, an approach to growing the group’s power brands and accelerating Mattel’s transformation. Dickson also cofounded Gloss.com, the first online retailer dedicated to high-end cosmetics, and served as an executive at Bloomingdale’s.
His career credentials contrast with those of the previous four Gap CEOs: Sonia Syngal, Art Peck, Glenn Murphy and Paul Pressler, over the last two decades. They were not considered merchants or fashion executives, with their expertise largely in non-merchandise areas.
The last true merchant running Gap was Millard “Mickey” Drexler, who masterminded the growth of Gap into a household name brand, known worldwide. Drexler led Gap through most of its best years, when it defined American casual style with an extra touch, and was something unique. There was always a fun aspect to it.
Apparently, Wall Street liked the news on Dickson’s appointment. The stock closed Wednesday up 7.7 percent, or 71 cents, to $9.92, but this year has exceeded $15.
“On the face of it, Mr. Dickson is a very solid appointment who brings an outside perspective and extensive skills in brand marketing and innovation. As he oversees merchandising with franchises at Mattel, Mr. Dickson also has relevant product experience,” said Neil Saunders, managing director of GlobalData.
“His reinvention of the Barbie franchise, which is currently riding on a high, is also proof that he understands how to turn around established brands that have run out of energy and steam. This is exactly the challenge he will need to address at Gap.”
“You definitely need leadership that is product-savvy, understands trend, and it’s also critical to be extremely operationally savvy and strategic given Gap Inc.’s different channels,” said another financial source, who requested anonymity. “Sonia Syngal did bring rigor and discipline, but you need someone that’s extremely product savvy and also with P&L rigor. She skewed more on the P&L [profit and loss] side.”
“Fixing the stock or fixing the brands are two separate conversations. From the stock perspective Old Navy is what matters,” said Simeon Siegel, managing director and senior analyst at BMO Capital Markets. “The sheer size of the Old Navy business demands that it be fixed for the entire entity to be healthy. Is Old Navy too large of a business right now? That is a question worth asking, which means the best answer suggests focusing on profitability even if it comes at the expense of growth. If revenues should be lower, allow them to be lower. Don’t promote for the sake of fighting to keep it where it is.”
Last year, Old Navy accounted for $8.23 billion in sales, or more than half of Gap Inc.’s total of $15.6 billion. In 2020, the corporation pulled back on a plan to spin off Old Navy, due to the division’s slowing sales trend and market conditions.
The Gap brand accounted for $3.7 billion in sales last year, and has been losing share for years.
“In the recent past, L Brands allowed Victoria’s Secret to shrink revenue and were rewarded for it by growing profits,” Siegel noted. “The pandemic showed the world growth in profit dollars can be much more impactful than growth in revenue alone.”
Gap Inc. has been focusing on reducing expenses, primarily through store closings and layoffs, but as Siegel pointed out, “No company has ever grown by reducing expenses. Companies need to focus on more profitability.”
“The Gap is still in my opinion a great brand, but it hasn’t effectively taken advantage of its history. It’s been a big denim company. They should be even more dominant in denim,” said a former retail CEO, who asked not to be named. “Figure out how to maximize it. There should be specialty tops that go with black jeans. Jeans with sparkle. How about a blue blazer with a white shirt that goes with a denim jean for wear-to-work? Think denim as a lifestyle — why not a world of denim,” demonstrating its versatility so it can be worn for different settings and occasions.
“The reason Gap has failed in the past is that there’s been too much bureaucracy and it’s been moving too slow,” the CEO added, though corporate layoffs would have reduced some of the excessive administration. “It’s always a matter of adjusting to the world as it changes. As customers age and there’s the next generation coming of age, you have to recreate the business.”
Some high-profile collaborations with Gap have been disappointments, among them with Yeezy and years before with the designer Patrick Robinson. One critic said: “Most talented designers are not interested, at the end of the day, to work with Gap, which has had a chronic long-standing lack of leadership and lack of direction, and lack of common sense of judgment. If you are in the fashion business, it’s a treadmill. You have to have a dynamic organization with dynamic assortments that creates appeal.”
There is something of a nostalgic feeling to the Gap brand, something that could be leveraged. “The Gap has a lot of residual brand equity,” said Craig Johnson, president of Customer Growth Partners. “Gap became very strong in the ’80s when the malls were all expanding, and continued strong into the early 2000s. Don’s real love was real estate,” Johnson said, referring to the late Don Fisher, the founder of Gap. “Gap is a brand in search of its core DNA. The brand lost its way. What does it stand for?”
Old Navy, he added, for the price has been offering decent quality clothes that are on trend but not leading edge. “People get it. But Old Navy really hasn’t been reinvented at all. The stores look old. They need more updating. There’s a very ’90s feel.”
Some industry sources indicate that Banana Republic has been recovering, at least from a style perspective, if not showing financial gains. After years of being tailored, career-oriented and quick with distributing discount coupons, in the last few seasons Banana Republic has adopted a more sophisticated look that seems more in tune with the return to office trend, and prone to striking a better balance between casual and dressy.
But rebuilding traffic in the stores has been challenging. Banana Republic recently had a major branding push to go back to their heritage, styles became more sophisticated, but it’s believed more could be done to align the brand with values and issues that speak to younger generations.
But credit Athleta with successfully tapping women of color influencers and celebrities including Alicia Keys and Allyson Felix. As reported earlier this week, at Athleta, Chris Blakeslee was named president and CEO, raising hopes that the brand will get back on track. The brand has experienced several seasons of poor product acceptance, but continues to open stores and is widely viewed as having a solid runway for growth into the future.
According to a filing with the Securities and Exchange Commission, Dickson will receive an annual base salary of $1.4 million and will be eligible for an annual target bonus equal to 185 percent of his base salary. Dickson’s 2023 bonus will not be less than his target annual bonus, prorated based on the effective date.
Dickson will also receive an initial bonus of $350,000 and in the event he is required to forfeit equity awards because Mattel terminates his employment prior to July 31, 2023, an additional initial bonus of $1 million.
In addition, he will receive an inducement grant of restricted stock valued at $4 million, and a make-whole grant of restricted stock valued at $4.3 million, and relocation benefits, including home sale assistance and commuting expenses, as part of his package.
“As history has shown, Gap’s major investors can be resistant to adaptation, and exert too much control over the direction of the company,” GlobalData’s Saunders added. “In our view, there is no point bringing in good people if you don’t allow them the scope to shake things up.
“When he joins, Dickson’s inbox will be crammed full of challenges. The core Gap brand is in desperate need of reinvention, the deep-seated problems at Old Navy need to be addressed, the faltering recovery at Banana Republic needs to be put back on track, and the now-fading momentum at Athleta needs to be reinvigorated. In short, being CEO of Gap is not for the faint of heart.”
It can use some of the magic of Barbie’s Dreamhouse.
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