Gap shares tumble after CEO announces exit

Gap shares tumbled 12 percent to around $37 on Thursday, after the company announced as the market closed Wednesday that Chairman and CEO Glenn Murphy will retire in February.

The news shook the confidence of investors and analysts alike, with four key firms downgrading their ratings on the apparel retailer.

Although all four analysts credited incoming CEO Art Peck's near-decade of experience and successful track record at Gap, they expressed concern over the additional question marks now surrounding the company, whose namesake label struggles to gain traction.

A pedestrian carries a Gap shopping bag in San Francisco.
David Paul Morris | Bloomberg | Getty Images
A pedestrian carries a Gap shopping bag in San Francisco.

"We consider Murphy to be one of the best retail CEOs, and while we believe Peck is a strong leader, this transition creates a period of uncertainty," said Wells Fargo analyst Paul Lejuez, who downgraded the retailer to "market perform" from "outperform."

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Under Murphy's leadership, Gap delivered a total shareholder return of more than 160 percent. The company also grew its e-commerce business, right-sized its domestic fleet by closing about 600 stores and expanded operating margins by hundreds of basis points, said Sterne Agee analyst Ike Boruchow, who downgraded the company from "buy" to "neutral."

"Clearly, it will be difficult to replicate the success that Murphy has overseen since his arrival," Boruchow said.

Telsey Advisory Group's Dana Telsey added that despite Peck's experience across the company's operations—which spans its outlet and North America businesses, and most recently its growing digital division—"he is a lesser-known quantity to the investment community." She also downgraded the retailer to "market perform."

Others pointed out that while he has extensive experience in the crucial area of integrating physical and digital commerce, he lacks a merchandising background—an area where Gap has struggled recently.

Janney Capital Markets analyst Adrienne Yih-Tennant, who downgraded the company's shares to "neutral" from "buy," attributed the ratings change not only to Murphy's departure, but also to "product weakness" at the Gap label, which she said could extend into spring 2015. The brand accounts for just under 40 percent of Gap's global sales, Yih-Tennant said.

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Boruchow, who had recently named Gap as his top retail pick for the second half of the year, sounded a similar note. He had been looking to the company's fall floorset—the first under its entire new design team—to potentially be the "harbinger of a turnaround."

"It's no secret that Gap's bread and butter is basics, but we believe designer Rebekka Bay's team has so far been unable to inject the assortment with the type of excitement that incites customers to buy," he said.

Still, other analysts took the news more in stride. Stifel Nicolaus' Richard Jaffe maintained his "buy" rating on the company, saying that sometimes change is good.

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"Certainly, the easiest and biggest gains came early in Mr. Murphy's tenure, but clearly, further gains were proving much more difficult to achieve," he said.

Canaccord Genuity's Laura Champine also maintained her "buy" rating, saying she was not surprised by Peck's selection given his experience spearheading digital initiatives—a key focus for the company.

"In addition to building a stronger e-commerce presence, we believe Gap's online initiatives such as reserve in store will become traffic and sales drivers across all channels," she said.