Gap's High-Risk Management Shakeup

"Who am I?" That's how Art Peck began his first blog post as the new president of Gap's (GPS) long-troubled North America retail store unit. "If you Google (GOOG) me, you won't find much." Yes, there's the MBA from Harvard, two decades spent at Boston Consulting Group, and his tenure as a Gap executive since 2005 helping craft international strategy and leading its small outlet division. However, there's a surprising hole in his vita: He's not a style guru. "That's right. I'm not a merchant," he wrote in his debut blog.

Those aren't exactly words that inspire confidence in retailing. "That's not the first thing I want to hear," says Christine Chen, a retail analyst at Needham & Co. In the apparel business, the merchants translate the ephemera of fashion into must-have commercial products. Unfortunately for Gap, it hasn't had a successful merchant since Mickey Drexler, now chairman of J. Crew Group (JCG), left the company in 2002. That's led to years of disappointing sales for its U.S. unit.

Yet when Gap Chief Executive Officer Glenn K. Murphy announced on Feb. 2 that Peck would replace Gap North America President Marka Hansen, a 24-year veteran, it was obvious he was rolling the dice. In addition to Peck, Murphy appointed a new head of global marketing, Seth Farbman, who had been worldwide managing director at advertising agency Ogilvy & Mather. He also promoted another relatively unknown executive from within Gap's ranks. Pam Wallack, who had been the creative director for Gap's kids and adult clothing at its San Francisco headquarters, will move to New York to run what the company is calling a Global Creative Center. It will bring together for the first time the design, production, and marketing teams for the brand.

"This is a great opportunity for Wallack," says Richard E. Jaffe, managing director of Stifel Financial (SF). "She's the chorus girl who got pulled out of the line to take the leading role." Will Murphy's gamble on untested talent work? "Who knows?" says Jaffe. "But if a tree is growing in the wrong direction, you have to cut off a limb. I think that's what's happening here. It's not a bad thing."

Peck says his first priority is "to understand what's keeping us from being more consistent. We have to put clothes in our stores that our customers emotionally connect to. That's … a statement of the profoundly obvious. If we don't do that, nothing else matters."

Murphy needed to think boldly after years of distracted management, aggressive expansion, and uninspired merchandise that have left the biggest apparel retailer in the U.S. weakened. It's been six years since Gap North America has posted an annual increase in sales at stores open at least a year, a prime measure of a retailer's health. During December, the height of the holiday selling season, Gap North America same-store sales dropped 8 percent. That's in sharp contrast to the average 3.2 percent gain at all U.S. retailers. Sales at the U.S. unit are down almost a third from where they were in 2004.

For the past year, Murphy has been expressing concern. In March he told investors on a conference call that Gap has been "on the longest slippery slope of all our brands." (The parent company also operates the Old Navy, Banana Republic, Piperlime, and Athleta brands.) And in another investor call in August, he noted: "My patience is not indefinite."

Then in October, Hansen, who had led Gap North America for the past four years, unveiled a logo that had been selected in part by voting among consumers on the Web. It was criticized for being ugly, outdated, and unnecessary. A week later, Hansen said Gap would go back to its old logo.

With both a new management team and ad agency for the U.S. brand—Ogilvy & Mather will take over the Gap account, replacing Laird + Partners, which was involved in the logo mishap—Murphy has put in place changes more sweeping than many expected. Yet analysts say the changes need to kick in quickly. Explains Janet Kloppenburg, the founder of JJK Research, which specializes in retailers: "Their competitors are making inroads, developing loyal customers, and getting better and better, while Gap is starting over."