The Gap Just Lost A Key Executive, But Shouldn't Rattle Investors

• Gap, Inc. GPS shares have declined 33.56 percent, year to date, from the high of $43.60 reached on January 7.
• Roxanne Meyer of MKM Partners has reiterated a Buy rating on the company, with a price target of $40.
• Although the departure of the President of Old Navy is likely to affect the company’s near to medium term performance, the stock is unlikely to be significantly impacted.

The company had announced after market close on September 29 that the Global President of Old Navy, Stefan Larsson, was leaving Gap, effective from October 2, to become the CEO of Ralph Lauren Corp. RL.

The company also announced that, Jill Stanton, the EVP of Product, would be taking care of the President’s responsibilities till a successor is found.

Analyst Roxanne Meyer believes that “Mr. Larsson’s influence over culture and processes is enduring and that the powerful team he assembled will continue to execute in at least the short-to-medium term.”

Meyer also believes that Gap has been overlooking the need for investment in “best-in-class external executive hires” to drive meaningful changes in its Old Navy business.

For 2H, Meyer expects “continued strength at Old Navy and under-appreciated margin catalysts to offset weakness at both Gap and Banana Republic,” while the performance at Old Navy is expected to benefit from the strong performance of the denim and active categories.

Margins are expected to be driven by inventory discipline, continued roll-out of fabric platforming, AUC benefits, as well as store closure benefits during 2H. Share buybacks are expected to continue to drive EPS growth by about 5 percent.

“We also look for changes in leadership, fit, and processes to be needle-moving at Gap in 2016,” Meyer added.