While the J.C. Penney (JCP) story continues to play out, I thought it would be interesting to take a look back on another retailer that underwent a drastic transformation to revive a dying brand: the Gap (GPS). In the early 1980s, the company was struggling after a decade of selling Levi’s; here’s how author Meryl Gordon described it in a 2005 New York Magazine article:
“Founded in 1969 and named for the generation gap, the company had gone public and expanded to 550 stores with sales of $480 million, but there were problems. Lots of other stores sold Levi’s [and were cutting prices to boot], and the Gap’s other merchandise was perceived as subpar. The company also had image problems…”
At the time, Gap’s founder Donald Fisher decided to handpick a young executive who had recently proven his retail prowess during a three-year transformation of Ann Taylor: his name was Millard "Mickey" Drexler. Upon his arrival as the president of Gap in December 1983, Mickey looked around him and got rid of anybody that he felt wasn’t up to the task at hand: “When you’re a CEO, you can’t wait. You’ve got to run a business to win, not just to lose; so I did the surgery.”
As noted in Ms. Gordon’s article, Mickey made drastic changes to completely reinvent the Gap brand from scratch [based upon the model of Brooks Brothers, which was less vulnerable to price wars than the department stores]: “He threw out everything and started fresh, giving all stores a top-to-bottom makeover and stocking them with simple, affordable, quality basics… Just as he would later do at J.Crew, Drexler set out to change everything. The first week on the job, he sent signs to the staff with one word printed on them: simplify.”
The first year was difficult: Net income fell 43%, likely drawing serious heat from investors (based on Google Finance, the stock fell roughly 60% from peak to trough in 1983-1984). Drexler later told Business Week, "We were all scared, and I was more scared than anyone the first year and a half." Despite his fears, Drexler’s explanation for such a change is simple: “You have to pay the big price.”
In the end, it all proved to be worth the short-term pain; as noted in New York Magazine, “Gap sales eventually exploded, the stock soared, and the board was delighted. 'Mickey got into everything', says Bowes [board member of the Gap for 21 years before retiring in 1997]. 'He pulled the merchandise together, the stores, he got into the advertising. He had that knack—he seemed to know what the public would want way before the public would know it.”
To say the stock soared is a bit of an understatement: In Drexler’s first full year at the company, earnings came in at 37 cents per share, with the stock trading between $4 and $6; two years later, the Gap earned $1.93 per share, with the stock registering as a ten bagger ($56 per share in May of 1987). By the time Drexler left the company, the shares had increased nearly 60 times, meaning that a $10,000 investment at the arrival of the already well-known successful retailer would have been worth $600,000 by the time he left the c-suite less than two decades later (that’s a compounded annual growth rate north of 24%).
The parallels between Gap in the early '80s and J.C. Penney in 2012 are striking, at least from my perspective. With August 1 just a few weeks away, the transformation at JCP is set to begin in a big way; I feel like I'm suffering from a case of deja vu.
About the author:
As it relates to portfolio construction, my goal is to make a small number of meaningful decisions. In the words of Charlie Munger, "Patience followed by pretty aggressive conduct."
I run a concentrated portfolio, with a handful of positions accounting for the majority of my equity holdings (currently two). From the perspective of a businessman, I believe this is adequate diversification.