Gap Inc (GPS) shares fell sharply (nearly 6%) on Wednesday following news that the retail star behind the tremendous renaissance of its biggest brand, Old Navy, was heading to Ralph Lauren (RL) to become CEO.
Stefan Larsson, who took the helm at Old Navy almost three years ago after a long stint at fast fashion retailer H&M, oversaw a transformation that helped the brand respond more quickly to new fashion so it could better compete with the likes of his alma mater and Forever 21 and have the ability to drop lines that are flopping.
The Swedish executive also deftly managed to mix fashion with lower-priced clothes, winning away market share from rivals including Target (TGT) and Walmart (WMT). Larsson introduced a new, quicker, and more flexible manufacturing model that sister brands Gap and Banana Republic are trying to replicate to return to growth. For many items, Old Navy rolls out pieces in small batches to test demand before mass-producing them, works more closely than ever with suppliers, and accommodates new trends by keeping a stockpile of fabric on hand.
And no one can argue with Larsson’s success—in 12 of the last 14 quarters, Old Navy has posted comparable sales growth, while its siblings have languished. Gap and Banana Republic’s declines have worsened in 2015. And Old Navy added $1 billion in annual sales over four years, a major reversal from the declines of previous years.
“Old Navy is our proof point on making structural change in our … processes to achieve better product more consistently season after season,” Gap Inc CEO Art Peck told investors back in June at the company’s investor meeting. “Old Navy is demonstrating that it’s possible.”
Peck has touted Gap Inc’s efforts to fix Banana Republic and its namesake brand, whose comparable sales have fallen for six quarters in a row, and he said that results will start being apparent in 2016. But for now, investors are anxious about anything that could slow Old Navy’s momentum or impede positive change at Gap’s other major brands.
“The move adds to near-term uncertainty as Old Navy’s strong performance has supported earnings amid Gap/BR brands’ recent struggles,” Baird Equity Research analyst Mark Altschwager wrote in a research note in which he lowered the price target on the stock.
