Gap Taps New Old Navy CEO to Turn Around Sluggish Sales

CNBC and Reuters reported that The Gap, Inc. (NYSE: GAP ) named retail veteran Michael Francis as president and CEO of Old Navy, effective November 2, succeeding Haio Barbeito, who will move into an advisory role.

The announcement came alongside second-quarter results showing Old Navy net sales fell 4% year over year to $2.1 billion, with comparable sales down 4% versus analysts' expected 2.4% decline, marking the brand's first negative comp in 12 quarters. Old Navy contributes nearly 60% of Gap's total revenue. CEO Richard Dickson attributed the miss partly to summer marketing that "lacked a direct product message" but said the brand has already seen "significant improvement" in traffic and sales over the past month. Gap's namesake brand posted 10% comparable sales growth in the same quarter, and Gap shares jumped as much as 14% after the report.

Overall profitability far exceeded what the sales headline suggests since operating income more than doubled to $676 million from $292 million a year earlier, while net income more than doubled to $501 million from $216 million. These results show that Gap can significantly improve earnings even while Old Navy struggles.

The turnaround playbook is clearly working where it has been fully applied. The Gap, Inc. (NYSE: GAP )'s namesake brand delivered double-digit comparable sales growth this quarter. It shows that CEO Dickson's broader strategy can succeed decisively when executed well, which strengthens confidence that it can eventually be applied successfully to fix Old Navy too.

Management also moved decisively rather than allowing the problem to linger. The appointment of Francis, who brings turnaround experience from Walmart, Target and JCPenney, triggered a 14% stock jump. Dickson said Old Navy had already seen "significant improvement" in traffic and sales over the past month. Early improvement could give Francis a stronger starting point when he takes over in November.

The Old Navy miss was larger than expected and ended a long streak of stability. Comparable sales fell 4% against an expected 2.4% decline, the brand's first negative comp in 12 quarters, a bigger and more surprising deterioration than a routine soft quarter.

Old Navy's weakness directly caps what the rest of the company can achieve, since it drives roughly 60% of The Gap, Inc. (NYSE: GAP )'s total revenue. The firm narrowed its full-year sales growth guidance to 1% to 1.5% from 1% to 2% specifically because of Old Navy's underperformance, showing one brand's problems constrain results for the whole company regardless of strength elsewhere.