Tuesday, September 10, 2002

Gap CEO exercises 14.5 million stock options

The Associated Press

        SAN FRANCISCO — Gap Inc.'s chief executive officer, Millard “Mickey” Drexler, exercised 14.5 million of his stock options in a move likely to leave investors guessing about his motives.

        The disclosure comes at a sensitive time for the clothing retailer, which has been trying to persuade Wall Street that it's poised to rebound from a humbling sales slump that has lasted more than two years.

        Drexler characterized the decision as part of his retirement planning. Earlier this year, Drexler announced plans to retire as Gap's CEO when the San Francisco-based company can find a replacement.

        Stock options are a perquisite that gives the recipient the right to buy company shares at a predetermined price. The option owner makes money on the spread between the exercise and stock market prices.

        Instead of immediately selling his exercised stock options, Drexler said he will hold on to most of the shares — a decision that could be interpreted as a bullish sign for Gap's turnaround hopes.

        But the timing of Drexler's decision puzzled industry analyst Richard Jaffe of UBS Warburg because the executive had until November 2003 to exercise 13.5 million of the options.

        If Drexler is confident that Gap will be faring better in a year, it's difficult to understand why he wouldn't wait until November 2003 to exercise the options, Jaffe said. “We are struggling to understand the rationale for this transaction. For now, we are willing to accept that it's an expression of (Drexler's) optimism.”

        Gap disclosed Drexler's activity after the company's stock rose 18 cents to close at $13.30 Monday on the New York Stock Exchange. Gap's shares dropped 60 cents in after-hours trading.

        The company said Drexler sold an unspecified number of the exercised options Monday to cover his tax bill and other expenses.

        The sale covered virtually all of Drexler's available stock options, according to Gap's shareholder proxy statement. Including his vested options, Drexler owned 26.3 million shares, or 3 percent of the company, as of March 15.

        Gap only disclosed Drexler's exercise price on the 13.5 million options expiring in November 2003. Drexler realized a paper gain of $101 million on those options, based on their exercise price of $5.79 per share and Monday's closing price of Gap's stock.

        The clothing retailer is trying to reverse an uninterrupted run of sliding sales that began in May 2000. The prolonged slump has ravaged Gap's stock, which peaked at $53.75 in early 2000, and provoked rampant second-guessing about Drexler and his management team.

        Gap has overhauled its clothing selection, helping to reduce sales losses this summer and raising hopes for better times in the fall.


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- Gap CEO exercises 14.5 million stock options