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Can Gap Put It All Together Again?

Marketing: Apparel

Can Gap Put It All Together Again?

The retailer's expansion plans have analysts wondering

When Renada Kulish hit Gap last spring, she couldn't believe her eyes. The 20-year-old student went in expecting the retailer's traditional basic offerings. Instead, she found the shelves stocked with capri-length jeans, complete with silver studs and buttons, in loud oranges, magentas, and turquoise. It was all a bit of a turnoff. "The colors got out of hand, and the orange and pink were just too bright," she says.

Kulish isn't the only Gap Inc. customer turning up her nose at the once-hip retailer that, aside from its namesake chain, also includes the Old Navy and Banana Republic units. After basking in the glow of the late '90s rush toward casual dress, San Francisco-based Gap has suffered through a series of missteps. Its worst headache is the quirky, low-priced Old Navy chain, where recent kid-oriented clothing has been a bust. Sales at Old Navy stores open at least a year declined by about 8% during May and June. But all across the company, performance is weak.

What went wrong? As recently as two years ago, Gap was riding a wave of khaki popularity to 17% growth in same-store sales. The first signs of a slowdown emerged last year when analysts reported that Old Navy was stealing customers from the core Gap stores with lower prices for similar merchandise. But this year the problems spread throughout the chain. From February through June, same-store sales for the core Gap stores and both its offshoots fell about 2% from a year earlier.

Now, as the crucial back-to-school buying season approaches, it's up to Gap Chief Executive Millard S. "Mickey" Drexler to prove that he can right the ship. A merchandising wizard with a reputation for keenly appraising consumer tastes, Drexler believes Gap erred this time by trying to chase the latest youth fashions. Though he declined comment for this story, Drexler recently told analysts that "when we get tricky and young and gimmicky at Gap, we lose it." Drexler also sees the economic climate as a factor--consumers are spending less on apparel than last year. And he's right--same-store sales at Gap rival Abercrombie & Fitch Co., for instance, are down 8% this year.PLAIN VANILLA. The fix, Drexler believes, will begin with a snappy new line of basic jeans, khakis, and shirts that will begin rolling out in August. But the problem with Drexler's strategy is that it represents a full-blown retreat to Gap's old formula. And critics warn that could do more harm than good. Gap's approach worked when fashion trends skewed toward plain-vanilla clothes. But today what's in has swung back toward flashier looks, especially among younger female consumers who are most apt to buy new wardrobes this fall. And there's only so much fashion that can be squeezed from khakis and t-shirts. "This trendy, girly-girl look is not a temporary fad," says Christine G. Hansen, executive vice-president of marketing at Limited Inc.'s Lane Bryant unit. Plus, Drexler now faces new competition in the basics market, with cut-price outfits like Target Corp. and Kmart Corp. increasing their khaki offerings.

Compounding Gap's predicament, Drexler, in the midst of this fashion crisis, is charging ahead with an aggressive expansion plan. Gap plans to increase its number of U.S. stores by 19%, to a total of 3,125 by next February. The chain has told analysts that there's plenty of room for growth, since thousands of communities still have no Gap, Banana Republic, or Old Navy. That kind of expansion helped drive profits up 37% in the most recent fiscal year, to $1.1 billion, on overall sales of $11.6 billion, a gain of 28%.

Over the past five quarters, however, the rate at which Gap boosted revenues slowed from 32% to 20%, while growth in store space moved in the opposite direction--rising from 22% to 31%. "It's expanding at an excessive rate, especially at this point in the consumption cycle," says Kimberly Scott, with institutional investor Waddell & Reed Inc., which sold its Gap shares last year.

Still, Drexler has proved the critics wrong in the past. He bailed Gap out of another downturn shortly after taking over the CEO spot in 1995 by ramping up the rollout of the Old Navy chain and by refocusing Gap stores on basic merchandise. But analysts and others point out that Gap is a much larger and more complicated company today. And it doesn't help that Gap's top executive ranks have been thinned by four defections in the past nine months. Wall Street's skepticism is reflected in Gap's stock price, which is hovering near 37, after bottoming out at a 52-week low of 28 in June. It traded as high as 52 7/8 in early February. Says one fund manager of Drexler: "He's turned around Gap before, but I don't know if the charm will hold again this time."

Fashion trends, for one thing, sure aren't cooperating. Weary of a minimalist, androgynous look, many teens and twentysomething women are opting for sexier, more glamorous clothing characterized by embroidery on jeans, crocodile-leather accessories, and halter tops, according to New York trend-spotting outfit Zandl Group. "People are looking for fashion, which just isn't what Gap does," says Rick L. Snyder, an analyst at Morgan Keegan & Co. in Memphis.

Old Navy and Gap aren't the only problems. The company's obsession with youth has also taken hold at Banana Republic, which was conceived as a chain serving office workers age 26 through 36. This spring, many of those original customers were perplexed by new fashion items cut much slimmer and priced much higher than what they were used to. Meanwhile, Gap was running its West Side Story advertising campaign. The colorful TV spots were pretty to watch, but teens leaping to a 1950s musical merely "reinforced for young people the idea that Gap is passe," says Irma Zandl, president of Zandl Group.OFFICE CASUAL. Now, for better or worse, Gap is working to get back to its original formula. In early July, it introduced its latest women's jeans in a "modern boot cut" style. Gap's e-commerce Web site plugs the jeans as new but not overly trendy--"like our original boot cut" but "updated with a slimmer fit."

Gap won't discuss details of merchandise for the upcoming back-to-school season. But Drexler indicated to Wall Street that there will be more emphasis on work clothes. The men's section is likely to be beefed up, adding items such as woven shirts and gabardine pants. Banana Republic is expected to loosen its fit and drop some prices. And Old Navy will make a play to bring back parents and other adults with a new line likely to be office-casual clothes in solid colors called Old Navy Collection.

Analysts and investors aren't convinced. Gap's expansion plans and its attempts to firm up prices, they worry, are coming up against a flood of khaki discounting by Kmart and Target. Still, Drexler is confidently increasing the number of weeks that merchandise is displayed at full price before it is marked down. And those high prices could yet again turn off consumers this fall. High prices and unpopular fashions usually don't go together for long. That's why it could be another disappointing season for Mickey Drexler.By Louise Lee in San Mateo, Calif.Return to top

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