A Bit Of A Rut At The Gap

Mickey's mantra goes like this: "Good style, good quality, good value." As president of The Gap Inc., Millard S. "Mickey" Drexler used that formula to sew up record earnings year after year at the casual-clothes retailer, while hard times had other retailers bleeding.

But now, even The Gap is suffering. Lingering economic malaise has changed the consumer's definition of good value to stress low price even more. That has forced price cuts on a wide array of merchandise, putting a squeeze on profit margins. In the meantime, copycats are knocking off the chain's fashions. And for the moment, The Gap seems to have lost its sharp eye for casual American style: Its fall season was a bomb. Concedes Drexler: "We made some fashion mistakes."

JEAN THERAPY. Granted, The Gap has a lot to live up to. Through 1991, it scored three years of double-digit gains in same-store sales, capping off the year with profit growth of 56%. No one thought the company could keep up the pace. Yet even with lowered expectations, October's 2% gain in same-store sales looked anemic--especially with other retailers finally showing better results. On Nov. 12, the company announced that third-quarter profits were down 12.4% from last year's figure, to $62 million. The latest estimates peg 1992 earnings between $223 million and $230 million on sales of $3 billion. That would be at or below 1991's profits of $230 million, on sales of $2.5 billion, a far cry from January's rosy projections of 20% profit growth in 1992. Since then, the stock has skidded from a high of 59 to 35.

The Gap's chill reflects how hot things have become in its market. In August, the retailer cut the price of blue jeans by $10 a pair, to $28. It was a back-to-school special, but other jeansmakers fought back, and the low price stuck. Since then, The Gap has trimmed price tags on other products: Turtlenecks, for example, dropped from $19.50 to $16.50. Meanwhile, everyone from Macy's to The Limited Inc. to tiny shops such as Dolin's Family Wear in Waynesboro, Ga., has begun hawking the Gap look. "None of them is doing a particularly good job," says Janet J. Kloppenburg, an analyst at Robertson, Stephens & Co. "It's just that everybody's doing it."

Nor has The Gap been doing a particularly good job of responding to the latest quirks of fashion. Normally right on top of the trend of the moment, it was slow to roll out products in colored denim, a hot new market. Also, an original fall collection might have helped. But The Gap's attempts at originality fell flat. A copious supply of $225 varsity jackets with leather sleeves didn't move until there were drastic markdowns. "We bought too many," Drexler says. "It was a sloppy buy." And some Gap stores are still trying to get rid of blazers designed to be a hip version of the preppy standby. Instead, buyers found them lumpy-looking, ill-fitting, and overpriced, at up to $128.

TOO, TOO COOL. Even The Gap's much-vaunted advertising is misfiring. Starting this fall, the chain has sharply curtailed its tv spots, which had been budgeted at $28 million for the whole year. One of the commercials, produced in-house, featured a serious-looking coffeehouse poet named Max Blagg intoning lines such as "Jeans curved into the shape of your thigh/Like they were meant to do just that." It was all too, too cool--to the point of self-parody. "We weren't thrilled with our fall advertising campaign," Drexler admits, "so we're changing it."

The Gap still has a lot going for it. Its GapKids and Banana Republic stores are doing well. Conservative financial managers are squeezing out costs. Indeed, Gap stock rose 212 points on Nov. 12, when the earnings drop came in lower than expected. And despite current woes, Gap merchandisers boast an enviable track record. "Don't underestimate The Gap's ability to change," says Jean M. O'Neill of Kidder, Peabody & Co.

Like most analysts, though, O'Neill is not recommending the stock. What investors want is a clear sign that the company has successfully anticipated the next big rage. In the meantime, they're left with the nagging concern that its look has grown tired. It's up to Drexler and his lieutenants to prove once again that they are some of the best trend-spotters in a business that rises and falls on trends. "They're still the fair-haired boys of retailing," says retail consultant Alan G. Millstein. "But their hair is thinning."