The Gap Dolls Itself Up

The fashion business remains in a funk. Apparel sales are stuck in a slump. But the Gap is back.

To see why, walk into any Gap store. Remember that huge wall of denim, shelf upon shelf of blue jeans staring you in the face? It has shrunk dramatically. Fewer T-shirts, too. But look at the hats and handbags, the embroidered tops and flowing skirts, the $58 linen pants.

Notice the emphasis on women's clothes. Gap Inc. says that it now is tailoring its apparel to be more "gender-specific." That means fewer unisex items and more floor space devoted to women. More frills, too. As Richard M. Lyons, Gap division president, puts it: "Women want women's clothes, and men want women who want women's clothes."

SOARING EARNINGS. Gap, which made its name selling basics, increasingly is turning to fashion. T-shirts and jeans still bring people in the door, and plain khaki pants anchor its effectively romantic ads. But fashion is where the profit margins lie--particularly when competitors are knocking off Gap basics and undercutting its prices. So far, Gap's new approach is paying off. For the fiscal year ended January, 1994, earnings shot up 23%, to $258 million, on $3.3 billion in sales. Fourth-quarter profits soared 66%, even as sales gains at stores open a year or more stalled (chart).

Usually, profit gains without big sales increases imply major cuts in costs. While Gap brass are serious about cost control, raw slashing is emphatically not the reason for the upturn. In fact, as the Gap expands floor space and adds new stores, it took on 5,000 new employees in 1993, hitting 44,000.

What's boosting profits is a combination of faster inventory turns, higher-margin merchandise, and far fewer markdmwns. Customers aren't spending much more, but what they buy produces higher profits. If consumers loosen up their purse strings, what's shaping up as a good 1994 could turn into a great year. Wall Street is noticing: At 47, the stock is up 83% since its trough six months ago. "Gap is doing a tremendous job of creating fashion in a business where there is no real fashion edge right now," says Janet J. Kloppenburg, analyst at Robertson Stephens & Co.

Gap's turnaround came in the second half of 1993, after Lyons moved to the Gap division from the successful GapKids unit. Gap stores, which account for almost 70% of the company's sales, were responsible for most of its earnings declines in 1992 and early 1993, when merchandising miscues and tougher competition magnified the effects of the retailing recession.

Lyons' team took advantage of aggressive changes in inventory management already under way. Gap had been stocking stores with far too many styles, and overbuying within each style. "We were creating too much competition within Gap stores," says Richard F. Eastwick, senior vice-president for planning and distribution. Six colors of blazers, say, when four would do. That meant too little space available for hot-selling, high-profit items, while too many doggy designs were relegated to the markdown racks, depressing margins.

NEW STORES. Basics were taking up too much real estate, too. Gap stores overstocked items such as denim to visually reassure customers that they'd find their sizes. That meant slower inventory turns and lower profits. But reducing space for basics and making room for fashion required much faster replenishment rates. Eastwick came through. In-store basics inventory has been reduced by as much as 40%. And companywide, inventory now is only 5% higher than it was two years ago, even as the chain has added 2 million square feet of selling space.

For help with fashion merchandise, Lyons tapped Lisa Salamone, who created hugely successful girls clothing collections at GapKids, to take charge of women's fashion. With others, they're fine-tuning the product mix. In the past, the biggest stores would get a wide array of styles that would be narrowed for smaller stores. Now, the array of styles is consistent in all 881 stores. "We want to present one picture." says Lyons. Larger stores fill extra space with new categories--shoes, workout clothes, and the like. And Gap is considering moving into personal care products, such as fragrances, toothpaste, and shampoo.

By cutting down on the number of styles, the risk is that the stores' buyers will pick the wrong ones. "The lower our inventory, the more critical our buying decisions are," acknowledges Robert Fisher, chief financial officer and son of founder Donald. But Lyons insists: "You've got to take the risk, do something new. The old things never work." So far, the new things are selling fine. If they don't, there will be a new line in a few weeks.

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