Gap: Missing That Ol' Mickey Magic
For most of us, polo shirts peaked in popularity back in the mid-1990s. But somehow, fashion guru Millard S. "Mickey" Drexler became captivated by them last year. The chief executive of Gap Inc. insisted that his Gap-brand stores carry deep inventories in an unusually wide palette of colors. Gap merchandising managers, unable to dissuade him from the idea, produced data suggesting that three or four colors account for the vast majority of sales. But Drexler was adamant, saying he didn't want to miss a sale to an XXL customer who wanted the shirt in purple. While Gap defends the plan as having "brought fashion to a basic item," the offbeat colors bombed. Stores wound up with mounds of marked-down polo shirts.
Call it another losing bet for Mickey Drexler. Long hailed as the merchant king whose inspired wager on khaki pants ignited a huge growth spurt in the late 1990s, Drexler recently has been on a ruinous losing streak. Gap's once-reliable growth engine has seized up: Sales at stores open at least a year plummeted by 17% in both August and September. As Drexler acknowledges, each of the company's three core brands--Gap, Banana Republic, and Old Navy (GPS )--has come untethered from the tight rapport with consumers that accounted for its earlier prosperity. Aggravating those tensions are the CEO's dogged insistence on adding new stores while trying to fix the fundamentals, plus management turnover, in particular last year's exodus of some seasoned executives who knew when to rein in Drexler's impulses.
Now, many analysts and investors, who long trusted that Drexler, 57, would once again pull a rabbit out of his hat as he did during a downturn in the mid-'90s, fear that he has lost his magic. Even in a tough retail environment, Gap's declining same-store sales are worse than those of its peers, having fallen 11% so far this year after declining 5% in 2000. In contrast, Abercrombie & Fitch Co.'s are down 7%, while American Eagle Outfitters Inc.'s are up 4.4%. Emme P. Kozloff, an analyst at Sanford C. Bernstein & Co., expects Gap to lose $216.6 million in the third quarter, including a charge of $140 million to $150 million related to an adjustment in tax rates. That follows five consecutive quarters of declining profits. Says Kozloff: "The Street has relied way too much on the `Mickey will fix it' idea. It's amazing that people give him the benefit of the doubt." Increasingly, however, they don't: Gap's shares are trading around $14, down from $35 in May and slightly more than one-quarter of their high in February, 2000.
While some observers figure the nation's more sober mood could spur a shift from rhinestone-encrusted jeans and other novelties to more tried-and-true styles, Gap won't necessarily benefit. Its customers have been fleeing to discounters, such as Kohl's (KSS ) and Target (TGT ), and youth-oriented chains, such as American Eagle, that offer similar goods. "Somewhere along the line, Gap just lost it," says New York retail consultant Wendy Liebmann.
Drexler scoffs at that and refuses to concede that he doesn't get it anymore. "I'm absolutely still in touch, talking to customers every day, looking at product every day, involved in the creative processes," he says. And so far, Gap board members and the company's founding Fisher family continue to express full support. "I don't know of a merchant better than Mickey," says director Adrian D.P. Bellamy, chairman of Gucci Group. "He's going through a difficult time, but I believe Mickey will lead the company to better days ahead." Board member and Apple Computer Inc. CEO Steven P. Jobs insists there's no talk of replacing Drexler: "The question's not even in the ballpark."
But talk to some of the legions of executives who have left Gap over the past couple of years and you get a different assessment. BusinessWeek spoke to 10 former executives, none of whom would be identified, who painted a disturbing picture of a manager whose short attention span and impulsive flip-flopping has cost the company dearly in both dollars and strategic detours. Drexler's erratic style arguably didn't matter so much during the flush times, when Gap could afford the inefficiency and waste that sudden changes of heart create. Besides, his guesses were more often right than wrong. Old Navy, launched in 1994, soared to $1 billion in sales in only five years on the strength of low-cost, whimsical fashions aimed at teens and their parents.
Former execs say Drexler still insists, though, on running the chain in a hands-on style and relying to an alarming degree on gut decisions. Critics contend that the company "is too big to be run by an entrepreneurial, possessed genius," as one alumnus puts it. It hasn't been unusual for Drexler to approve, say, gingham-check skirts for the Gap chain only to cool on them once they arrive from the factory, says a former manager. The skirts were shipped to Gap's outlet stores, forcing the regular stores to overemphasize core denim styles to fill the void. "When you see the denim stretched out in the store and think it sure looks kind of basic, it means Mickey fell out of love with something," the exec says. Another recalls the time Drexler approved new store racks and shelves only to decide after they were installed that their overall appearance "just doesn't hit me." Store managers dragged out and reinstalled the old racks while Gap wrote off the new ones. "He'll pull the plug on things," says the former exec. "It's part of his emotional style." Gap dismisses such complaints, saying such changes are "part of the normal give and take of the business."
CONCRETE FLOORS? Some of the flip-flops have strained relations not just among Drexler's staff but also with external partners whose goodwill Gap needs to cultivate. Drexler created an internal uproar last summer when he greenlighted a change in design for new Gap stores without making sure that company real-estate specialists assigned to negotiate with mall developers had been informed. The real estate team then had to go back to developers to persuade them to accept the new design, which uses concrete floors and open ceilings rather than the maple floors and finished ceilings that had been promised. Some developers were affronted, feeling the retailer was trying to put an eyesore in their malls. "It was a significant departure from what people expect from a Gap," says Leonard Richards, senior vice-president of Chicago mall developer Landau & Heyman, which is putting a Gap unit in a mall opening late this year in Carbondale, Ill. "It didn't look like a Gap. It looked like an outlet or an Old Navy." When Richards objected, Gap stayed with the original design. Calling the new look a test, Gap says: "We wouldn't force it on anyone."
Certainly, Drexler's not backing off his intrusive stance. Asked at a recent investors' conference whether he'll continue to devote so much time to minute details, he responded that "you become a bit more dictatorial in this kind of environment."
Of course, creative types often have disruptive personalities. Board member Jobs, no stranger to an impulsive management style, defends Drexler--who sits on Apple's board--on those grounds. "I think Mickey Drexler is a creative person," Jobs says. "As a creative person, he's not a robot--he's a human being with moods. When he sees something he doesn't like, he says so." Drexler sees that as a requirement in an ever-changing industry. "I do like to introduce newness at the edges of the business all the time," he says. "That might be read as mercurial or inconsistent, but you can't get the new ideas without challenging current ideas."
To be sure, some of Drexler's staff find his style motivating. "Creative people really like working with him because he's emotional, passionate," says Amy Schoening, senior vice-president and chief marketing officer at Gap. She recalls Drexler's insistence two years ago that Banana Republic cast some older people in its catalog, over the objections of Schoening and her staff. Now, she concedes the "inclusive" move generated goodwill among those older customers. Dennis Connors, who left his post as Gap's chief information officer in 1999, adds: "People who blame Mickey, they have to grow up. It's a fast-paced company. The cycle times for fashion are getting shorter and shorter."
REACHING OUT. Problem is, in the past, there were plenty of veteran managers and staffers around who could talk Drexler out of going too far out on a limb. Today, many of those veterans have left the company. Of the 23 corporate and divisional officers named in Gap's 1999 annual report, 8 have departed for various reasons, including 4 of the 5 officers in the Gap division. True, Drexler gets good marks for some of his replacements. That's particularly the case with nine-year board member John M. Lillie, who was put on the payroll in January as vice-chairman and assigned to such crucial matters as manufacturing and distribution systems and cost-cutting, none of them Drexler's forte. In recent months, Drexler has also filled key marketing and operating jobs at each of the chains while reaching outside the company for help. He also dropped his longstanding practice of creating all advertising in-house by recruiting Boston agency Modernista, which has helped Gap develop ads using offbeat celebrities, as the chain did with great success in the late 1980s.
Still, it may take a while for the new execs to decode Drexler--to "lip-read" him, as company insiders say. An edict to order 50,000 more shirts might be meant literally, or it could just be a metaphor for taking risks. "You have to figure out when he's serious and when he's emotionally going off," explains a former Gap exec. Meanwhile, staffers often end up playing guessing games in which they debate what they think the CEO wants, says another former manager. And with some of the newcomers arriving from very different corporate cultures, the learning curve may be steep. "They all could potentially have what it takes to run their businesses, but do they have experience in their positions? No," says Karen Hiatt, an analyst at Gap shareholder Dresdner RCM Global Investors.
With all three chains facing big problems, there's no time to waste. Banana Republic, which last year offered such flops as a line of purple clothing, is struggling to come up with a fashion mix that its 30-and-older customers, especially men, feel more comfortable wearing, Drexler says. Old Navy, whose merchandise mix last year skewed too far toward teens, is scrambling to win back grownups with a line of subdued slacks and jackets, sold as the Old Navy Collection. Old Navy also still struggles to restore a distinct identity to avoid drawing bargain-hunting Gap shoppers. Instead of chasing niches, Drexler feels Old Navy should claim higher terrain as a purveyor of "fun, fashion, and value for the whole family."
The biggest problem, though, is at the core Gap chain, which in its peak years appealed to everyone from teens to baby boomers with its huge selection of khakis and wearable tops. Drexler took a serious wrong turn in 1999, pushing Gap into fashions that were too young-looking for its clientele. Today, he has gotten rid of the oodles of pink capri pants and cargo pants in favor of items with broader appeal that he hopes reflect "casual style." But that emphasis still seems to span irreconcilable genres. Earlier this year, Drexler declared Gap's target market to be 20- to 30-year-olds who crave fashion. So for the fall season, he ditched much of Gap's basic-style merchandise and took a stab at offering trendier, more cutting-edge fashions, such as belted sweaters and super-dark denim jeans and handbags. That's a risky move that has Gap vying in apparel's most treacherous segment against more agile competitors, such as American Eagle, which can revamp its merchandise mix in half the time Gap needs to respond to shifting tastes. Gap's plummeting same-store sales this fall suggest that Drexler is off-base again.
With Lillie in place, Gap has finally committed to realistic cost-cutting. One of Lillie's more dramatic moves was a first-ever layoff of 1,040 employees in July. Yet Drexler continued to increase his store count by over 20% in both 1999 and 2000. He has backed off a bit on the pace of expansion--from 10% for next year, to 5% to 7%--but some analysts wonder why he's expanding at all. Drexler insists there's still opportunity to be tapped but admits he's evaluating 2002 leases that haven't already been signed.
Drexler's loyal supporters on the board say he's merely executing the strategy they set. "We all agreed to put the foot on the accelerator" for the massive expansion, says director Bellamy. But with Gap heading for what looks like a wreck of a year, more investors wonder if Drexler has both hands on the wheel.
By Louise Lee