Gap: Trying Not to Be a Fashion Victim

Despite a style and operations revamp, the chain hasn't yet found its groove

For proof that Gap (GPS ) Inc. no longer moves on the infamous gut instinct of former CEO Millard S. "Mickey" Drexler, consider the plum-colored argyle vest hanging on a mannequin in one midtown Manhattan Gap store. Something so dowdy would never have made it in Mickey's style-obsessed Gap. True, today there are no wild items like pink Capri pants that helped scare away core customers. But there's also less visual energy amid a sea of gray, brown, and cream that has washed over Gap's fall merchandise. Shopper Catherine Salvante, for one, is unimpressed: "Putting argyle in my socks is one thing, but wearing it across my chest is something else."

Yet beneath the piles of T-shirts and denim, a lot is going on at Gap. Long seen as the most troubled segment of Gap Inc., which also includes the Old Navy and Banana Republic brands, the $6.8 billion chain of Gap stores is radically revamping how it designs and sells clothes. Drexler, who turned Gap into a household name with bets on everything from khakis to fleece, was pushed out in September, 2002, after sales slid at Gap Inc. for 29 consecutive months. With Walt Disney (DIS ) Co. veteran Paul Pressler at the helm, the mantra is more about marketing, customer research, and backroom efficiencies. Dapper though he may be, Pressler is largely hands-off about the actual clothes and declined to be interviewed by BusinessWeek, deferring to executives like the chain's new design chief Pina Ferlisi, who left niche clothing brand Theory to join in March.

Ferlisi's impact won't be fully felt until Gap releases its clothes for the spring season, although the holiday will bring in bolder colors. Her boss's new strategy is already showing up on store shelves and behind the scenes. Pressler has improved turnaround time, cut inventory, and squeezed out other costs, which helped Gap Inc. more than triple its earnings, to $209 million, in the second quarter ended Aug. 2, up from $57 million a year earlier. Gap Inc.'s stock price has doubled, to more than $18 per share, from the lows it hit after Pressler came on board last fall. That compares with a 30% jump in the Standard & Poor's 500 Index. Even so, some retail experts feel the merchandise is too derivative and uninspired to push sales higher. "Boring!" says veteran retail analyst Howard Davidowitz.

Of course, customers will have the final say. That's why the company is refining the look, fit, and marketing strategy for the Gap brand through focus groups, extensive staff surveys, and consumer research with Leo Burnett USA. It has divided its shoppers into several categories -- such as "style conscious" and "updated classic" for women -- and is segmenting its ads and products to follow suit. "We were very product-focused before," says Gap U.S. President Gary P. Muto. "This is trying to balance the art and the science."

BIGGER BUZZ. So far, though, it's proving hard to mix fashion with science. While the parent has now had four quarters of improved earnings, based largely on merchandise developed under Drexler, the Gap chain's U.S. same-store sales in August were up only 1% over a year earlier. That's despite easy comparisons with last year's miserable results, a vigorous back-to-school environment, and a high-profile ad campaign starring Missy Elliott and Madonna. Greater buzz and customer feedback aren't yet paying off at the till. As analyst Richard E. Jaffe of UBS Investment Research argues: "Consumers are the worst people in the world to ask what they want." They don't know until they see it.

And at Gap, they're probably seeing products that could just as easily show up on the shelves of J.C. Penney (JCP ) Co. or Macy's (FD ). The fit is more predictable, thanks to consumer research that has simplified most of the women's pants designs into modern and classic styles. There are occasional hits, such as hot-pink coats, cropped corduroys, and the retro argyle look. There are even hot commercials, with Italian actor Raoul Bova strutting around shirtless in tight Gap jeans. But so far there are few clothes that distinguish Gap from offerings at other chains. And more frequent discounts may be training Gap customers to buy only during sales.

Having reached out for feedback, the challenge for Pressler is to woo customers with must-have clothes. Few dispute his marketing expertise, honed in running Disney's massive theme park and resorts unit. And Pressler is nothing if not confident, suggesting in a recent earnings call that "the dynamic mix of Madonna and Missy Elliott was frankly brilliant." But others wondered who those ads appeal to and note that few consumers think Madonna actually buys her pants at Gap.

In any case, growth ultimately will depend on Ferlisi's design team. Sure, she wants to find the next big thing. But her job is also to make sure the stores are well stocked with clothes in four main categories: "basics" such as T-shirts or underwear; "essential" wardrobe builders like black pants; "style" items that make customers feel current; and "trend" clothes aimed at the more daring consumer. The challenge, Ferlisi says, is to get the mix right while inspiring more purchases through better quality, fabrics, and details. She promises "brighter, happier" clothes next season, arguing that the chain can take more risks now that "the customer feels Gap is a trusted friend."

Maybe so. But Gap veterans know all too well that, when it comes to fashion, friendship is fleeting.

By Diane Brady in New York

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