Old Navy May Still Be at Sea

Two years ago, Old Navy decided to try to recreate itself with a strategy that has become almost routine in modern retailing: hire a celebrity designer to confer new prominence on an uninspired brand. In September 2007, the giant apparel chain announced that Todd Oldham, who had already worked with Target (TGT), would be Old Navy's design creative director and develop a collection under his own name.

At first Oldham seemed like just the kind of designer to give Old Navy an edge. He's quirky and fun, he likes bold, bright colors, and he has an all-American sensibility. Which is how most people would have described Old Navy at its most successful. But before Oldham was halfway through his three-year contract, the partnership came apart at the seams, as it were, and eventually he was fired. (He and the company have countersued one another over the breach, and a federal judge in Manhattan may soon decide if the case will go to trial.)

What happened? Gap (GPS), which owns Old Navy, won't talk about it. But people who were there at the time say internal disagreements, management turmoil, and tanking sales prompted the company to ditch its designer strategy for a back-to-basics one that was easier to execute in hard times.

The question now is whether Old Navy did the right thing. It is true that in recent months store sales have improved. On Nov. 19 the company announced that autumn sales had increased by 10% from the previous year, the first time the business has grown since the spring of 2004. But some industry watchers are dubious the back-to-basics strategy will work as well once the economy revives. "Old Navy lacks an identity now," says Robert Burke, founder of his own retail consultancy. "A retailer needs buzz. Saying you're basic puts people to sleep. Even if a retailer says it's affordable, it has to be interesting."

NO DESIGN HERE, THANKSSince its founding in 1994 as a cheaper, more exuberant version of the Gap, Old Navy has been essentially a volume business. The retailer has some 1,000 stores that encompass almost 20 million square feet. Last year sales were $5.7 billion.

In a business like this, creativity is always tempered by pragmatism. Original design is not encouraged. Quite the contrary. Old Navy's designers practiced what they called competitive shopping: buying pieces from stores such as Neiman Marcus or Abercrombie & Fitch to show the season's trends. The company's all-powerful merchants—the more market-oriented executives—would look at the merchandise and decide what to adapt for Old Navy.

For a while, the strategy worked amazingly well. Old Navy made shopping on a budget fun for the first time: Its clothes were easy to wear without being utilitarian; its stores looked like old industrial lofts and sometimes featured DJs; its ads were campy. Five years after the first store opened, Old Navy's sales exceeded a billion dollars. But by the early part of this decade, other retailers developed their own approaches to cheap chic. The Swedish company H&M introduced its edgy clothes to America. Target brought in a new design aesthetic. Old Navy didn't change. Its clothes started to seem uninspired, its stores outdated. That could only last so long.

In late 2006 Dawn Robertson, an ambitious and forthright executive who had come up through the ranks at Federated Department Stores, joined Old Navy as president. She modernized the company, speeding up the time it took for clothes to go from drawing board to rack. The retailer was finally going to join the world of fast fashion. Robertson also decided to abandon Old Navy's focus on price-conscious moms, a group every other mass retailer was chasing. Instead, Old Navy would make clothes for young, fashion-conscious women.

To make that work, Old Navy needed to shake up its designers. Many other companies had already been there, collaborating with big names in fashion. Sometimes such tie-ups turned out to be nothing more than a lark. (Did you see Madonna's collection for H&M?) But others, such as Target's arrangement with Isaac Mizrahi, worked wonderfully. Robertson put out the word that she was looking to appeal to a younger, hipper crowd, and in the summer of 2007, Oldham visited the San Francisco headquarters to discuss a possible partnership.

Over the course of his career, Oldham, now 48, had moved from designing women's couture to creating dorm-room accessories for Target, designing furniture for La-Z-Boy, and hosting a show on Bravo. He was eager to try fast fashion and was reassured by how serious Gap was about bringing a new sensibility to Old Navy. "I was asked to join a company whose focus was to clothe 25-year-olds in smart, chic, fashionable ideas for a great price," Oldham says.

Although harnessing the power of a celebrity designer was by then common, few retailers had tried it the way Old Navy set out to. Usually designers put together a line of their own or create a one-time collection to get people talking. Either way, they are fairly isolated from the everyday workings of the company. Oldham, however, who traveled back and forth between New York and San Francisco, was supposed to inspire and motivate the designers in any way he saw fit. The idea of a well-known fashion figure hovering over the entire creative process at a retailer the size of Old Navy was an altogether different undertaking, one that would require finesse and tenacity.

Changing Old Navy's attitude toward design was going to be a challenge, especially for someone working part-time and without any direct authority or reliable means of persuasion. To spark designers' imaginations, Oldham created a library of fashion monographs, old magazines, and catalogs that reflected his aesthetic: bold, colorful, retro. He showed a marching band uniform, a varsity sweater; he combined a Fifties prom skirt with a ski sweater from the Seventies. "My ideas weren't supposed to go into the stores," Oldham says. "What inspires a designer might horrify a merchant. My goal was to inspire the designers to create something appropriate for the merchants."

But it quickly became clear that some of Old Navy's more literal-minded merchants were skeptical that the designers could interpret Oldham's ideas. "Right from the beginning, I sensed that Todd wasn't the right fit," says David Fox, who returned to Old Navy in November 2007 after a three-year absence specifically to work with Oldham. "As much as the company may want to be creatively driven, it hasn't ever been. It wasn't then. It isn't now. In order to be successful there, you have to understand that."

As 2008 began, the recession was taking hold, and Old Navy's sales during the holiday season had been discouraging. By then Gap had a new CEO, Glenn K. Murphy, who had previously run Canada's largest chain of drugstores. Insiders say the more aspirational strategy Murphy had inherited went against his instincts and that he felt the necessary cultural shift would be too hard to pull off. Murphy decided to make some changes.

In February, after 16 months as Old Navy president, Robertson announced her departure. Many were shocked. "[The leadership] bought into Dawn's premise from Day One," says Sheryl Clark, who has since left as the merchandising chief. "I sat in the board meetings. We looked them in the eyes and told them who we were going after. Someone else might have made adjustments. We didn't evolve it, we tossed it. It was a fast death."

Robertson was replaced by Tom Wyatt, genial and soft-spoken, who in his two years at Gap had been president of GapBody and the outlet division. He took the position at Old Navy on an interim basis with orders to rethink who the customer should be. It turned out to be "Jenny," a 25- to 35-year-old recession-weary mom who shops for her family first, then herself. Most people quickly readjusted. In March 2008 sales had plunged a shocking 27% from the previous year. The disaster seemed to justify a change in strategy.

Old Navy's experiment with fast fashion was over, and Oldham found himself without a powerful advocate at a time of great flux. Some key executives began to openly dismiss his ideas as too retro, or too expensive, or too eccentric. One detractor, say several who were there, was Michael Ingram Jones, a self-assured and well-regarded executive who led the women's design team. "Todd never lost his passion, but he became less relevant," says Fox, who also is no longer with the company. "There were two visionaries in conflict." (Ingram Jones declined to comment.)

That spring, as Bear Stearns collapsed, anxiety grew, and Old Navy's sales remained dismal, Oldham began to press Wyatt about the launch of his own line. His contract required Old Navy to come to terms about a licensing agreement by October 2008. That didn't happen, and on Feb. 18, Oldham sued Old Navy for not keeping its promise. The retailer fired Oldham two days later by e-mail. The two sides remain at legal loggerheads, though a settlement is not impossible.

In October, Wyatt, by then officially Old Navy's president, told analysts that identifying Jenny "helped us calm and really focus the team." The question is how long the strategy can sustain the retailer. Old Navy may have returned to where it is most comfortable, but that's exactly where it got into trouble before. When the economy improves, the company may find that all it has to talk about is price. Christine Chen, a retail analyst at Needham, says she generally supports the company's direction. But she adds: "Old Navy could have given the [Oldham] collaboration a little more time. A major overhaul like that takes time for customers to figure out." Old Navy may still come to regret its midcourse correction.

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