By  on March 12, 2009

NEW YORK — Gap Inc. chairman and chief executive officer Glenn Murphy uttered many mea culpas during a speech Thursday at the Bank of America 2009 Consumer Conference. Among the company’s sins: not exciting consumers enough to lure them into stores, being overly confident in the brick-and-mortar channel and not wielding Gap’s considerable buying power to negotiate better prices from manufacturers.

“We have not played the hand we’ve been given as well as we should have,” Murphy said. “We’re fixing the North American business. The market leader should never lose market share. We’ve been losing market share for the last couple of years. It’s unacceptable.”

Sales at Gap Inc. decreased 8 percent in 2008 and comp-store sales dropped 12 percent compared with a 4 percent slide the prior year. In the fourth quarter, Gap Inc.’s comp-store sales declined 14 percent, compared with a decrease of 3 percent in the fourth quarter of last year.

“Part of that is the macroeconomic environment,” Murphy said. “A large part of that is us. We have to stop the erosion of market share.”

Apparel at Gap has been criticized as being alternately too fashion-oriented or too basic. “We’ve returned to classics,” Murphy said, “categories we feel are very sought after. Denim is a key driver of the overall brand. In late summer, we’ll come back with a very serious proactive marketing push for denim. As the basic-classic business becomes stronger, we’ll look at more fashion elements.”

Banana Republic’s clothes “got too serious,” Murphy said. “They lost that cool factor, that edgy factor. That’s easily correctable. I’m disappointed it happened. The brand is still a significant and important part of our portfolio.”

Old Navy hasn’t lived up to its promise either, according to Murphy. “These are times when Old Navy should be gaining market share,” he said. “The fact that it was not in tip-top shape in 2008 is a huge disappointment to me and the organization.” Nonetheless, a new advertising campaign for Old Navy launched this month and includes TV commercials, print circulars and online ads.

Because of the company’s long-running problems, Gap Inc. has put off updating its fleet of stores. That’s no longer possible. “We don’t have a store that customers walk into and go, ‘wow,’” he said. “When Old Navy was designed in 1994, it was revolutionary, for sure, and different. The fact is that we redid the store in 2008 and it’s almost identical to the one launched in 1994. Shame on us.”

Old Navy is already testing two prototypes. Gap will unveil new store designs in the third quarter and Banana Republic’s first test stores and a new outlet store design will launch in the summer. “The Achilles’ heel of our organization has been traffic,” Murphy said. “For the last five years, we haven’t been able to get people to come in the door. We have to go and get the traffic. We have to speak to people. There will be a shift in our marketing. We have to become more proactive.”


The online and international businesses both grew by $500 million last year. E-commerce has a universality platform with all four brands. Athleta, the women’s activewear brand Gap bought six months ago, will become the fifth brand. “The women’s athletic market is worth $30 billion,” Murphy said, noting that 72 percent of Gap’s customers are women. “We have to drive more eyeballs to Athleta and then consider other opportunities. There could be a sixth brand in our future.”

With 125 stores, Gap’s international business is underdeveloped. About 60 franchised Gap stores will bow this year and Banana Republic could go to Japan and the United Kingdom.

The outlet division’s 300 stores have the highest sales per square foot in the company and give the highest return on investment. “There is a huge opportunity to take that business global,” Murphy said.

Gap Inc. decreased its capital expenditure by 37 percent, or $250 million, in 2008. “Balance sheets are increasingly important,” Murphy said. “We generated almost $1 billion in free cash flow in 2008. We returned about $1 billion to shareholders. We have no debt and are sitting on $1.8 billion of cash.”

Murphy wants to negotiate lower rents with landlords of Gap Inc.’s 2,800 North American stores. In addition, stores will be closed and downsized. “We have 40 million square feet [of retail space],” he said. “Getting concessions and reductions in rent as [leases] come up for renewal” makes sense.

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