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Gap’s Transition

The numbers gap at Gap Inc. finally began to close in the final months of 2002, but not before Gap amassed 2 1/2 years of negative same-store sales results and pushed out legendary chief executive, "merchandise maestro" Millard "Mickey"...

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The numbers gap at Gap Inc. finally began to close in the final months of 2002, but not before Gap amassed 2 1/2 years of negative same-store sales results and pushed out legendary chief executive, “merchandise maestro” Millard “Mickey” Drexler.

Its fortunes can be easily read in the performance of its stock. Riding high on the strength of the casual explosion in April 2000, shares passed the $50 mark before word of the first of the comparable-store declines arrived that month. By early October of this year, shares had lost 80 percent of their value and reached a 52-week, and multiyear, low of $8.35. Since then, with the return of positive comps and concrete actions by new ceo Paul Pressler, the rebound has taken the stock back up more than $15.

The picture was vastly different as the nation’s largest apparel specialty chain, with revenues exceeding $13.85 billion, crawled out of the starting gate this year. Its stores were plagued with uninspired and deeply discounted clothing, its three nameplates — Gap, Old Navy and Banana Republic — were barely distinguishable from each other, its debt ratings had been lowered and its once omnipresent advertising had both evaporated and become predictable. Almost unthinkable in 1999, when it earned $1.13 billion, it actually lost money in fiscal 2001, albeit the relatively modest sum of $7.8 million.

With Drexler still at the helm, Gap announced at the beginning of the year it would be getting away from trendy fashion and back to the basics — both in its merchandising and in the operation of its mammoth organization. But Gap warned that the turnaround at its San Francisco headquarters and its 3,158 locations would be an exasperating and time-consuming process, with visible in-store change not expected until the fall.

Drexler wouldn’t be there to see the process through. He announced his plans to retire as president and ceo on May 21, ending 19 years with the firm and months of speculation about how long he could weather what, at the time, appeared to be a meltdown. “I’m very proud that I was able to dress America in great-looking apparel and accessories for so many years,” he said that day. “I don’t know if any company or brand could say that.”

Speculation about Drexler’s successor was heated and immediate, including a roster of names that reads like a Who’s Who in Fashion Merchandising. A little more than a month after the Sept. 26 announcement that Pressler, the chairman of Walt Disney Co.’s global theme park business, would trade in his mouse ears for the Gap gavel, the company announced that its October same-store sales results had broken a 30-month losing streak. October comps rose 11 percent and, lest anyone consider it a one-time event, were followed just last week with a 9 percent gain in November comps. All three nameplates comped positively in both months, but, probably indicative of the current emphasis on value, none more dramatically than Old Navy, which leapt 24 percent in October and 15 percent in November.

Other executive changes at Gap include the appointment of Gary Muto as president of Gap U.S., while Maureen Chiquet, executive vice president of merchandising for Old Navy, succeeded Muto as president of Banana Republic.

The last person to hold the title of Gap divisional president was Ken Pilot, who ran Gap International before becoming chief executive of J. Crew Group Inc. on Sept. 9. (Drexler filled in as president of the Gap division.) In addition, John Lillie retired in November as vice chairman and relinquished his seat on Gap’s board after 10 years as a director.

Just last month, Gap may have provided the best evidence yet that it had gotten its groove back and gotten its arms around its business. It said Nov. 14 that it had completed a trio of consecutive profitable quarters after suffering three straight quarterly losses in reporting its first earnings improvement in more than two years. The last time Gap had posted an earnings increase was in the first quarter of 2000.

Gap reported third-quarter earnings fattened to $135.3 million, or 15 cents a diluted share, beating Wall Street’s raised expectations by a penny and reversing a year-ago loss of $178.8 million, or 21 cents. Net sales for the quarter increased 9.3 percent, to $3.64 billion from $3.33 billion in last year’s quarter, and rose 2 percent on a comp basis versus a 17 percent decrease last year and an 8 percent dip in 2000.

Gross margins rallied to 36.1 percent, a 760 basis point improvement, mostly because of higher merchandise margins as a result of lower markdowns, an increase in regular price selling and better customer response to the company’s new, revitalized flow of core basics.

At the same time, it did what was once unthinkable — announce a planned reduction in net square footage for the coming year. Most of its new space in 2003 will be dedicated to Old Navy.

While the improvement reflects the swan song of the Drexler era more than it does Pressler’s honeymoon, the latter’s operational expertise, combined with his determination to let each brand steer its own fashion image, seems to have bolstered the confidence of the financial community in the prospects for a continued turnaround.

Increased advertising, and increasingly amusing advertising, has helped expand sales in recent months and appears to be doing the same for holiday.

At Old Navy, a strong response to two circulars and a quirky new TV ad campaign focusing on basic items helped produce double-digit comp results.

Gap division’s “For Every Generation” campaign has lured back some former customers, analysts say. The roster of recruited baby boomers for the ads has included Laird recruited celebrities such as Willie Nelson, Whoopi Goldberg, Kelly Klein, Lauren Hutton, Salma Hayek, Polly Mellen, Wayne Gretzky, Alek Wek, Natalie Imbruglia, Christian Slater, Gene Rowlands and Sissy Spacek. The hiring of Laird & Co. for a broad range of marketing communications services should help all marketing efforts mesh.

In addition, it recently announced it hired Leo Burnett USA as a “strategic branding partner” for Gap and Banana Republic brands.

The resurrection isn’t completed, but it’s clearly under way and could become one of apparel’s outstanding turnarounds and a fitting tribute to departed ceo Drexler, whose plans and whereabouts remain the subject of continuous market discussion.

“The 30 percent additional investment in advertising this holiday will be the key driver of holiday sales,” Richard Jaffe, a retail analyst with UBS Warburg, wrote in research notes. “With a similar 30 percent increase in fourth-quarter ad spending anticipated and a more focused merchandise assortment, more closely linked to the market effort, I believe Gap has the means to further accelerate its improvement in performance.”

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