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Gap Inc.’s Recovery Plan: New Format, Markets and Decor

Gap Inc., seeking to combat disappointing results and reinvigorate the divisions, laid out an aggressive agenda for growth across several fronts.

NEW YORK — Gap Inc. on Thursday revealed a new look, a new brand and a slew of other initiatives aimed at reinvigorating its flagging performance.

Among the priorities: stepping up international growth, including entering China and smaller countries, and ramping up the capital expenditure for both store openings, particularly Old Navy, and for remodels, especially the Gap brand. Capital expenditures will rise to $625 million through 2006 and to $725 million in 2007, compared with $450 million last year.

In addition, the company is projecting $1.41 to $1.45 in earnings per share for 2005, and a 12 percent gain in EPS in 2006. The company will also increase dividend per share.

The Gap brand debuts a prototype today in seven Denver locations (for more on the prototype, see accompanying story). “We consider this the expression of our store of the future,” Paul Pressler, president and chief executive officer, said at the company’s first analysts’ day in San Francisco on Thursday.

Also, Pressler announced that its fourth brand, which will appeal to Boomer women aged 35 and older, will be called Forth & Towne and will open four stores in Chicago and one in New York next fall. Each store will be 8,000 to 10,000 square feet, offer a broad range of styles, with price points below traditional department stores and somewhere between Gap and Banana Republic. While the name tries to evoke a sense of place, the inspiration for the concept comes from the old grand dame department store flagships of bygone eras, with high service standards and lots of selection.

With its historically huge emphasis on sportswear, the company plans to devote greater space to petites, handbags, jewelry and personal care at Banana Republic, which expects to have five freestanding petite units by the end of this year.

Officials also want to do a better job tailoring the merchandise to better meet local demands in the U.S. and abroad.

The growth agenda suggests a company that’s trying to be less dictatorial and less cookie-cutter in approach. Pressler stressed Gap has begun seeking greater input from consumers and store managers on products and styles, and is willing to spend big to overhaul the fleet.

However, the company is struggling to recover the stature it had through the Eighties and up to a few years ago as the leading American casual sportswear and jeans chains. It’s been criticized for presenting stale merchandise, missing trends, and suffering from a talent drain.

“We’re disappointed with recent results,” Pressler told analysts during his opening remarks, which were followed by break-out sessions with Gap’s divisional leaders.

However, Pressler added that during the two-and-a-half years since he took the helm, the $16 billion, 35-year-old company has achieved healthy margins and earnings and has “laid a solid foundation for growth as evidenced by solid operating performance and a strong balance sheet.”

He emphasized that the 3,000-unit Gap needs to do a lot more than just improve the product offering and is eliciting feedback from customers and store managers, in a departure from the company’s reputation as well as Pressler’s own reputation for being more of a financial and operations oriented executive and less a merchant.

“It all starts with product, delivered through engaging shopping experiences,” Pressler said. “Customers care about a satisfying shopping experience as much as they do about product. We know what it takes to win….We’ll walk customers through the product line before merchants make the buy.”

He cited sweater weights, buys on particular colors, and Old Navy tunic displays as being adjusted to some degree based on customer input. Focus groups are also helping to shape the buys and how merchandise is presented in the stores.

As far as the merchandise, “We’re refocusing the brand aesthetic on fresh, casual American style.”

To help localize the offering, the company this year is installing a Retek inventory system. “The single most important [IT] initiative is the replacement of inventory systems with Retek applications,” said Byron Pollitt, chief financial officer. “It will give us the transparency to our inventory and the ability to manipulate our inventory that will drive our localization strategy.” The hope with greater localization in terms of size and style is that the company sells more goods at regular price and has less promotions.

Discussing expansion, Pressler said Old Navy will open 200 stores in North America through 2007, net of closures. Another 60 Gap stores are planned for the period.

On international expansion, at least 50 stores are seen opening through 2007, including bringing Banana Republic to Tokyo this fall. Gap Inc. has 250 stores in Japan, France and the U.K.

“We plan to expand to new countries, with franchises in smaller countries,” Pressler said. “In 2006, we’ll explore opportunities to enter China.” That entails introducing a franchising model.

Pollitt said that the company conducted a “rigorous analysis” of where to open Old Navy units, based on reviews of sales and zip codes, psychographics, competitors, demographics, and effects of cannibalization of existing stores. The corporation has already gone through some major rationalization of the store base.

Gap is also looking to convert more Web site browsers into customers. Pollitt said an estimated 35 percent of customers who visit the site do so to preshop in advance of store visits. “This represents a huge opportunity for conversion,” he said.

Also, Pressler introduced several key executives running divisions, including Gap brand president Cynthia Harriss, who was appointed on Monday. He cited her extensive background in retailing, on both the operations and merchandise sides, and talked up other important executives, seemingly to address what has been some market concerns about a talent drain at Gap.

The specialty retailer earned $370 million, or 40 cents a diluted share, in the fourth quarter, compared with $356 million, or 37 cents, last year, just meeting analysts expectations. Sales in the quarter were $4.9 billion, up 0.3 percent from the same period last year, while same-store sales fell by 3 percent. In the year, Gap earned $1.1 billion, against $1.03 billion the year before.