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Gap Eyes Growth Online, Overseas

Gap Inc. told investors Thursday that it would open its first store in China and return to television advertising for its namesake stores.

Consumer apathy and product misfires aside, Gap Inc. says it is past the down and dirty turnaround work, has built the foundation to recapture lost shoppers and sees online and overseas expansions as top growth priorities.

And in a sign of confidence in its revamped product, Gap brand will return to TV advertising for the November-December holiday period after a two-year absence. These and other initiatives, including store prototypes and entering China next year with company-owned units, were outlined during a three-hour meeting with analysts Thursday.

“Now is the time for the business to stand up and really move forward,” declared Gap Inc. chairman and chief executive officer Glenn Murphy. “From a turnaround perspective, that work is done. There is definitely a bit of ‘we are walking a little taller.’ We have a lot to do still. We have a good plan. We know we have good people. Now we just have to continue to climb, continue to work hard. The confidence is just beginning to come back to the business. My commitment to you is we will not be complacent.”

Murphy recounted how Gap has rebuilt its economic model through process changes, cutting staff by 18 percent, reducing the cost of goods and raising cash, and has recruited senior-level talent after an exodus of executives. With new teams set and brand positioning clear across all the divisions, the organization will enter next year “much better prepared and focused,” Murphy said.

Phase Three has arrived, Murphy said. “It’s connecting with customers. We have to gain market share.…We need more people to cross the lease line.”

In his eyes, the road back began midyear with Old Navy, spurred by its “Supermodelquins” advertising campaign, showing improvement. But the buzz isn’t back yet at Gap and Banana Republic. Comparable-store sales for September were negative-8 percent at Gap North America; negative-12 percent at Banana Republic, and up 13 percent at Old Navy. For the second quarter, the company earned $228 million, or 33 cents a share on a diluted basis, compared with $229 million, or 32 cents a share, for the same period last year.

On the international front, “we definitely want to broaden our European presence. There are big countries that we are not in,” Murphy said, citing Italy, Spain and Germany, which Gap entered more than a decade ago but then pulled out. The company operates in 19 countries worldwide and soon will be in 25. An entry into China with Gap is set for fall 2010. Those stores will be corporate owned, not franchised like most of Gap’s overseas stores. In China, there is no strong presence by any American apparel brand, Murphy observed.

Banana Republic, which has a “very strong” flagship on London’s Regent Street, is considering three or four additional sites in London as well as one in Paris.

According to Sabrina Simmons, chief financial officer, Gap’s financial mission centers on earnings growth, a culture of ongoing cost management, generating strong free cash flow and improving the return on invested capital. But like others on her team, she stressed more time and attention must be devoted to elevating comp-store sales.

She said Gap Inc.’s square footage would decline about 2 percent in 2009; total square footage will be 10 percent down in the next five years.

On the other hand, marketing expenses are on the rise. At Gap and Old Navy combined, they will be up $45 million in the fourth quarter, after a $25 million increase in the third quarter.

Marka Hansen, Gap North America president, said the holiday message will revolve around a “big plaid statement” and “American cozy cabin.” She also said she’s committed to “right-sizing our overall square footage,” including combining adults’ and kids’ stores in the same mall into one unit.

Jack Calhoun, president of Banana Republic, said the division’s top priority is to “rebalance” its assortment to reflect weekend, work and going out for the evening. The plan is also to inject a touch of wit into the marketing and a “beautiful range of seasonal colors.” The collection has been too heavily work related, too serious and lacking color and versatility, Calhoun said.

However, he stressed: “This is not an overhaul [to] change everything. What’s consistent is the brand proposition — a global, accessible, luxury lifestyle brand. The target customer has not changed. They’re in their 30s and 40s, affluent and professional, knowledgeable about fashion, but it’s not the most important thing.” The right organization and cost structure are in place and the store fleet is about the right size, creating a “strong foundation” to revive the chain, he said. Banana launched a new store format in Las Vegas last month, which will be replicated in Scottsdale, Ariz., with an opening today, and again in SoHo in New York next month. Calhoun described the format as providing “a physical structure that allows us to interact with the customer in a different way.”

Old Navy president Tom Wyatt said the chain has scored lately with logo merchandise and a consistent value proposition and is resonating better with customers. “This brand is far from dead. I feel great about where we have taken it over the last 12 months.”

Old Navy also is rolling out a prototype, with nine operating and 55 expected to be by Nov. 7. They feature “an explosion of color throughout” and easier sight lines for navigating the store. In the next five years, Old Navy will reduce square footage by 10 percent. Jewelry, accessories and licensed product are seen as among the best growth categories.

“At this point, ‘Supermodelquins’ is resonating with the customer as well as, if not better than, any of our older campaigns,” Wyatt said. “‘Supermodelquins’ will be part of our life for many years to come.”

At Gap Inc. Direct, the online division, distribution to customers in Canada and the U.K. will begin next fall, with Gap, Banana Republic and Old Navy. Japan could follow, but no commitment has been made. The Piperlime online site will offer 100 brands by the end of the year, from the current 65. The site sells shoes and contemporary apparel.