NEW YORK — Gap Inc. this week disclosed it will target women aged 35 and older with a new concept, but its president and chief executive Paul Pressler on Wednesday acknowledged it could be up to two years before there is any significant rollout of the format.
While Gap disclosed few details about the new division, up to 10 stores are seen opening in fall 2005 in two regions of the country and they will undergo at least a couple of seasons of testing before a decision on a more aggressive rollout is made, said Pressler.
The concept’s development comes as there are growing questions over the long-term growth prospects of Gap Inc.’s existing brands — Gap, Old Navy and Banana Republic — and sales growth has slowed recently at the group, especially at Gap brand. But Pressler believes the business is in good enough shape to introduce another concept.
“The past two years have been spent restoring the health and credibility of our management team and fixing our balance sheet,” said Pressler in an interview Wednesday. “I believe we have earned that trust with shareholders and now we are beginning to explore the growth potential for this company.” He added, “We are exploring lots of ideas on how to grow.”
He also said he prefers a “general manager,” rather than a merchant or product specialist, to succeed Gary Muto, president of Gap brand, who has been reassigned to launch the new, yet-to-be-named division. In the second quarter ended July 31, sales at Gap brand remained flat at $1.2 billion, while Old Navy sales rose 6.7 percent to $1.6 billion and Banana Republic sales rose 6.2 percent to $528 million.
Gap Inc. saw earnings slide 7.2 percent to $194 million, and overall sales inch up 1 percent to $3.72 billion. The international division continued to show difficulty, falling 4.9 percent to $445 million.
For August, a tough month for many retailers, Gap reported flat sales at Gap brand and Banana Republic, and down 1 percent at Old Navy.
While there are perceptions that Gap’s existing operations have maxed out, and investor demands (in particular from Gap’s biggest shareholder, the Fisher family) are mounting for developing expansion strategies and lifting the stock price, Pressler said, “We are not under significant pressure to grow. We have huge growth opportunities in our existing businesses, and we are planning and considering other concepts.”
Further downplaying reports of investor pressures, Pressler added, “We feel we have to take, and will take, a very disciplined and conservative approach to building value for our shareholders.”
But playing to investors, Gap first released its plan to start the new division to The Wall Street Journal, which ran a story on it Wednesday. Gap’s stock rose fractionally on the news that day, up 15 cents to $20.17 on the New York Stock Exchange.
Recently, Merrill Lynch analyst Mark Friedman downgraded Gap’s rating to “neutral” from “buy” amid concerns about lackluster early fall sales trends and what he described as an “uninspiring product assortment for fall.’’ But Pressler stressed that balance sheet improvements have led to a better debt outlook and that “most importantly,” credit ratings have improved.
In a vote of confidence on Wednesday, Wells Fargo Securities, in a report by analyst Mark Montagna, reiterated its “buy” rating with a 12-month stock price target of $26. Montagna also wrote that he believes the company is hitting its sales and profit plans for the second half of ’04.
Muto and the new division will be based in New York. That’s a switch for Gap, which has headquarters and all divisions based in San Francisco, with the exception of design offices in New York. “The entire brand will be developed in New York,” Pressler said. “We feel there is value in having one team in one location. That’s not to say [the new division] is not going to leverage the mother ship.”
He said the company is “knee deep” in developing the division’s product lines and store design, and the number one priority is to build the team.
With the Gap division, “Gary built a tremendous team and I have tremendous confidence in its leadership,” Pressler said. “I have the luxury of looking for a broad general manager, a great leader with great taste who can integrate teams and run a complex business, as opposed to someone who can purely drive the product vision. We have that already with Julie Rosen, Pina Ferlisi and Jeff Jones,” the executive vice presidents over merchandising, design and marketing, respectively. He also cited Lee Bird, the division’s chief operating officer.
The company has retained the executive search firm Egon Zehnder International to find a successor to Muto, and will consider candidates from outside retailing. “Seeking a rounded general manager is one of my top one or two priorities. We don’t want to rush it,” Pressler said. There was some speculation that Andrew Rolfe, president of the company’s international division, was one candidate. Muto will continue to assist at Gap brand while working on the new format.
In addressing an older demographic, Gap is going right after chains like Chico’s, which has been one of the most consistently successful retailers over the last several years.
Asked why Gap announced the formation of the new division far in advance of its store openings, Pressler responded that the company needed to address a demographic that has received much press for being under-served and that it was important to inform the investment community about the fate of Muto, “one of our most senior executives.”
In contrast, Abercrombie & Fitch disclosed details about its new Ruehl division, geared to 22- to 30-year-olds, just a few days before the first Ruehl store opened.
Like Ruehl, Banana Republic addresses an older customer compared with Old Navy or Gap, but Pressler said that BR’s core audience ranges from 25 to 35. “That’s not to say it doesn’t halo older and younger customers,” Pressler noted, adding that he didn’t want to “dilute” its appeal by broadening the target audience. “Gap Inc. in total under-penetrates the 35-plus market,” Pressler said.
Muto said he never launched a retail division, though he also said that in his 16 years with Gap Inc., he started up several categories of merchandise, including plus sizes, maternity and khakis at Gap, as well as accessories, shoes and petites at Banana Republic.