DISAPPOINTING GAP INC. TO NARROW ITS SCOPE

Byline: Jennifer Weitzman

NEW YORK — To reclaim its position at the apex of specialty retailing, Gap Inc. needs to find a way for big, fast and focused to coexist.
Following Thursday’s disappointing earnings report, in which net income dropped 34 percent, Gap chief executive officer Millard Drexler said that among the chain’s missteps in 2000 was “trying to be all things to all people.” While the Gap’s merchandise got too broad and unfocused, Banana Republic was seen as unchanging over a three-year period. Old Navy suffered the worst of the three brands as merchandise got too dull and prices crept up.
Analysts noted that Gap had become akin to a specialty department store, offering a wide range of merchandise that appeals to no particular niche. Meanwhile, more nimble competitors — from American Eagle and Pacific Sunwear catering to teens, to Talbots and Chico’s catering to the more mature customer — posted far stronger results as they continued to zero in on a given demographic and even psychographic segments of the market.
Meanwhile, Gap reported negative comps in each quarter and earnings declined year-over-year in the last three quarters of the year, including a 34 percent drop to 31 cents a share in the fourth quarter. In addition, the company lowered earning estimates for the first quarter to between 10 and 15 cents a share, as comparable-store sales trends deteriorated further in February to about a 12 percent decline. Analysts, on average, were expecting the company to earn 20 cents.
In addition to correcting merchandise miscues, Drexler said the San Francisco-based retailer is trimming its store expansion plans from 20 percent to about 15 percent unit growth in 2002.
Reacting to the news, released after the markets closed Thursday, investors on Friday pulled down the price of Gap shares $2.26, or 8.7 percent, to close at $23.81 in New York Stock Exchange trading.
“Gap, Banana Republic and Old Navy are more sharply focused now on producing the right fashion, creating distinctive marketing and delivering consistent customer service,” Drexler said. “We’re also aggressively managing costs and improving internal management processes.”
Industry watchers point to Drexler’s skills as a merchandising aficionado, who can step in to correct these fashion missteps, especially now with more time to focus on fashion with John Lillie, a nine-year board member, named to serve as executive vice president.
Still, this is a huge task for a chain that, founded in 1969 as a single jeans store, has swelled to 3,676 units — 2,079 of them domestic Gap stores — and seen its core customer move from young baby boomer 10 or 15 years ago, to the current focus on those individuals’ young adult children.
In research notes, Anne-Maria Lillestand of Thomas Weisel Partners, pointed to Gap’s own admission that for both holiday 1999 and 2000, weak results were due to the lack of fashion items, resulting in steep markdowns. Similarly, she pointed to Old Navy’s unsuccessful merchandise strategy last year as being more directed to “mom and dad” and less dependent on the teen.
“Many consumers equate the Gap brand with basic merchandise and do not view Gap as a fashion destination and do not want to purchase a fashion-forward item at the Gap,” she said, adding that recent retail results “suggest that consumer psychographics are increasingly shifting toward more focused, nimble specialty retailers that target specific customer groups. In contrast, Gap’s three specialty retail concepts are currently positioned to target a relatively broad group of customers.”
Unlike the niche retailers, according to Lillestand, Gap has confused and, in some cases, alienated customers in both its fashions and its marketing.
In a research note, Todd Slater of Lazard Freres & Co. said that the Gap had its greatest success when it was a leader in basic commodities, supplying denim, khaki and twill. “Unless the Gap can transform itself into a leaner and more nimble company, and evolve into a ‘test and reorder’ model, I don’t see the Gap succeeding as a fashion leader,” he said. “A supertanker is unlikely to achieve success as an ocean racer.”
His three-part turnaround prescription: Fast, focused and fashion.
Dana Eisman Cohen with Banc of America Securities said the Gap should not try to become a niche player, but rather a middle of the road retailer. “We are talking about a company which could not have been hotter with its khaki campaign,” she said, suggesting basics sprinkled with fashion newness rather than either an only-basics or trendy approach.
“It ain’t about leather,” she said.
Robert Buchanan with A.G. Edwards & Sons said the Gap needs to get to know the customer better and that failure to do so has manifested itself in an overassortment on the floor. “I don’t see much in the way of conviction — driver items and sufficient depth of stock,” he said, “but rather little tentative bits here and there.”
Drexler said prices at the Gap, particularly its Old Navy division, became too high, despite a shift by consumers to value in the apparel market place. He also acknowledged the company’s need to offer new merchandise more speedily to keep customers coming back. Currently, merchandise flows into stores every six to eight weeks — not fast enough to meet the growing consumer demand for newness.
Arguing there is no quick fix, Maura Hunter Byrne of Salomon Smith Barney said the Gap needs to correctly market the basic items that have been its “bread and butter, while layering in fashion items appealing enough to drive core customers back.”