CURING WHAT AILS THE GAP
THE SAN FRANCISCO-BASED RETAILER’S CEO HAS THE PRESCRIPTION: A BIG DOSE OF FASHION, EASY ON THE BASICS.

Byline: Kristin Larson / Rusty Williamson / With contributions from Jennifer Weitzman

We were an elephant,” Mickey Drexler, Gap Inc.’s chief executive and one of the industry’s most respected merchants, said of his trio of chains after a string of dismal quarters.
Gap’s misfortunes were reflected in its 17 percent plunge in same-store sales in August, its largest decline in three years.
He cited the more mature Gap stores in particular for resting too long on their basics while trends passed them by.
Are the Gap’s problems of pachyderm proportions, or is turnaround just a hot trend away?
It’s a complicated question. Some feel name recognition and consumer following remains strong, and the Gap chain will soon reverse plummeting profitability and regain their dynamic stance. But Gap stores specifically are a victim of overexpansion and competition and face a difficult road ahead.
Drexler, who made khakis and five-pocket jeans the signature Gap look, admitted during the company’s second-quarter conference call, “We stayed with the five-pocket and same old stuff. The one thing about the Gap brand…we could run as fast as any of them in terms of owning business and we handed off a lot of denim business in the last few years.
“We have been an elephant, and elephants are fast runners. But in any case, we’ve been slow on that and we’ve got to move.”
In a consumer climate driven by 20-to-30-year-olds with a thirst for fast-breaking fashion items at value prices, Gap has to restore the vitality more than three decades after it opened as a San Francisco counterculture denim and music store.
The company aims to attract baby boomers and Generation X’ers via trendier merchandise, a big push on TV and print ads and updated-looking stores.
Gap’s core product category — denim — is enjoying a sizzling fashion moment right now.
The ceo plans to make key fashion items — such as denim in a variety of washes — Gap’s primary focus. It also wants to replace its reputation as the place to shop for basics.
“What really made us who we are in terms of our three brands has always been the ability to interpret an item that might be considered a somewhat simple kind of fashion basic,” said Drexler. “But we stuck too long with certain basics.
“We thought we were pretty aggressive in moving more inventory into so-called new basics and new fashion, and perhaps we could have gone a little further. “
The company is also focused on brand positioning at Old Navy and Banana Republic, Drexler said, offering “fun fashion at value” looks at Old Navy and more relaxed career separates at Banana. For all divisions, the firm is committed to delivering “newness and style to customers faster than ever before,” Drexler said.
Starting with fall 2002, the company has shaved off two months of production time at Gap and Old Navy and one month at Banana. The company is also committing less to inventory up front, resulting in greater open-to-buy flexibility to respond to fashion trends quicker.
“For example, Old Navy has been blowing out of corduroy and denim blazers the second quarter, so we quickly increased our buys for fourth quarter and added two more styles. That kind of response action is a given in terms of this environment and we’re working very hard to accomplish that,” he said. “Our basics investment over time, really tied down some of the inventory and made us much more sluggish in spending dollars for newness.”
Advertising has always been key for driving home the message about Gap’s new fashion product. Recently launched TV ads feature offbeat musicians like Daft Punk, actresses Juliette Lewis and Shannyn Sossamon, deejays Shortkut and Rob Swift, and “Saturday Night Live” actor Will Ferrell.
The company has also seen success with Old Navy’s “Get this Look” campaign, in particular with the miniskirt.
Still, fashion is not offsetting basics business at Gap. Drexler said it’s all about finding the right balance between fashion and basics.
“We always built business on being key-item merchants and we’ll continue and intensify that effort,” he said. “I’m challenging our merchants to take risks and push the envelope and have a much stronger point of view on these items. I think over time our business has become too formulaic.”
In August, the company saw its earnings per share decrease 43 percent to $0.12, compared with $0.21 the prior year. While net sales for the second quarter rose 10 percent to $3.2 billion, net earnings decreased 51 percent to $90 million. Comparable-store sales for the period dropped 9 percent.
In the year ended Feb. 3, Gap earnings decreased 22 percent to $877 million, or $1 a share, compared with $1.1 billion, or $1.26, last year. Sales rose 18 percent to $13.7 billion.
The second-quarter sales call came one week after the company announced the layoff of 800 employees, eliminating 1,300 positions. The layoffs represented a 10 percent staff reduction from the prior year and exceeded original plans to reduce staff by 5 to 7 percent.
Commenting on the third quarter, chief financial officer Heidi Kunz said Gap is experiencing a continuation of July’s difficult sales trends and projected third-quarter sales trends to improve from month-to-date levels.
Wall Street analysts point to the lagging economy that has prompted a change in consumer taste away from basics toward more trendy merchandise.
“Consumer preferences have shifted to more distinguished merchandise and specialty retailers that target specific customer niches,” said Anne-Marie Lillestrand at Thomas Weisel Partners. “Gap is not positioned to respond because they have too many stores.”
She noted that Gap garners a 6 percent share of U.S. retail apparel sales, with 3,800 stores worldwide. Gap is adding 3.5 million square feet next year.
“I don’t think Gap’s fashion is going to work. Gap is most successful when it is a key-item, basic-driven business,” Lillestrand said. “But that is commodity business today, with so much denim.”
She pointed to Old Navy’s second-quarter sales decline in the midteens, despite new fall merchandise and marketing campaigns.
Jennifer Black at Wells Fargo Van Kasper said: “I think it is going to take nine months to a year to turn the company around. Even though management said women’s fall merchandise was strong, I believe the merchandise is not suited to the core Gap customer and it is not going to be enough to compensate for shortfalls in other brands and merchandise categories.”
Despite Gap’s consumer identity crisis and punishing sales, other Wall Street analysts still believe in its long-term viability. They cite Gap’s new focus on fashion and reconfigured executive team, including new chief operating officer John Lillie and new merchandising and design managers, as proof that Drexler is serious about turning around the $13.6 billion corporation.
“Gap Inc. is wisely rebalancing the point of view of the company in many ways — the leadership especially needed to be more balanced,” said Richard Jaffe, analyst at UBS Warburg in New York.
Jaffe said the Lillie’s appointment will allow Drexler to focus more sharply on merchandising and marketing.
“For a year, Drexler tried to run the company while playing too many roles and it detracted him from being a good merchant,” Jaffe said. “With changes in the merchandising team, the new focus on fashion and their broadcast and print advertising campaigns, the company remains a turnaround story. But it’s not a quick fix. It’s a big ship to turn around.”
Other analysts praised Gap for taking a more narrow focus on its target demographic.
“The Gap has to have more youth appeal,” said Jeffrey Klinefelter, analyst at UBBancorp Piper Jaffray, New York. “They need to focus more on their target demographic, the 20- to 30-year-old fashion customer.”
Liz Pierce, analyst at Wedbush Morgan Securities, Los Angeles, said despite difficulties, the Gap brand remains strong.
“The Gap still has a great ID among consumers,” Pierce said. “But most of the activity occurs at the back of the store on the promotional racks.
“For fall, they have a nice presentation of denim and they’ve done a good job of narrowing their fashion focus. I’d like to see more variation in women’s tops. There’s still a lack of cohesiveness in fashion assortments. They’re trying to please too many people.”
Kurt Barnard, president of Barnard’s Retail Marketing Report, said the Gap as it stands now cannot be revitalized.
“The only thing that can help the Gap is for it to reinvent itself and emerge with a new incarnation that hits the public’s chord with the harmony that the invention of Old Navy did,” he said. “If that doesn’t happen, the Gap will have to get used to being one of many.”
Barnard said Gap must return to its iconoclastic beginnings and recharm consumers with a unique retail perspective.
“The Gap started as something novel and the world flocked to see it,” he said. “They grew enormously based on being unique. The rest of the retailing world scratched its head and tried to figure out what the Gap was doing, and when they figured it out, they did it better.”
But with the new merchandise mix, the large assortment of denim in a variety of washes and at lower prices, Mark Minsky, general merchandise manager of men’s, women’s and children’s sportswear at The Doneger Group in New York, said he’s confident the Gap will turn around.
“I think they’re just going through a time when the cycle of business is making it more difficult for them to do what they did in the past,” Minsky said. “The junior sportswear business as of today and recent past has been the most fast-moving and positive-trending business. Today versus four or six months ago, you see a lot more trendy women’s merchandise.”
Minsky said this is a good starting point — offering more price-driven fashion.
“The store looks good today,” he said. “The next step is more clearly defining differences between Old Navy and Gap and going after those individual customer bases. Banana has clearly identified its customer base and it’s more sophisticated and dressier than Gap and Old Navy.”
Few would dispute Gap’s status as an American retail icon. Adam Lippes, vice president and creative director at Oscar de la Renta, recalled a time when celebrities would go to events in Gap separates — a la Sharon Stone at the Oscars. Vogue magazine put 10 supermodels on its 100th anniversary cover in April 1992. What were they wearing? Gap white T-shirts and jeans.
“When it started, it brought the best basics,” Lippes said. “You could be assured of looking simple and great and they were the perfect khakis, perfect turtlenecks, perfect separates.”
But as the Gap grew bigger, Lippes wonders if it lost focus, while new competition arose in stores like Zara, H&M and Club Monaco.
“You walk into Gucci now and there’s 150 white V-neck T-shirts. Who did white T-shirts better 20 years ago than the Gap?” Lippes asked. “The Gap has always been the first. They need to focus on being the first with the perfect basic — and figuring out what the perfect basic is today. It’s such a big challenge.”
When the Gap first emerged, it represented the young activist baby boomer generation, said Marc Gobe, president and executive creative director of DG, a branding firm here. Gobe said it should go back to its roots and focus on capturing the youth of this generation, or Generation Y, which represents 72 million people in the U.S.
“That’s where the Gap started. It was about Generation Gap,” said Gobe, who also authored “Emotional Branding,” a book that explores ties between brands and emotional needs. “But along the way, they became more conservative.”
Following in this vein, Gobe said Gap’s merchandise focus should be denim and items that appeal to this youthful, individualistic group. Stores should be hip and contemporary — as opposed to neutral, as they’ve been.
“They really need to clarify,” Gobe said. Gobe sees the challenge as a tremendous opportunity for Gap — mainly because of its strong emotional connection with its customers.
“They have to find what kind of emotional communication they want to relate, but they have to be careful not to focus on warm and fuzzy, when Generation Y is interested in fun and sexy,” he said.
Ellis Verdi, owner, DeVito/Verdi advertising agency here, said the company should have a take-charge approach with advertising and branding.
“Their advertising has been a reflection of product and not taking it a step further,” Verdi said. “They need to make a statement and get to a concept. A brand requires support especially when you want to maintain the fashion aspect.”
Vogue contributing editor Andre Leon Talley said he thinks Gap should reembrace its cross-cultural roots and portray global diversity in ad campaigns.
“The Gap has become too homogenous and lost its way in the mainstream. There used to be an effervescence to their whole approach: the fashion, the merchandising and those clean Avedonesque ads,” Talley said. “The Gap was one of the first big fashion companies to distill a sense of global harmony and celebrate ethnic diversity.
“The real front-runner in that arena was Benetton. But then Gap came along and made it understandable to the average consumer. The Gap needs to return to those roots in a sense, but update their fashion direction.”