Old Navy May Still Be at Sea

Inside Old Navy's foray into fashion, its bruising strategy switch, and its very public breakup with designer Todd Oldham

By Susan Berfield

Two years ago, Old Navy decided to try to recreate itself with a strategy that has become almost routine in modern retailing: hire a celebrity designer to confer new prominence on an uninspired brand. In September 2007, the giant apparel chain announced that Todd Oldham, who had already worked with Target (TGT), would be Old Navy's design creative director and develop a collection under his own name.

At first Oldham seemed like just the kind of designer to give Old Navy an edge. He's quirky and fun, he likes bold, bright colors, and he has an all-American sensibility. Which is how most people would have described Old Navy at its most successful. But before Oldham was halfway through his three-year contract, the partnership came apart at the seams, as it were, and eventually he was fired. (He and the company have countersued one another over the breach, and a federal judge in Manhattan may soon decide if the case will go to trial.)

What happened? Gap (GPS), which owns Old Navy, won't talk about it. But people who were there at the time say internal disagreements, management turmoil, and tanking sales prompted the company to ditch its designer strategy for a back-to-basics one that was easier to execute in hard times.

The question now is whether Old Navy did the right thing. It is true that in recent months store sales have improved. On Nov. 19 the company announced that autumn sales had increased by 10% from the previous year, the first time the business has grown since the spring of 2004. But some industry watchers are dubious the back-to-basics strategy will work as well once the economy revives. "Old Navy lacks an identity now," says Robert Burke, founder of his own retail consultancy. "A retailer needs buzz. Saying you're basic puts people to sleep. Even if a retailer says it's affordable, it has to be interesting."

NO DESIGN HERE, THANKS

Since its founding in 1994 as a cheaper, more exuberant version of the Gap, Old Navy has been essentially a volume business. The retailer has some 1,000 stores that encompass almost 20 million square feet. Last year sales were $5.7 billion.

In a business like this, creativity is always tempered by pragmatism. Original design is not encouraged. Quite the contrary. Old Navy's designers practiced what they called competitive shopping: buying pieces from stores such as Neiman Marcus or Abercrombie & Fitch to show the season's trends. The company's all-powerful merchants—the more market-oriented executives—would look at the merchandise and decide what to adapt for Old Navy.

For a while, the strategy worked amazingly well. Old Navy made shopping on a budget fun for the first time: Its clothes were easy to wear without being utilitarian; its stores looked like old industrial lofts and sometimes featured DJs; its ads were campy. Five years after the first store opened, Old Navy's sales exceeded a billion dollars. But by the early part of this decade, other retailers developed their own approaches to cheap chic. The Swedish company H&M introduced its edgy clothes to America. Target brought in a new design aesthetic. Old Navy didn't change. Its clothes started to seem uninspired, its stores outdated. That could only last so long.

In late 2006 Dawn Robertson, an ambitious and forthright executive who had come up through the ranks at Federated Department Stores, joined Old Navy as president. She modernized the company, speeding up the time it took for clothes to go from drawing board to rack. The retailer was finally going to join the world of fast fashion. Robertson also decided to abandon Old Navy's focus on price-conscious moms, a group every other mass retailer was chasing. Instead, Old Navy would make clothes for young, fashion-conscious women.

To make that work, Old Navy needed to shake up its designers. Many other companies had already been there, collaborating with big names in fashion.

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