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Gap Is Buried Alive in Khakis


If Millard S. "Mickey" Drexler has his way, Gap Inc.'s (GPS) flagship chain is about to undergo a swift transformation from stores that flog the known and predictable to a cutting-edge retailer selling the latest and hippest trends. But the CEO of the struggling apparel company, operator of the Gap, Banana Republic, and Old Navy chains, has a pretty big task ahead of him. For starters, he'll have to contend with the likes of 30-year-old Pia Bresnen. "I don't think of it as the place to come for fashion--just for basics, just jeans and T-shirts," says Bresnen, a telecommunications manager in Millbrae, Calif.

Drexler's problem, of course, is that there are countless other shoppers who feel the same way. Reeling from 13 consecutive months of declining sales at stores open at least a year, he's struggling to stem the retailer's lengthiest downturn yet.

MELLOW YELLOW. The biggest problems are at the core Gap chain, which has lost its focus by trying to appeal to too wide an audience. Its sister chains, though, have their own woes. Old Navy has alienated customers with high prices and confusing marketing. Banana Republic has blundered by offering clothes in unpopular colors that fit too tightly. All three have been hurt by a rickety logistics and distribution system. Worse, amid the slump, Drexler has pressed ahead with an ambitious expansion plan that many outsiders view as foolhardy at best. Add it all up, and for the year ended Feb. 3, net earnings fell 22%, to $877 million. First quarter earnings were off another 51%, to $115.5 million.

Moreover, he's leaning on a team that includes many new execs with little or no experience in retailing. A shakeup last year sent five key executives packing, including the COO and the head of product design at the Gap division. Both the Gap and Old Navy chains have new marketing heads, respectively, in Peter Hempel, who hails from ad agency Lowe Lintas & Partners, and Tom Clendenin, who headed marketing at Walt Disney unit ESPN.

The latest to join is Terry Kramer, a former executive from paging company AirTouch Communications Inc., now part of Vodafone PLC (VOD). Kramer has signed on as chief operating officer of the Banana Republic unit. Among his first jobs: implementing Drexler's fashion strategy, a complex undertaking that requires speeding up the flow of new goods onto racks, and improving creaking logistics and inventory systems. "It's a lot for a green management team to handle," says Emme P. Kozloff, an analyst at Sanford C. Bernstein & Co.

But Drexler's No. 1 problem may be one he doesn't even see. Gap continues to add hundreds of new stores at a torrid pace despite the sluggish economy and signs of market saturation. In 2000, Gap, Banana Republic, and Old Navy hiked their total square footage by a huge 30%. That's on top of gains nearly as big the year before. Although Drexler has scaled back, he's still expanding about 20% this year. Yet the proliferating stores may simply be cannibalizing one another and spreading confusion among consumers.

STOCK GAIN. Drexler, who declined to comment for this story, vows that Gap's sales will improve during the upcoming back-to-school season. Problem is, he has been saying that recovery is just ahead for more than a year. "The company has lost credibility," says Richard N. Baum, an analyst at Credit Suisse First Boston.

Still, don't count Drexler out. Thanks largely to his earlier track record, some investors bet he'll get Gap's house back in order. After falling from $53 in Feb., 2000 to $19 in October, shares have recovered to about $29.

So what is his new team promising? This fall, Gap plans to put new goods out every two or so weeks to appear trendier. Meanwhile, it's downplaying such basics as khakis and plain blue jeans in favor of items like tops with matching belts. "The difference will be fewer basics and more fashion," said Gap division head Kenneth S. Pilot in a June 11 speech to institutional investors. Fortunately, if that gets Gap shoppers excited again, they will have plenty of locations to choose from. By Louise Lee in San Mateo, Calif.


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