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Can Gap Do It Again?


Building a clothing brand from scratch is always a challenge. But Chief Executive Paul S. Pressler is betting that Gap Inc. (GPS) can do it again. More than a decade after it launched its hugely successful Old Navy (GPS) stores, Gap's diversification plans are starting to jell. Pressler had made it clear that he was considering acquiring or creating a new chain to add to the retailer's three existing brands -- Gap, Old Navy, and Banana Republic (GPS). At a June conference, he told analysts: "Gap Inc. at its best is a brand-builder." Now, BusinessWeek has learned, Pressler has settled on a plan to develop a moderately priced clothing chain aimed at women aged 35 to 50. Although Gap wouldn't comment, Pressler and Old Navy chief Jenny J. Ming have been interviewing outside executives to run the new chain as well as designers for the creative side, say people who have learned about Gap's hiring plans.

Launching a new brand into an increasingly crowded market won't be easy, but analysts say Pressler has little choice. Having shuttered stores, cut costs, and revamped merchandise and marketing, he's now focused on boosting growth. But Gap's existing chains are already in practically every market. What's more, Pressler can't take his nascent turnaround for granted: As it is, June sales fell 2%, ending a 20-month streak of monthly increases. Says Arnold Aronson, managing director at consultant Kurt Salmon Associates: "There'll have to be another leg added onto the business."

The San Francisco-based company has big hopes for its new retail concept. Gap aims to generate an additional $1 billion to $2 billion a year in sales. That goal would represent between 6.3% and 12.6% of its $15.85 billion in 2003 sales. Based on last year's average per-store sales of $4.82 million at Banana Republic -- and assuming that the new stores will be about the same size and charge similar prices -- Gap would need to open between 200 and 400 new locations to meet its target.

SALES POTENTIAL

The new venture would target women older than the typical Gap shopper but not as hip or fashion-conscious as the Banana customer. Stores would sell several categories of apparel, ranging from weekend wear to office outfits, with each category marketed under separate sub-brands.

With the new stores, Gap is courting the younger half of the boomers. That's a crowd it doesn't currently target head-on, and one with more sales potential than boomers, now aged 50 or older. "As men and women age, they spend less money on apparel," says Jeffrey P. Klinefelter, analyst at Piper Jaffray & Cos. (PJC). The new store could also help recapture some of the customers who used to shop at Gap but have gone elsewhere seeking more grown-up and comfortable clothes. The key will be to avoid stealing sales from Gap's existing stores. Rather than more low-slung, snug-fitting pants, designers will have to serve up loose, flowing pants -- perhaps even with elastic waistbands.

It's far from certain if there's much room for yet another apparel chain. Analysts say the popular Chico's FAS Inc. (CHS) is the most formidable competitor, with its fashionable-yet-forgiving styles. Chico's plans to open 90 stores this year, bringing the total to 640. And classics-oriented Talbots Inc. (TLB) will add 75 stores to its existing 975 outlets.

Nor is Gap the only newcomer. In April, kids' clothier Gymboree Corp. (GYMB) launched Janeville, aimed at women 35 and older, and expects to operate 14 stores by yearend. And the young-adult fave Abercrombie & Fitch Co. (ANF) will unveil a brand for the 25-to-35 crowd this month, potentially treading on Gap's toes. With this kind of competition, Pressler can only hope he won't be elbowed aside.

By Louise Lee in San Mateo, Calif.


Steve Ballmer, Power Forward
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