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OLD NAVY WILL INTRODUCE BUSINESS CASUAL GEAR AND OTHER CHANGES TO REVIVE SALES

By Maura K. Ammenheuser

The Old Navy boat is still rocking. The chain, struggling to right itself after years of sales declines, announced several new merchandising tacks in January.

First, Old Navy says it will focus on 20-something women, though its customers have included men, teens and children as well. It will push wardrobe collections, rather than an à la carte approach to fashion. And it will introduce business-casual clothing, a departure from Old Navy's offerings of jeans, T-shirts, socks and the like. It also announced new advertising that will be more urbane than its usual campy TV spots.

Developers, investors and consumers had little time to react, however, before parent company Gap Inc. announced in February the abrupt departure of Old Navy's president, Dawn Robertson. A few days later Gap CEO Glenn Murphy told investors during a conference call that he and Robertson had “philosophical differences” and that the change was a “mutual decision.”

Tom Wyatt, head of Gap's outlet division, took the helm during the search for Robertson's permanent replacement. But “permanent” seems to be a relative term at Old Navy. Robertson's departure, after 16 months on the job, was but the latest of several executive changes there and at Gap Inc. (The company's other chains are Gap, Banana Republic and Piperlime.) Murphy became CEO just last July. Wyatt joined the company in 2006. Michael Cape, executive vice president of Old Navy's marketing, came aboard in February 2007. And Old Navy named celebrity designer Todd Oldham creative director in September.

The merchandising initiatives announced in January would continue despite Robertson's departure, the company said. “We are not starting over,” said Gap Inc. spokeswoman Kris Marubio, who described the moves as steps in the right direction.

But some are shaking their heads at Old Navy's turmoil at the top. “What it says is you can't necessarily draw conclusions as to the success of the variety of changes at Old Navy,” said Mark Montagna, an analyst at CL King & Associates, an investment firm based in Albany, N.Y. “But I think it's a better-run chain than when Dawn Robertson took over.” The stores are cleaner and Old Navy has tighter inventory, he says.

Old Navy, which was launched in 1994, sells value-priced casual wear, primarily in outdoor shopping centers. At first the chain enjoyed smooth sailing and a reputation for fun fashion. Gap Inc. expanded the chain aggressively; Old Navy now has 1,012 stores in North America. But a chain with such ubiquity can lose its novelty. Old Navy began shedding market share to the likes of youth fashion juggernauts Abercrombie & Fitch and American Eagle, as well as Wal-Mart and Target. Net sales for fiscal 2007, which ended Feb. 2, slipped to $6.2 billion from $6.5 billion a year earlier. Comparable-store sales fell 7 percent, meanwhile, on top of an 8 percent drop the previous year. (Net sales for Gap Inc. slipped too, to $15.8 billion from $15.9 billion the previous year.)

Old Navy's woes cannot be blamed entirely on corporate middle age, however. Sources say the retailer lost its quirky vibe. “Old Navy used to be cool,” said Lee Peterson, vice president of brand and creative services at WD Partners, a Dublin, Ohio-based retail consulting firm. Russell Jones, the retail practice director at AlixPartners, a Detroit-based turnaround consultant firm, agrees. “Old Navy for a lot of shoppers went from the place I go to five times a season, to once or twice.”

Can Old Navy regain its mojo? And if so, how? “There's some pretty dramatic changes in both target market and how they'll go about merchandising the stores,” Jones said. “Big changes are risky when you're a big company.” In particular, Jones says he finds Old Navy's targeting of 20-something women puzzling, though officials at the chain insist that they are not abandoning other demographics.

AlixPartners' research found that shoppers between 18 and 24 and between 45 and 54 had the most favorable impression of Old Navy, the latter because they buy their children's clothes there. Those who were 25 to 34, however, took a “neutral” view. It is odd, therefore, that Old Navy would stake its turnaround on a group consisting of its least enthusiastic shoppers, says Jones.

But Catherine Fox-Simpson, whose title is tax partner in the retail and consumer product practice of BDO Seidman, a Chicago-based financial consultant firm, says she believes the transition to young woman customers will be fairly easy. “What they're trying to do is take their casual consumers, and market to them a higher-end product.”

Business-casual offerings include pants, wrap dresses, cardigans and white shirts. The new wardrobe collections will represent half of Old Navy's merchandise, according to Robin Carr, a Gap Inc. spokeswoman. The other half will remain jeans, tanks and other basics. These collections target a group of people going through important changes in the early part of adult life, such as college, a first job and possibly marriage, Carr says. Further, Old Navy has cut its product-development time in half, to allow for new collections each month, Marubio says. Before, merchandise got rotated seasonally. February's “urban explorer” wardrobe collection included safari jackets and sandals, for example, and March's had a Palm Beach theme. Jones says he wonders why Gap Inc. does not create a brand to serve the business-casual niche, or at least work it into the relatively upscale Gap or Banana Republic offerings rather than at the value chain. “This doesn't make any sense for this to happen at Old Navy,” Jones said.

But Markos Moya, vice president of Battalia Winston Amrop Heve, a New York City-based business development and head-hunting firm, says the move into business-casual is interesting and likely to pay off, because the goal is higher margins; young women do spend money on stylish clothes, he says. Fox-Simpson agrees. Jeans or casual tops one can buy anywhere, she says, but work wear is a niche that is plainly underserved.

Old Navy is planning to make changes to its stores, too, though the chain has disclosed few details, beyond a “bolder and more contemporary feel, more natural light, wood and glass,” in Carr's words.

Gap Inc. CFO Sabrina Simmons said during the conference call in February that Old Navy's remodeling pace is set to slow down this year. Executives must fine-tune renovation costs and merchandising before rolling out a new look, she said. Old Navy will be opening very few North American stores this year, others said at the time.

Murphy specified no preferred store size, but current units measure between 15,000 and 19,000 square feet. Old Navy could increase profit margins using less space, and if the chain truly wants to narrow its merchandising focus, that is huge, Peterson said. Montagna agrees. “You could probably squeeze the size down by a third,” Montagna said.

Gap Inc. “has been a 'donor of market share' to the specialty apparel (and likely discount store) industry for several years now,” wrote Brian Tunick, an analyst at JPMorgan, in a report in February. “We don't expect a quick fix to change the top-line struggles.”

Old Navy practically handed the business over to Abercrombie and American Eagle, who draw young shoppers with their fashions and store environments, despite having prices steeper than Old Navy's, according to Peterson.

Risks aside, though, the new strategies could work. “If it's brilliantly executed … the customer will see it, and it'll be terrific,” said Howard Davidowitz, chairman of Davidowitz & Associates, a New York City-based retail consulting firm.

Of course, a rapid turnover in leadership does not necessarily translate into brilliant execution. Peterson dates Old Navy's troubles — and Gap Inc.'s as a whole — to 2002, when the parent company fired CEO Millard (Mickey) Drexler.

“He made [Gap] what it is today,” Peterson said, lamenting that the company has lacked a gut fashion instinct ever since. “Does anybody get it as well as Mickey Drexler gets it?”