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RETURN TO BASICS SPURS GAP REBOUND

BY ANNA ROBATON

Not long ago Gap, the 34-year-old casual apparel retailer that has become a mainstay of shopping center retailing, was reeling from an identity crisis. Now, with a Gap in virtually every mall, the retail development industry is watching anxiously as the company attempts to claw its way back.

To boost its appeal among young shoppers and breathe new life into what some call a stale merchandise mix, San Francisco-based Gap got trendy in the late 1990s, shifting away from such basics as khakis to fashion-forward items like low-rise jeans.

The move ultimately backfired, alienating many longtime Gap shoppers just as the publicly traded company was aggressively expanding its fleet of stores. Total same-store sales for the company’s three chains — Gap, Banana Republic and Old Navy — dropped for three consecutive years beginning in 2000, falling by 5 percent that year, 13 percent in 2001 and 3 percent last year.

By store count, Gap is the biggest of the three, with 1,446 stores in the United States and 376 in Europe and Japan as of early May, followed by its value-oriented counterpart, Old Navy, with 842 U.S. stores. The upscale Banana Republic has 441 units in the United States.

“Gap’s problems began with overexpansion in real estate, which strained its systems and personnel,” said Dorothy Lakner, a New York City-based specialty retailing analyst at investment bank CIBC World Markets. “Then the merchandise all of a sudden starts disappointing the customer, and problems snowball, because they are expanding at 30 percent square footage per year.”

Now Gap is regaining strength, thanks to a turnaround effort begun last year by the company’s longtime president and CEO at the time, Millard S. “Mickey” Drexler, who retired the same year. (Drexler moved over to J. Crew as chairman and CEO early this year.)

The changes that packed the biggest punch, experts say, were the company’s return to some of the basic apparel that brought early success and its decision to shelve arty lifestyle ads in favor of marketing that refocused on products.

“The fall of 2002 was kind of the rebirth of Gap as we had come to know it,” said Adrienne Tennant, a retail analyst at Los Angeles-based Wedbush Morgan Securities. The company “went back to the two things where they had a lock on the market: denim and khakis.”

The first quarter of this year marked the company’s third consecutive quarter of positive same-store sales and earnings growth. Same-store sales for the quarter jumped 12 percent, compared with a drop of 17 percent for the first quarter of 2002, thanks in large part to better product assortments that helped compensate for a continued slump in store traffic.

Drexler’s replacement, Paul S. Pressler, former chairman of The Walt Disney Co.’s global theme park and resorts division, must prove he can maintain the turnaround momentum.

He must do that, however, in a world that is far different from the one it inhabited during Gap’s go-go years of the late 1980s and the first half of the 1990s. First, the appeal of casual dress for business, which helped propel Gap’s growth in the mid-to-late ’90s, has waned with the softening of the economy in recent years. Gap must also contend with a much more crowded field of retailers vying for teen-age shoppers and with ramped-up competition from big discounters Kohl’s, Target and Wal-Mart, which have been working to improve their denim apparel offerings and the like.

“The Gap shopper has lots of other places to be lured away to and clearly they were,” said Candace Corlett, principal of WSL Strategic Retail, a New York City-based consulting firm.

Drexler was heavily involved in the merchandising decisions that helped to establish the company’s brands, but Pressler is taking a broader approach. He’s charging his key lieutenants with reviewing every area of the business, from inventory management to real estate, in order to boost operating efficiencies, reduce costs and improve the performance of existing stores. After all, Gap isn’t likely in the immediate future to grow its sales through the kind of square-footage expansion it undertook during the past decade.

“The Gap division is a mall-based chain, and there are no new malls,” said Howard Davidowitz, chairman of New York City-based retail consulting firm Davidowitz & Associates. “So you don’t have a lot of places to go. The question is, where will growth come from?”

In the critical area of merchandising, Pressler and his team, including the new presidents of each division, are “focusing intensely on getting the product right across all three brands,” said a company spokeswoman. That means creating “balanced brand-appropriate assortments” to ensure that each chain reaches its intended audience and to further differentiate Gap, Banana Republic and Old Navy, she says.

To that end, the company is relying heavily on market research, customer surveys, focus groups, feedback from store employees and fit clinics, where shoppers are asked to try on certain clothes and comment on everything from the overall fit to simple features like pockets.

The chains will continue to carry the iconic items that made them successful, but the company is also juicing sales by adding new product categories. At Old Navy, for instance, the company has reintroduced such signature items as cargo pants and fleece pullovers. At the same time, it is expanding the availability of such newer items as maternity clothes, which were first sold through Old Navy’s Web site and then rolled out this spring at Old Navy stores.

“We are now moving quickly and creatively to continue to identify and interpret what our customers want,” the company spokeswoman said.

Same-store sales at Old Navy and Gap have risen steadily this year.

Gap’s biggest challenge may lie in turning around Banana Republic, which has lagged the Gap and Old Navy in recent months. While first-quarter same-store sales for the U.S. units of Old Navy and Gap climbed 16 percent and 12 percent, respectively, Banana Republic saw an increase of only 1 percent. Observers say Banana Republic, which competes directly with Ann Taylor and Armani Exchange, is the weakest of the three chains in terms of brand image, and it must compete in an environment where consumers are increasingly price-conscious.

“The Gap stands for something,” said Wedbush Morgan’s Tennant. “It is a little bit unclear as to exactly what Banana stands for.”

To better position the Banana Republic brand, the company has reintroduced clothing made from such luxury fabrics as cashmere and suede. It is also seeking to create a stronger emotional connection to the brand among consumers through marketing and by reintroducing a program offering higher levels of service to favored customers.

Banana Republic may also become the vehicle that helps the company tap into the return of more-formal dress in the workplace. Last year merchandise assortments at Banana Republic stores were overhauled to create a better balance between casual and dressy clothing.

Company officials say there are still domestic expansion opportunities for Banana Republic, Old Navy and the BabyGap and GapKids concepts, but they remain cautious when it comes to real estate. Last year when Gap slashed capital spending by more than half to $272 million, net square footage increased by about 2.5 percent.

This year the company expects to downsize its real estate portfolio more aggressively. It anticipates net closings of about 100 “store concepts” (this is what the company calls any Gap, GapKids, BabyGap or GapBody unit that meets a certain square-footage threshold), versus net openings of 81 concepts. As of May Gap had 4,241 such concepts and 3,105 store locations, many of which contain multiple concepts.

In evaluating its portfolio, especially the roughly 500 leases that come due yearly, Gap takes a market-based approach, using a new analytical tool that assesses sales potential, cannibalization and such factors as whether a store closure raises sales for a given market’s remaining units.

“We use the tool to help us make better decisions,” said Alan Barocas, Gap’s senior vice president of real estate.

Indeed, some shopping center executives are optimistic about the company’s future, despite any immediate pain that store closings might cause.

“They are being very smart about the way they are looking at their fleet of stores,” said William Hecht, senior vice president of retail leasing at The Rouse Co., adding that he doesn’t expect Gap to close any of its stores at Rouse properties. “They are going to be much more mindful about things like cannibalization.”

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