Confessions of a Fashion Victim

Gap executives have all but written off this holiday shopping season
and are looking to spring for a recovery.

FORTUNE,  December 10, 2001

By Julie Creswell

As he sweeps into the sunny conference room, Gap CEO Mickey Drexler proclaims, "Welcome to the good, the bad, and the ugly." The good: an assortment of simple, neutral-colored pants and sweaters from Gap's spring 2002 line. Hanging on hooks in the center of the room is a not-so-bad black shirt and a denim jacket that sold well this fall. And the ugly? A fitted shirt with red and black stripes that consumers left in the stores. "That one was mine," owns up Jerome Jessup, Gap's head of product design. "We wanted to see how far we could go. We went too far."

It shows. The nation's ubiquitous, largest apparel retailer has been in a shockingly deep and protracted slump. The numbers tell a scary tale. October marked the 18th consecutive month of declines in same-store sales for the $14-billion-a-year retailer, which owns the upscale Banana Republic and low-priced Old Navy chains. Heavy markdowns have sliced Gap's operating margins in half since 1999. Its stock, which trades at $15, is down 71% from its high in February 2000. Earnings fell 22% last year, and analysts forecast that they'll tumble another 73% in 2001, before $150 million in tax-related charges. "Gap used to be a paradigm of fashion interpretation," says Kurt Barnard, president of Barnard's Retail Trend Report, a New Jersey consulting firm. "Today there's no compelling reason to visit the Gap for fashion. It has fallen flat on its face."

Indeed, analysts and Gap executives have all but written off this holiday shopping season and are looking to spring for a recovery. "We've been working on getting back to our core customer over the last six months quite intensively," says Drexler. "Given lead times in our business, you don't see the results in the stores as quickly as we would like. But we're getting back on course."

Drexler, a bespectacled 57-year-old who dresses very old Gap himself, knows--and can almost admit--that he blew it. "Are we having an identity crisis? That's too strong a term. We have disappointed some of our core customers," he says in an interview at Old Navy's headquarters in New York City. "We misread some of the market, I guess."

That's a startling admission from the man many have anointed the king of retailing. Drexler guided the former jeans-and-record chain to the forefront of corporate America's dress-down revolution in the mid-1990s. By offering khaki pants and button-down shirts to the masses, Gap increased earnings at a 29% average rate for five years through 1999. The problems started last year, when Gap and Old Navy stores began chasing a much younger, trendier audience. Critics say they not only failed to catch that finicky group but also alienated older customers, who went into stores looking for basic polos and instead found studded pink corduroy pants and turquoise sweatshirts with the word "fabulous" spelled out in glitter. Others say Gap became too big too fast. Square footage at the three chains doubled in three years, to 32 million square feet in 2000. But sales per square foot should fall to $400 this year, from $544 in 1999. (Gap recently announced that it was slowing square-footage growth for 2002 to 5%, down from 17% earlier this year.) "Buying a so-called fashion item for 2,300 stores is difficult because you're trying to appease a diverse market and broad demographic," says Todd Slater, a Lazard Freres analyst.

And while few doubt that Drexler is still the heart and soul of Gap, many wonder whether he has strong enough support. Frustrated by the company's results over the past couple of years, Drexler has orchestrated a few rounds of musical chairs among the executive ranks. Gap's heads of marketing, merchandising, and product design as well as its COO have all been in their positions for a year or less. Yet nearly all of them are longtime Gap employees. "This company needs new blood," says Emme Kozloff, an analyst at Sanford C. Bernstein. "They still look to Mickey to bless everything." Drexler counters that in the current tough climate, "we have to lead at a much more intense level."

When asked to select his favorite item from Gap's spring collection for women, Drexler picks up a simple, dark-brown, V-neck sweater that could be worn by a 16-year-old teen in New Jersey or a 35-year-old lawyer in Kansas. "In our spring and summer lines consumers will see clothes that they're familiar with and comfortable with," says Drexler.

When it comes to fashion, Gap may be regaining its footing; winning back customers, however, will be much more difficult. There Gap's biggest challenge may be its own arrogance. Its executives believe that Gap is as much an American icon as McDonald's or Coca-Cola. "At the end of the day Gap is a very, very well-respected, popular, and recognized brand, I would say almost worldwide," says Drexler. "And that's a great advantage we have even in difficult times." Gap may indeed be a great American brand. But then again, at one time so was Sears.