Retail Traffic

Hanging by a Thread

In early April, Gap Inc. released what, for it, qualified as the best news in a long time. The chain's same-store sales were up 2 percent during the first quarter 2007 — compared with a 12 percent decrease for the same period last year. Total sales were also up 11 percent to $2.47 billion from $2.21 billion for the same period last year.

It's been a long wait for Gap, which saw its total sales drop from 2005 to 2006 and has been searching in vain for half a decade to return to the heady heights it achieved in the 1990s. The question facing the company now is whether the first quarter was the result of its turnaround strategy paying dividends or merely a temporary reversal of its long descent. (Gap, for its part, declined to answer Retail Traffic's questions.)

At least some observers are holding off before rendering a verdict saying that even a few good quarters in a row would be unlikely to change Gap's overall trajectory. Gap's performance over the past 20 years has been inconsistent, mirroring the fickleness of the fashion business. “Gap is a very tired brand that does not resonate with the public,” says Donald Trott, an analyst with New York City-based Jeffries & Co., who has been covering Gap for about 20 years. “Instead of being a brand that appeals to everybody, Gap has become so fragmented that it really appeals to nobody.”

For its fiscal year ending Feb. 3, 2007, Gap's earnings were down 25 percent from the year before to $0.93 per share, down from $1.24 in 2006. Net sales were down too — $15.9 billion for fiscal year 2007 compared to $16 billion for the previous year even though it had the benefit of an extra week of sales factored into its fiscal 2007 numbers.

Since achieving record sales volume in 2004 of $16.26 billion, Gap has flatlined. And same-store metrics have been even worse. They were flat in 2004 and have decreased each year since. In 2006 same-store sales were down 7 percent, even worse than the prior year's 5 percent decrease. The company's troubles aren't limited to one brand either: in 2006 Gap's same-store sales were down 5 percent, while Banana Republic's were flat and Old Navy's were down 6 percent. Meanwhile, over the past three years, cumulative traffic at Gap's three divisions is down 25 percent, according to Trott.

That meager performance has already caused the company to run through two CEOs, and with 3,135 stores worldwide, it has announced its plans to close roughly 200 stores in 2007 including 80 Gap stores, 65 Old Navy stores, 20 Banana Republic stores and 15 international stores. (The company plans to open 230 stores — more than half of them Old Navy locations.)

Providing uniforms

How did Gap get to this point? It helps to look at not just its recent troubles, but also how it grew in the first place.

The chain's ascent began in 1969 in San Francisco, stocking basic apparel — khakis, T-shirts, button-down shirts and Levi's jeans. One year later, sales reached $2 million and a second store opened. Within a decade the company went public, conducting its IPO in 1976. But it didn't really begin to hit nationally until Mickey Drexler took over as president and COO in 1983. That same year, Gap acquired Banana Republic, a two-store chain that sold safari and travel clothing.

Under Drexler's leadership, Gap stopped selling Levi's and expanded its private label apparel. By 1987, the chain had expanded to 815 stores and reached $1 billion in sales. Over the next four years, Gap's store count grew to 1,092 with comp store sales ranging from 8 percent to 15 percent annually.

In 1992, Gap was considered the second largest apparel brand in the world. And, in 1994, Gap unveiled Old Navy. Named after a bar in Paris, Old Navy originally targeted suburban shoppers looking for less expensive basics like T-shirts and jeans.

Initially, Old Navy looked like a home run as sales reached $1 billion in less than four years of operation. During that same time, Banana Republic was also expanding, and in 1998 it reached $1 billion in sales.

From 1994 to 1999, Gap's earnings compounded 36 percent annually, according to Trott. Of course, part of that growth was generated from Old Navy and Banana Republic. However, the flagship Gap brand was on fire, reaching its zenith during the tech boom when business casual was taking over dark suits. Gap became the place to go for the new work “uniform” and comp store sales for all three brands reached 17 percent in 1998 and 7 percent in 1999.

But seemingly out of nowhere the ascent stopped. The chain hit a wall in 2000, when sales unexpectedly began falling. Since then it's been a struggle. In 2000, Gap's same-store sales decreased 5 percent, followed by a 13 percent decrease in 2001 and a 3 percent decrease in 2002.

Experts debate what exactly happened: was it the fiery death of the dot-com economy that doomed the whole business casual movement and therefore Gap? “Because of the business casual movement, Gap was able to appeal to a lot of different people,” says Russell Jones, director of Southfield, Mich.-based AlixPartners' retail practice. “They were in the right place at the right time — a time that will never occur again.”

Pressler pains

Despite sales problems, Gap continued to expand under Drexler, adding 731 stores in 2000, 587 stores in 2001 and 188 in 2002. During that time, he pushed the flagship brand to become fashion-forward, Trott says. “That's when Gap stumbled initially.”

However, industry experts say it was more than just the economy. Ousting Mickey Drexler and bringing in Paul Pressler from Disney didn't help much, Trott says. In fact, with the exception of a 7 percent increase in 2003, same-store sales have been flat or negative from 2000 to 2006.

For the past seven years, Gap has bounced back and forth between its classic style and trying to get in on the so-called disposable fashion sector exemplified by H&M and Target. But nothing has worked. “Gap has managed to confuse everyone. Gap is trapped in the middle — it's not high end or low end, it's not stylish or basic, and it's not young or old,” notes Tim Calkins, professor of marketing at Northwestern University's Kellogg School of Business.

Like The Home Depot's former CEO Robert Nardelli who abruptly resigned after shareholders clamored for blood when the home improvement chain's growth slowed, Pressler has been blamed for Gap's poor performance despite Gap being in trouble long before Pressler came on the scene.

Industry players say that Pressler made things worse, especially in the style and design of Gap's merchandise. Unlike Drexler, who was considered a merchant prince, Pressler was an operations-driven person, says Joe Carideo, retail practice leader with New York City-based Battalia Winston International, an executive search firm.

“Gap has been missing the beat on fashion because Pressler is not a fashion or product man,” notes Carideo, who has recruited several Gap executives to other apparel companies. Over and over, he heard from Gap executives that Pressler was unable and unwilling to make fashion decisions. “Pressler would sit in product review sessions, and he wouldn't make any comments about the product.”

Instead, Pressler's preference was to rely on market research. But, there's danger for companies that are overly reliant on that, says Beth Zimmerman, principal at Cerebellas LLC, a Long Beach, N.Y.-based marketing consulting firm. “Market research is not going to tell you what is going to be the next hot thing because it's not a substitute for that visceral sense of what the business is about.”

Trott adds that Pressler's focus on improving efficiencies within the three Gap division's backfired. For example, Gap sourced the same material for all three divisions, and the designers at Old Navy, Gap and Banana Republic often shared ideas. “Customers noticed that the material was the same and that the styles looked alike, especially between Gap and Old Navy” Trott says. “No one was willing to buy a shirt at the Gap when they could pay $15 less for one that was almost identical at Old Navy.”

Brand confusion

That fact contributed to general confusion among consumers among Gap's three brands. “When you have a portfolio of brands, it's very important that the brands are distinguished and unique rather than fighting with each other,” Calkins says, pointing to BMW, which owns Mini Cooper, BMW and Rolls Royce. “Those brands are very clean and distinct, and the customers definitely don't confuse the different products. That's not the case with the Gap brands.”

Gap has also struggled with attempts to create new brands. After an 18-month pilot that began in August 2005, Gap pulled the plug on the Forth & Towne brand, which targeted female Baby Boomers. Gap will close all 19 Forth & Towne stores located in 10 markets by the end of June 2007 at a cost of $40 million.

In addition, Gap continues to water down its flagship brand with GapKids, babyGap, GapMaternity and so on, says Scott Rothbort, a finance professor at Seton Hall University's Stillman School of Business. He likens Gap to a tree that has grown so many branches that the trunk can't support the weight. “All of these Gap brands have caused the overall brand to lose momentum,” he says.

The most recent Best Global Brands report found that Gap lost the most brand value with a decline of 22 percent to rank number 52 out of 100. The report, issued by Interbrand and BusinessWeek, says Gap has been unable to clarify its brand image and with a less distinct positioning the brand has been less effective at selling clothing, causing reduced long-term stability.

Since the 1990s, competition within the apparel segment has proliferated with retailers like Abercrombie & Fitch and American Eagle targeting teens, while J. Crew focuses on customers in their 20s and early 30s. No one retailer has benefited from Gap's missteps, Trott says.

Nor is any other retailer poised to reach Gap's size since the apparel segment becomes more fragmented daily. “Gap's success bred a lot of imitators,” says Jones, who has conducted more than 10,000 interviews to gauge consumer attitudes and preferences. “We've seen Gap go from a position of dominance to a situation today where consumers have a negative perception.”

And, it's not just the specialty retailers that have impacted Gap. Discount chains like Target and H&M with their disposable fashion, as well as department store retailers like JCPenney and Kohl's are cutting into the apparel pie. “Today, Gap's market share is being picked off by a lot of other chains,” says Ann Brower, senior partner at Chicago-based retail consulting firm McMillan Doolittle.

Connecting with customers

Gap's competitors are not only doing a better job with their merchandise, but they're also excelling at connecting with their customers. There was a time when Gap appealed to shoppers across lifestyles, incomes and ages — when people would stop and watch Gap commercials on television and actually want to shop there. That's not the case today.

“The brand can be a company's strongest asset, and when you have a great brand, you're always in the game,” says branding consultant Erin Patton, who has worked with NBA star Stephon Marbury to launch his athletic shoe line. But, he warns that brand awareness does not always equal brand value. “Brands can lose relevance, and the Gap brand has taken a pretty big hit,” he says.

Brower contends that Gap lost sight of its customers, and as a result, none of the company's marketing efforts were successful. “If you don't have focus, it's hard for marketing to be effective,” Brower notes. “They've lost their voice.” Over the past several years, Gap has spent an average of $490 million on advertising, according to SEC filings.

It's likely that consumers are confused by Gap's conflicting messages. “Are they targeting teens and college students or are they targeting adults? I don't think they know, and that's why they've turned off a lot of people,” says Robb Hecht, a marketing consultant and adjunct professor at the City University of New York

Richard Laermer, author of Punk Marketing, agrees: “Instead of thinking about what they want to sell or who they want to reach, they must be sitting around thinking about who they can invite to be part of their ad campaign. They are focusing on celebrities instead of the person who is going to walk into their stores and buy a shirt.”

Being hot for just one season is a precarious place to be, says Rob Frankel, author of The Revenge of Brand X: How to Build a Big Time Brand on the Web or Anywhere Else.

“You cannot build a brand by being edgy because there will come a time when it's simply not cool,” he explains. “Brands have to lead their customers, and the Gap isn't leading so no one can follow.”

For Gap's part, it is trying to fix its core business, although the specifics of these turnaround efforts are ambiguous and vague at best. Very few apparel companies have managed to survive and prosper after such a prolonged downturn, although other apparel companies like Abercrombie & Fitch and J. Crew have gone through resurrections. The big difference is size: both chains are only about a quarter the size of Gap.

Most important is Gap's search for a new CEO to fill the space that Paul Pressler vacated in January 2007, Trott says. Robert Fisher, the son of Gap founders Donald and Doris, is serving as interim president and CEO while the board conducts the search. There's also been turmoil with other positions, ranging from merchandising to marketing.

Independent Gap Inc. director Adrian Bellamy, chairman of The Body Shop International plc, is directing the search for the new CEO. Gap says that it desires a chief officer who has “deep retailing and merchandising experience ideally in apparel, understands the creative process and can effectively execute strategies in large, complex environments while maintaining strong financial discipline.”

The industry is buzzing with speculation about the person who would be willing to take on the CEO position. The front-runner is Paul Charron, the former CEO of Liz Claiborne. However, Charron has too much in common with Pressler, Carideo says. “He's not a product man — he is not the one to inspire the merchants,” he explains.

Roger Farah, president and COO of Polo Ralph Lauren is another name that experts are floating. However, Carideo contends that Farah doesn't have a track record of fixing problems. “He has done well with companies that are doing well,” he says. “Gap needs someone who is a problem-solver.”

Gap has not indicated any specific timeline to replace Pressler, but Trott says that Gap is facing a huge challenge, regardless of who leads the company. “It's difficult to resurrect a brand after it's been around for this long,” Trott says. “If it can be resurrected, it's a lengthy, painful process. For someone to come into Gap to do a quick fix is a pipedream.”

Year Total Sales* Stores Stores Opened Same-Store Sales Sales per sq. ft.
1987 $1,062 815 110 9% $292
1988 1,232 900 106 8 328
1989 1,586 960 98 15 389
1990 1,933 1,092 152 14 431
1991 2,518 1,216 139 13 481
1992 2,960 1,307 117 5 489
1993 3,295 1,370 108 1 463
1994 3,722 1,508 172 1 444
1995 4,395 1,680 225 0 425
1996 5,284 1,854 203 6 441
1997 6,507 2,130 298 5 463
1998 9,054 2,428 318 17 532
1999 11,635 3,018 570 7 548
2000 13,673 3,676 731 -5 482
2001 13,847 4,171 587 -13 394
2002 14,454 4,252 188 -3 349
2003 15,854 3,022 35 7 415
2004 16,267 2,994 130 0 428
2005 16,023 3,053 198 -5 N/A
2006 15,900 3,131 194 -7 N/A
Source: Company filings and sales reports.
* In millions

Out of the Spotlight

Is a private equity takeover in Gap's future?

Private equity has a strong track record in taking ailing, publicly traded retailers and turning them around, and there's a lot of speculation that several private equity funds have their eye on Gap Inc.

But, what's best for Gap? Should the company remain a public company or should it court a buyout?

“There's certainly some attraction to going private,” says Doug Hart, a partner in the retail and consumer products practice at global accounting firm BDO Seidman LLP. “Gap is a turnaround situation, which makes it difficult to attract a CEO because that new CEO will be under a microscope. If they were private, I think it would be easier for them to attract a rock star CEO.”

Hart says private equity owners are more willing to consider “radical solutions” such as extensive store closings and spinning off divisions. Even then, “private equity is not a silver bullet,” he contends. “The fashion business is risky and there's no quick fix for Gap.”

Moreover, Gap's founders and majority shareholders — the Fisher family — have indicated that they have no desire to see the company go private, says Donald Trott, an analyst with New York City-based Jeffries & Co. who has covered the company for roughly 20 years. “The Fisher family has sufficient ownership where it would be difficult for an outside party to come in and take the company private without their approval.”

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