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Gap gets back to the basics

If Gap Inc. CEO Mickey Drexler has anything to say about it, Gap is far from a goner.

In announcing Gap's latest dismal financial results for 2001 on a conference call last night, Drexler was more than candid about why Gap has fallen so far, so fast.

"We got a little bored with some of the basics. We can't get rid of what our customers expect from us. It's what drives traffic through our stores, and we alienated our customer base."

The numbers speak volumes on this. In fourth quarter 2001, Gap lost $34 million, or $0.04 a share, compared to earnings of $272 million or $0.31 a share for the same period in 2000. For the year, Gap reported an $8 million loss, or just $0.01 a share.

And, while other retailers have crafted new strategies to cope with a soft economy, Gap is still falling. Its February same-store sales dropped by a hefty 17%.

"We have a lot of work ahead of us," said Drexler. "We know what we have to do and we're doing it."

"It" first requires turning the Gap brand around. To do that, Drexler is counting on some proven apparel. "We want to own khakis once again. We walked away from them." He's also going to bring back women's stretch pants, the performance fleece business and cotton sweaters. For men, Drexler has identified the khaki business, more denim and more inventory in Gap's classic T-shirt.

Already, analysts are questioning the decisions made under Drexler’s reign (he became CEO in 1995). On the call, Drexler was asked why Gap seems to stray off its proven course (i.e. winning fashion formula) every few years. "Any good brand business has consistency to it. But customers don't change as rapidly as we do. We just didn't have enough of the right products. We also misread the fashion tea leaves," said Drexler.

And, he conceded that Gap's woes can be traced to rapid growth. For 2002, the company had planned more aggressive expansion. But those plans have been scaled back, in the face of declining sales and losses. "We made a serious mistake two years ago in creating a global organization. Our growth left the organization thin in management talent. That kind of growth takes a toll on the organization."

Drexler says he is personally overseeing the rejuvenation of the Gap brand. "Gap remains our biggest challenge. I'll concentrate most of my day-to-day work on Gap."

He's also beefing up his merchandising management team. Marka Hansen, a 15-year Gap merchandising veteran, becomes executive vice president of Gap Adult and Tara Poseley assumes the same role for Gap Kids and Baby Gap.

In a further shift back to more traditional thinking (internally, at least), Drexler also is bringing back the Gap slogan: "For every generation there's a Gap."

But getting back to better times won't be a quick fix. The company gave little hope for a turnaround before the second half of this year. According to Gap CFO Heidi Kunz, the U.S. economy will remain soft through the first half of 2002, then recover in the second half. The company plans to open 170-190 new stores in all of 2002, only a 3% overall increase over its 2001 store-opening pace. It plans to spend about $400 million in new stores, but fully 75% of that money will be used to open stores in the first half of the year.

Store closings are expected to be consistent with 2001 levels. As new leases come up for renewal, "we'll look at whether we will close them," said Kunz.

She also indicated that more corporate cost-cutting measures would be implemented in the first half of 2002. These could include more layoffs.

Overall, analysts are divided over Drexler’s ability to fix up Gap. While many think his return to classic merchandise is not nearly enough, Merrill Lynch retail analyst Mark Friedman believes "the strategy will eventually work," but he remains cautious until Gap provides better guidance on its product improvements.

-- Ben Johnson

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