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Gap fighting to come back into fashion

This fall is show time for the Gap.
/ Source: San Francisco Business Times

This fall is show time for the Gap.

Struggling with negative or flat same-store sales for almost two years, the San Francisco retailer is pinning its fortunes on the season. A first fall collection overseen by a new head designer at its Gap brand mainstay began hitting store shelves July 20, backed by a renewed new media campaign. Top management has been or will be replaced at two of its three core brands, and Gap Inc. CEO Paul Pressler has promised investors the second half of this year is when the long-delayed turnaround will finally take hold.

In a sign of how committed Pressler is to righting the Gap brand that launched a $16 billion retail empire, the entire team running Gap brand has been replaced within the past 15 months. Cynthia Harriss, who joined the company in February 2004, became Gap's president in April 2005. Since then, the Gap brand has named all new division presidents and a new head designer, Charlotte Neuville.

Promising signs

The moves by the Gap, which declined to make any executives available for comment, are drawing cautious but favorable response from some analysts. Their optimism, however, is tempered by the fact that this isn't the first time the Gap, Gap Inc. or Pressler has said they're about to turn the corner.

"Internally, the company is more focused on fashion than I've seen in years, and the thought is that this will translate into more compelling product than we've seen," said Todd Slater, an analyst at Lazard Capital Markets who recently upgraded the stock to "buy." (Neither Slater nor Lazard owns stock or does investment banking for Gap Inc.) "When organizations put all their effort behind getting their product right, they can often turn it around."

Slater cautioned that while improved, he thinks the Gap brand is still missing the fashion mark, despite a strong denim offering.

Gap's problems are numerous. Traffic at stores is way down. People who do enter Gap stores are not buying full-priced merchandise, if they are buying at all. June sales declined 1 percent overall, and same-store sales, an important industry measure of stores open over one year, dropped 6 percent. Indeed, for the past 25 months, same-store sales declined or were flat all but two months. In February and March of this year, they were down 11 percent and 13 percent, respectively.

"(Gap) is clearly the least far along of the three core brands from a product perspective in repairing its current shapeless image and in regaining its past luster," Slater said. "The Gap right now is the best antidote for insomnia that I know."

Marketing push

Like them or not, the new fashions are accompanied by a major Gap brand media blitz after a long hiatus from the airwaves, signaling the company's confidence.

"It is a comprehensive campaign focused on creating buzz, building confidence in the brand and driving traffic," Harriss told investors in June.

"Success for us is when we're driving greater earnings," Harriss said. "It will come from our product and our ability to sell more of it at regular price. ... We will know when our customer comes back."

Those who do enter the stores, whether lured by advertising or products, will encounter a new, fresher Gap.

In June, Gap announced plans to reorganize its stores around four categories: denim, T-shirts, activewear and "clean" -- those khakis and black pants that once were a Gap staple. Analysts believe the move will attract shoppers back to Gap. Separating merchandising, production and delivery teams along these four categories will also allow the company to rush merchandise into the stores more quickly, something fast-fashion retailers like H&M and Zara have done to great effect.

The stores-within-a-store concept debuted with the new fall line and ads last week.

Considering that analysts have not been totally wowed by Gap's new products, the risk remains that this will be one more promised turnaround that does not deliver -- last August Pressler told investors that sales would pick up in the second half of 2005. But this time, several analysts are upgrading Gap stock.

"It is better to buy the stock now while expectations are still low than miss the upside when comps improve," said Merrill Lynch analyst Lorraine Maikis, who just initiated coverage with a "buy" rating.

Slater agreed that, "The risk-reward is compelling."

Other brands need help, too

Gap's sibling brands also need a makeover, as their sales have also been weak.

Banana Republic's return to fragrance this fall, and a strong accessories offering there, will improve sales, analysts believe.

But Old Navy looks most promising for fall, analysts agree, with its more fashion-centric offering at that low Old Navy price-point.

The brand tried to skew too far to value, Slater said, and it's hard to out-value Target or Wal-Mart now that those retailers have started emphasizing fashion. Old Navy's fall offering includes leather jackets and silk tops as well as basics, and it will advertise in the September issues of Vogue and Glamour.

The question out there is if the turnaround will continue after Jenny Ming departs as Old Navy's president this fall. No successor has yet been named, but her departure signals that the board wants a new vision at the brand -- something Harriss is supposed to have brought to Gap.

New leader?

While Gap Inc. focuses on fixing the business through improved product and a return to each of its brands' core strengths, its lengthy struggles have industry watchers chattering about the future of Paul Pressler, and the company itself.

The company vehemently denied rumors printed by Women's Wear Daily in November 2005 that it sought to replace Pressler, though some say his job depends on a successful fall season.

The other consistent topic of speculation is taking the company private. Gap's stock is cheap, its cash situation strong and it still has solid earnings, all of which has industry folks talking buyout.

The Fisher family, who still own over 30 percent of Gap stock, has never chimed in on the debate, but industry trends have smiled on retailers going private.