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Archive for Tuesday, February 12, 2002

s fall forces chain to reassess

February 12, 2002

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— Shannon Hartnett used to shop at the Gap at least once a month, figuring it was a pretty reliable stop for basic turtlenecks, T-shirts and a good looking pair of jeans.

Until two years ago, that is, when the jeans became too low-slung for her taste and the sweaters, cropped to expose the midriff, started appearing in "hideous colors."

"I bypass the store now," the 33-year-old Alexandria, Va., resident said. "They're trying to be too hip."

The San Francisco-based chain is the first to admit it has lost its way. And it has the numbers to prove it.

Last week, Gap Inc. reported a 16 percent drop in January sales, marking the 21st consecutive monthly decline for stores open at least a year, including those in sister chains Old Navy and the more upscale Banana Republic. The company also said it expected to post a loss for last year's fourth quarter when it reports earnings later this month.

Gap's stock has lost more than half its value during the past year. And Gap has amassed $2 billion in debt.

After two years of soul-searching, Gap officials say they've pinpointed the problem: just about everything.

The mix of clothes. The clothes themselves. The layout of stores. The size of stores. And the company's spending habits.

"We need to fix it," said Stacy MacLean, a Gap spokeswoman.

How did this happen? The company's simple style was such a hit that it inspired copycats. That caused Gap to veer in a different direction with its fashions. Ultimately, it drove away its core customers.

Exacerbating matters was the soft economy, which prompted consumers to pinch pennies.

The fix starts with the Gap's spring line, which brings back the classics (think khakis and oxford shirts) that made the brand famous, MacLean said.

"But we're going to update it," she said. "We're going to bring a new flair."

Some industry watchers are skeptical. Doubts about an imminent recovery prompted Moody's Investors Service to downgrade Gap's unsecured debt last month to a notch above junk level, making it tough to renegotiate a $1.3 billion credit line that comes due in June.

Gap's weakest link is its low-end Old Navy unit, launched in 1994 as a cheaper version of the Gap with fun clothes for moms, teens and children.

One reason is that Old Navy faces too many thriving competitors. When the chain was conceived, Kohl's Department Stores was a little-known midwestern brand. Today, the superstar retailer has expanded and cut into Old Navy's bid for the value-and-quality-conscious family, Flickinger said. So has Target.

Meantime, teen-oriented American Eagle Outfitters cut into Old Navy's appeal to young America.

"A lot of younger people are telling us Old Navy is expensive for them," said Irma Zandl, president of Zandl Group, a New York trend research firm. "There are a lot of places now where they can get things similar to what Old Navy is selling at vastly reduced prices."

Yet Old Navy, and even the Gap division, pursued teens with a fervor. Gap fashions, in particular, failed to excite the fickle younger set and downright alienated older, more loyal customers.

Also, there were so many stores that they started to cannibalize one another's sales, said Lori Wilking, an analyst with H&R Block Financial Advisors.

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