Analysts: Gap Needs a Make-Over

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Gap Inc. is in dire need of a make-over, analysts said on Wednesday, one that includes closing underperforming stores and slowing expansion as well as creating more appealing fashions and putting in place swifter turnaround times for getting goods into stores.

While those may seem like logical expectations for any retailer, for Gap it is a tall order -- especially since the No. 1 U.S. apparel chain has struggled with many of these issues for two years and has shown little signs of progress.

The deepening concern over the future of what was once the leading icon of casual name-brand apparel in the United States was further illustrated on Wednesday after a second Wall Street investment firm put a rare "sell" notice on Gap's stock.

The news comes as little surprise, however, as the industry has bore witness to Gap's spiral into financial straits.

Gap's earnings in 2000 declined by more than 21 percent, a trend expected to repeat itself this year. Sales have also been battered and Gap's stock price has lost 65 percent of its value in the past two years, with about 48 percent of that loss occurring in the last year.

Earlier this month, Gap posted its first quarterly loss in at least 10 years, revealing the battle scars from the company's long bout against diminishing sales and a tough economy as well as a series of significant fashion misses.

"I do believe they can do it, but I do not believe that they're well on their way," said Janet Kloppenburg, retail analyst with Robertson Stephens. "Maybe in nine months we'll see signs of them being on their way, but not right now."

Representatives from Gap were not available for comment.

Gap shares fell 5.6 percent, or 80 cents, to close at $13.60 on the New York Stock Exchange on Wednesday, near its 52-week low of $11.12. The year high is $34.98.

From Retail Icon to Retail No-No

To be sure, Gap revolutionized the U.S. clothing industry. Before 1969, when the Fisher family started selling Levi's and other denim products in a small San Francisco store, there was nothing quite like The Gap.

But in 32 years, the company has managed to fashion itself into a retail leviathan, so much so that it is increasingly difficult for Gap to weather any drastic changes in the retail environment and change its strategies appropriately.

"There are no easy fixes and there are no easy answers," Todd Slater, retail analyst with Lazard LLC, said in Gap's defense. "They're trailblazing. Because they're breaking the mold, there are very few examples to follow."

Slater lowered his rating on Gap to "sell" in October.

One of the more significant issues raised by analysts is Gap's lead times, or how quickly clothing goes from the drawing board to the store racks. Currently, it takes Gap anywhere from six to nine months to complete this cycle, analysts said, which is far too long to introduce new product into the market.

"I don't think anybody is smart enough to predict within even a 60 percent success rate what's going to be hot in fashion six months from now," said Mark Minsky, general merchandise manager at retail consulting firm Donegar Group.

In a vain attempt to recapture a younger consumer, Gap has also sacrificed its basic khaki and denim business to attempt more trendy fashion items. The plan backfired, however, and Gap not only turned off its teenage customer but also lost the baby-boomer consumer who couldn't appreciate the new fashions.

Another issue is store expansion. Earlier this year, the retailer cut its growth plan to 10 percent for 2002. More recently it trimmed that plan to 5 percent for next year.

With more than 2,200 Gap stores in the United States, they are almost as common as a Starbucks or a 7-Eleven. Gap's Old Navy brand has grown at a high rate, surpassing a U.S. square-footage base that took Gap stores 32 years to build, according to one analyst.

"My model assumes no growth next year," said Lauri Brunner, retail analyst with RBC Capital Markets. "The likelihood of them doing no growth next year is slim, but it's possible."

"They could strong-arm their way out of leases if they needed to, but I think they would be reluctant to do that because it would probably cost them something," Brunner said.

It is not uncommon today to see customers walking out of Gap, Banana Republic and Old Navy stores empty handed, and some shoppers have even been overheard calling Gap's more recent fashions "just plain ugly."

Fashion from all the brands seem just a little off center, like the Nordic-style sweaters, which bring to mind the worst of '80s fashion, or the new asymmetrical wrap denim skirt, which has left many fashionistas scratching their heads.

The pressure for a turnaround, both on the corporate and store levels, has been heaped on the shoulders of Gap President and Chief Executive Mickey Drexler who, after signing on as president in 1983, successfully overhauled Gap's image from a seller of Levi's and other denim brands to one of the most popular private-label apparel brands in U.S. history.

Drexler's control over the direction of the company has hardly faltered in all those years, which means he often bears the burden of answering for any mishaps. With that in mind, the question arises over whether Mickey has lost his touch.

Most analysts agree that despite Gap's shortcomings, the retailer would be foolish to bring new blood in to replace a man who is largely responsible for the retailer's success.

"He has built Gap into such a large and dominant brand that it has broken the mold," said Lazard's Slater. "Quite frankly, nobody has the experience of operating this type of business."

"The good news and bad news is that he's created this new paradigm, and there's no one else who really understands it," Slater said.