Will GAP bounce back again?


During an investor conference call last spring, Gap Inc. CEO Paul Pressler did a mea culpa, admitting he was "disappointed" by the retail firm's sagging sales. Pledging that a turnaround was in the works, he indicated that improvements in the company's clothing lines should appear by year's end.

Yet when the holiday season arrived, the flagship Gap (Research) brand's annual TV ad campaign–a critical tool and ostensibly a competitive advantage for a true national clothing chain–was shelved. "We had more work to do with Gap's in-store experience and product," explains investor-relations chief Sabrina Simmons.

“IT is very easy to go wrong in fashion,” says Howard Davidowitz, a retail consultant. Gap, a fashion retailer that was once one of corporate America's shining success stories, used to get everything right. Its affordable, trendy clothes epitomised casual cool. But not any more. The company's production cycles are too slow to keep pace with rivals, prices have risen and the brand has lost its shine. In 29 of the past 31 months Gap reported flat or declining same-store sales. Senior executives are quitting in droves. Profit margins, at 6.5%, are about half the industry's average. In December, traditionally the busiest month for shopping, same-store sales were 8% lower than in December 2005. Gap is now said to have hired Goldman Sachs, an investment bank, to evaluate its options.

That was not the plan when Pressler took over in 2002 from his embattled predecessor, Millard "Mickey" Drexler, who had built Gap into a retail powerhouse but then stumbled badly. Gap's stock fell by two-thirds in Drexler's last two years, and the firm was drowning in $3.4 billion of debt.

Gap seems to have swung from one extreme to the other. The stock, after initially rebounding under Pressler from $10 a share to $25, has since drifted back down to $18. Same-store sales have declined for 18 of the past 21 months. By summer 2005, Pressler was referred to as "DMW," or "dead man walking," in the private-equity community. The Gap board declined to pay Pressler a bonus in 2005, and director Meg Whitman of eBay, who recommended him for the job and whom Pressler considers a strong backer, has announced she will step down when her term expires in May.

The Fishers replaced Mr Drexler with Paul Pressler, a former Disney executive without any experience in fashion. “He was good at fixing the infrastructure and the finances of the business,” says Paul Lejuez, a retail analyst at CSFB, an investment bank. He has closed underperforming shops, reduced inventory and trimmed debt. He also launched Forth & Towne, a chain for women over 35, and Piperlime, an online shoe shop. But what Gap needs now, says Mr Lejuez, is a fashion genius to make the clothes appealing again.

Analysts think a change at the top is the most likely outcome of the review. The consensus is that a new boss should close more of the group's 3,100 shops, reduce its nine-month lead time for new clothes and bring in new talent. Last time Gap was in trouble, all it took was a single campaign, called “Crazy Stripes”, to rebuild its fashion status.

If Gap's ambition in this phase of its existence is simply stable growth, then Pressler–through his use of metrics and the cautious addition of new brands–may be the right man for the job. But without a defining product vision, Gap is unlikely to be the cultural presence it once was, when the dream was not just to deliver dividends but to become a global brand on a par with Coke and McDonald's.

Emanuel Weintraub, a management consultant, reckons Allen Questrom is the man for the job. Mr Questrom ran Neiman Marcus, a posh retailer, in the late 1980s, revived Barney's, another retailer, in the late 1990s, and transformed Federated from bankruptcy into the largest chain of department stores. The fickleness of fashion has one advantage: companies lose their shine very quickly, but stars can be born—and reborn—almost overnight.