Mend that GAP

It makes no difference to Millard ("Mickey") Drexler, the master merchant behind Gap Inc., whether business hums or business sputters. He is rarely satisfied. If the former, "I'm pleased," he admits, "but never happy." Certainly the past year's uneven performance did little to put Drexler in the mood to do the khaki swing.

The flagship Gap stores, which account for more than a third of the company's $11.6 billion in sales and estimated $1.1 billion in profits, made their name as a basics retailer with a fashion edge, the message driven home by brilliant advertising. But last May, Gap began to lose that edge. For six consecutive months, sales at Gap stores fell flat or into negative territory, dragging the stock price down with them.

For Gap, it was a perplexing strategic predicament. The company's higher-priced, better-goods Banana Republic stores as well as its cheeky, value-priced Old Navy outlets have been clicking. So, as the company's mid-priced brand, Gap had to be careful about remaking itself without skimming sales from the other stores. In fact, the company's 27% sales jump in the fourth quarter, to $3.86 billion, was powered by those other brands. And by most standards, Gap Inc.'s 7% increase in company-wide comparable store sales in 1999 would be considered more than respectable. But it looks positively threadbare next to the firm's 17% increase in comp store sales in 1998. "We probably did lose our focus," concedes John Wilson, Gap Inc.'s chief operating officer. "We didn't have enough fashion, we weren't promoting a point of view, and it was confusing to customers."

Fashion can be a nasty business, even in a profligate economy. Struggling Levi Strauss just had its debt downgraded, and the stock price of can't-miss Tommy Hilfiger took a drubbing over slowing sales and murmurs that the Hilfiger label was losing its cool. Last year it was lifestyle king Polo Ralph Lauren's turn to get hammered by the market.

Gap seemed safer, because its philosophy has been to sell a seemingly limitless supply of tried-and-true basics. But that strategy makes less sense at a time when people want to dress up, when they want more color, style and luxurious fabrics. On the fashion side, Gap stores were either slow to jump on seasonal raves like embellished jeans and Capri pants or they didn't have enough of them. Of-the-moment niche retailers such as J. Crew and Abercrombie & Fitch (see box) were grabbing the attention of younger shoppers.

When Drexler turns his attention to something, results are usually quick to follow. So in October, when Robert Fisher, president of the Gap division and son of founders Donald and Doris, announced his resignation, Drexler quickly assumed his duties. The company's stock rose 10% on the news. Under Drexler, who took over as president of Gap brand in 1983, the company has gone from a $430 million blue-jeans chain to an $11 billion global enterprise with the kind of brand recognition enjoyed by Coca-Cola. It is rare to find a town where a Gap store does not exist and rarer still to find someone who doesn't have at least one item of Gap clothing. The name needs no translation in Japan, the United Kingdom, Canada, France and Germany, where Gap Inc. operates some 375 stores. "I would not be the least surprised if Mickey has something up his sleeves to renew the fireworks at the Gap," says Kurt Barnard of Barnard's Retail Trend Report.

He'll need something big, and here's why. Julie Kahn, 41, of Burlingame, Calif., walked into an Old Navy a couple of years ago and hasn't set foot in a Gap store since. "The Gap's merchandise just became too crowded and blase," says the vice president of sales for Susquehanna Radio Corp. and mother of 18-month-old Samantha. Kahn used to buy her basics at the Gap and pair them with a closetful of Richard Tyler and Giorgio Armani suits. But now her designer duds share space with her cashmere and wool Banana Republic sweaters and Old Navy nylon pants and fleece shirts. "Banana Republic has that grownup, luxurious merchandise," she says. She then opens her dresser drawer to expose a pile of Old Navy pajama pants, better known to Old Navy shoppers as Just Bottoms. "Old Navy is what the Gap used to be," she explains. "Old Navy rocks. It has the balls to have a point of view, and I appreciate that."

The sentiment has not gone unnoticed by the (non)suits back at Gap Inc. headquarters. The Gap brand's strength in basics, displayed in a minimalist setting, is wearing a bit thin. So Drexler is moving to reposition Gap stores on the price and fashion fronts and improve the in-store presentation.

This spring, look for a much less basic Gap. The company has pared down its mind-numbing khaki and blue-hued assortment. Instead of all those jeans, Gap has upped the fashion mix, injecting more color and style onto the shelves. "Frankly what happened is we got a little sloppy in [fashion] investments," says Drexler. "We're a fashion and basics business. We can't do what we do without fashion. The Gap point of view is that if we don't change the style, the business will get stale." You'll see the change in the form of hot pink suede shirts, leather boot-cut jeans and the edgier 1969 collection denims--a higher style and costlier ($78) fashion jean with details like yin-yang designs.