The plunge made Wall Street veterans grab for their rip cords. "I've never seen a stock fall that far, that fast," said Barry Bryant, a retail analyst at Drexel Burnham Lambert. "This is a decline that leaves you gasping." Only a month ago Gap Inc., owner of the Gap, GapKids and the Banana Republic clothing chains, had been one of the stock market's highest flyers. But from an August peak of 77 7/8, the stock sank to 37 early last week, down 52%. That included a 10 1/4-point drop last Monday alone.
Even for the wild market of 1987, it was a hair-raising ride. Many of the forces driving Gap stock down affected other retailers as well: sluggish August sales, sharper competition and growing ambivalence among shoppers. But such factors were not enough to account for the rout of Gap stock. Some problems were uniquely its own -- just as its startling success had been over the previous four years.
The Gap, which is based in San Bruno, Calif., has been an innovative leader in the specialty retail business that is siphoning sales away from department stores. Founded in 1969 by Entrepreneur Donald Fisher, the company relied heavily on the blue-jeans craze in the 1970s, but then added bright-colored, practical sports clothes. In 1983 Fisher made two shrewd moves. He bought Banana Republic, a San Francisco retailer with three stores and a catalog operation that sold trendy travel and safari wear, and he hired a new president, Millard Drexler, the marketing whiz from the Bronx who had turned around the faltering Ann Taylor chain.
Drexler worked similar magic at the Gap. Between 1983 and 1986 its sales rose from $480 million to $848 million as the number of stores expanded from 550 to 724. Banana Republic alone grew to 65 stores. The Gap's annual profits ballooned from $21.6 million to $68.1 million. Before its dive, the firm's stock price had risen nearly 2,900% in five years. Said Dean Witter Reynolds Analyst William Tichy before the stock's plunge: "This thing has just defied the law of gravity."
But last week the stock started obeying all physical laws. The trouble began at a Sept. 17 Manhattan conference on the retail industry with Smith Barney as host. Dozens of top Wall Street analysts and institutional investors were assembled to hear reports from the leading companies. Many of the experts suspected that the news was not good. But the Wal-Mart Stores discount chain announced that sales were up sharply in September. The chairman of Toys "R" Us declared that though this was a slow period, he was excited about the Christmas season. True to Gap tradition, Chairman Fisher refused to reveal any projections for third-quarter earnings. In the past, though, company officials had offered at least a hint of whether sales were up or down. This time there was not a word, and the analysts got queasy. "We are a forgiving lot," says Walter Loeb of Morgan Stanley. "Had Gap advised us about what was happening, we would have stayed with it. But we on the Street don't like surprises."