Holiday Season Is a Holding Action at Gap Stores
By MICHAEL BARBARO- Dec 7 2005
In an unusual advertisement that ran briefly in New York movie theaters, customers and employees suddenly begin to trash a Gap store. One man tackles a mannequin, tearing off its shirt with his teeth, while another slices through a display case with a chain saw. A woman, spotting the pandemonium, drives her minivan through the front doors.
The ad was intended to introduce a remodeled Gap store, but it may be a fitting metaphor for the retailer itself. Sales are slumping across all three divisions, several executives have left recently and Wall Street analysts are openly questioning whether the company's leadership is up to the job.
Gap, the nation's largest specialty apparel retailer, has largely written off a strong showing this holiday season, cutting its forecast for full-year earnings after finding that the number of shoppers walking into its stores has fallen by 8 percent. In increasingly gloomy conference calls, Gap executives describe the situation as "disappointing" and "unacceptable."
The company's central problem is not new. Shoppers are rejecting its clothing as too trendy one season, too safe the next, and generally less exciting than that offered by chains like H & M and Zara, which have pushed quick and cheap fashion knockoffs, or teenage-oriented retailers like Abercrombie & Fitch and American Eagle Outfitters, which strongly evoke a lifestyle.
But what is different this time around is that analysts are challenging the company's chief executive, Paul S. Pressler, a former Disney executive who took over Gap in 2002 with little retail experience. "Paul Pressler may be the wrong person to run the Gap," read the headline on a recent research report published by A. G. Edwards.
Jennifer Black, head of Jennifer Black & Associates, an investor research firm, wrote that she is "beginning to question the leadership's ability to run" a retail company and predicted that "Gap may be on the cusp of a leadership change."
Gap has aggressively defended Mr. Pressler against the criticism. After a trade publication reported that the company had begun a secret search to replace Mr. Pressler, Donald G. Fisher, a founder and a major shareholder, issued an angry denial. "Paul is the right person to lead this company," he wrote.
Mr. Pressler, for his part, seems unfazed. "We read our analysts' reports," he said in an interview. "And others, in equal if not greater numbers, are complimentary of this management team." Gap, he said "has strong talent with lots of tenure."
What makes the attacks so surprising is that they are coming just a year after Wall Street praised Mr. Pressler for reversing the chain's seemingly endless sales slump. At a Lehman Brothers retail conference in New York City last May, Gap was hailed for its strong turnaround.
Sales rose, if only for a couple of years, under Mr. Pressler's leadership, and he was widely credited with wiping out much of the company's $3.4 billion in debt. He closed 300 poorly performing stores, brought its excessive inventory under control and invested heavily in store remodeling.
What he has not done, analysts say, is inspire shoppers with the right products. As a result, sales at locations open for at least a year (same-store sales, a widely recognized measure of a retailer's health) have remained flat or declined for 12 consecutive months. In November, the start of the holiday selling season, sales fell 4 percent at Gap, 2 percent at its Old Navy chain and 5 percent at its Banana Republic stores.
As Gap has struggled, executive turnover has grown. The Gap brand's chief financial officer, the head designer and the head of marketing have all left. Gap, meanwhile, has named a new president; a new head of its children, baby and maternity business; and a designer for adult fashions.
Retail analysts blame the merchandise. "Pressler's problem is that he is not taking risks," said Richard Jaffe, an analyst at Stifel Nicolaus. "There is nothing exciting or interesting on the sales floor."
Company executives acknowledged that they briefly lost touch with consumers, designing too much clothing around occasions - a pink suede tote, tailored for an evening out - rather than classic Gap staples.
During a conference call in November, when Gap announced "challenging" third-quarter results, Gap's new president, Cynthia Harris, said with unusual candor that "we have disappointed our customer for several seasons, and we know it will take a while to win them back."
An overhaul of the merchandise, designed to return Gap to its casual roots, began at the end of 2004. But because much of the 2005 clothing was ordered last year, the product is just reaching stores now. Harris said the holiday merchandise signals a return to "the fresh casual American style" and "bright optimistic colors Gap is famous for."
There is no shortage of those this holiday - yellow- and blue-striped scarves, pink knit caps and lime green corduroy coats. Thomas Filandro, an analyst at Susquehanna Financial Group, said the reunion of old Gap best sellers is "much safer than in past years."
Mr. Pressler said the shift to casual "is a work in progress" and pointed to turnarounds at Abercrombie & Fitch and Coach that unfolded over years. "It will take several seasons to get where we want to be," he said.
Mr. Pressler has taken some criticism for relying too much on customer polling, but he defended the approach. Such analysis, he said "is not a tool we use to tell us where to go, but where we did not go right." Requesting quarterly reports from store managers, for example, "has led to a lot of improvement" in how well clothing fits.
As Gap struggles to find the right mix of fashion and basics, it has abandoned its signature TV spots for the holidays - a dancing Sarah Jessica Parker, for example - favoring instead a catalog inserted in magazines and distributed in stores.
Gap says the catalog better showcases merchandise by putting dozens of product images into the hands of consumers. But several analysts said the approach was an acknowledgment that Gap needed to figure out what was wrong with its products before advertising its brands.
Consumers complain that Gap seems adrift. Samantha Turner - 28, in urgent need of a winter coat - walked up to the window of the Gap store on Lexington Avenue in Manhattan one night this week and shook her head in confusion.
"It snowed yesterday, but I'm seeing fall clothes here," she said, pointing to mannequins dressed in puffy vests, crew-neck sweaters and a thin corduroy coat. So Ms. Turner walked across the street to the Swedish retailer H & M.
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