Khakis Get the Blues

By Kristina Dell

When the retail world's bright lights gathered Jan. 15 at investment bank Financo's annual dinner in New York City (a can't -miss annual event for the apparel crowd), the gossips, according to Fortune.com, had one juicy no-show to chatter about: Where was Gap CEO Paul Pressler? Fashion insiders had been numbering Pressler's days for months. And sure enough, after nearly two years of limping sales and yet another holiday season in which the Gap's big idea (more hoodies?) drew yawns from shoppers, Pressler agreed a few days later to step down.

His departure--"a mutual agreement between him and the board," according to a Gap spokesperson--marks a low point in the history of a brand that not so long ago epitomized smart, affordable fashion. Named for "the gap in the market it hoped to fill," the Gap had something for everyone. You got your khakis there; your grandmother got her cardigans; Sharon Stone got her outfit for the Oscars. So what went wrong?

Perhaps it was just too much of a good thing. When Pressler joined Gap as CEO in 2002, he took over the reins of an unwieldy empire, home to the Gap, Old Navy and Banana Republic brands. The kingdom had become so enormous--$16.3 billion in sales at its peak, with 2,994 stores--that the only way for Gap to keep growing was to push clothes with broad appeal that could sell millions and millions of units. But once everyone had bought a pair of khakis, a white button-down and a few pocket Ts, what next? Pressler, a novice to fashion who came to Gap after a 15-year career at Disney, took his time figuring that out. Meanwhile, competitors surged ahead, as Gap's sales fell 2%, to $14.8 billion last year. "It used to be that the Gap dictated fashion, but now customers have so many resources, they dictate what they want and see if a store has it," says Marshal Cohen, chief analyst at the NPD Group. And they found what they wanted everywhere, from Target to Wal-Mart to Abercrombie & Fitch. The Gap may have invented cheap chic, but it steadily lost customers to stores that were cheaper, chicer or both.

To his credit, Pressler did rid the company of most of the $3.2 billion debt he had inherited by tightening inventory, closing underperforming stores and managing the supply chain more efficiently. And while Gap's stock still lags its competitors', the company's shares rose 66% on Pressler's watch. "Under his leadership, the company has meaningfully improved its operations, strengthened its balance sheet, greatly enhanced its online presence and improved our standing as a global corporate citizen," Robert Fisher, son of Gap's founders, told TIME in an e-mail.

But Pressler's penny-pinching may have turned off the Gap's core customers. Sweaters that were once 100% cotton or wool, for example, showed up in stores as acrylic blends, and people noticed. Banana Republic tried to woo the same high-end consumers as J. Crew but didn't go far enough in offering luxury fabrics, like cashmere, that those shoppers wanted. In 2005, while department stores couldn't sell enough $100-plus premium jeans, the Gap skipped denim and tried to push khakis. "Pressler went too far in focusing on costs at the expense of merchandising," says Christine Chen, senior research analyst at Pacific Growth Equities. "Sometimes you just need to go with your gut and do what makes sense to get customers in the door."

The Gap's advertising, too, veered off course. Signing up the rapper Common as a pitchman was a play for teen consumers, but analysts point out that it might have been better to forget that fickle demographic and win back folks who remember the Gap in its heyday. Meanwhile, Pressler missed his chance to remind people in their 20s and 30s how hip the Gap could be. (Remember the thrilling Jump & Jive khaki-campaign holiday spots?) Pressler launched two entirely new brands-- Forth & Towne, a midpriced line aimed at baby boomers, and Piperlime, an online shoe store--instead of working to make the Gap, Old Navy and Banana Republic relevant again. Rather than trying to be everything to everyone again, says David Bassuk, retail consultant at Kurt Salmon Associates, Gap ought to focus its brands on a narrower group--shoppers in their 20s and 30s.

Those consumers have been gorging themselves at the so-called fast-fashion boutiques, such as H&M, Zara and Mexx. These stores have figured out how to cut the clothing cycle down from six months to six weeks, so their racks are constantly replenished with fresh styles still wet from the runway. Gap, on the other hand, with its huge operations and slower reaction times, has been forced into the riskier business of guessing up front how a season's trends will play out (skinny jeans? newsboy caps?) and making huge bets on a few ideas.

For the wardrobe basics that used to be the Gap's bread and butter, consumers now expect higher quality at a bargain price. Banana Republic has had some success filling that niche, promoting classically styled work clothes that can be brightened up for an evening out. Analysts say that brand is the one hot spot in Gap's portfolio, with sales rising 2% last year. "You don't want to waste Banana's profits fixing other parts of the company," says Bruce Greenwald, an economics professor at Columbia Business School.

Can this company be saved? Why not? Retailing is full of 360DEG turnarounds. Wall Street darling Abercrombie & Fitch, for example, was once an afterthought unit of Limited Brands but spun itself off and repositioned itself as the hottest label for the teen crowd. Even once dowdy JCPenney reinvigorated itself by hiring a smart merchandiser, Vanessa Castagna, as executive vice president and giving her the freedom to remake the brand. "She helped make Penney's cool, and the Gap needs to be cool," says Chen.

A new CEO would have the advantage of deep pockets and patient owners. Founders Donald and Doris Fisher, along with their son and interim CEO Robert Fisher, own about 33% of Gap shares and have never seemed interested in selling their baby; they want it fixed. One possibility: breaking up the company into three more-nimble parts, with each brand focused on a specific customer demographic. "The combination is overly complex and unmanageable," says Todd Slater, managing director at Lazard Capital Markets. Whether or not it remains one intact company, industry experts say Gap will have to get back to the fashion basics at its flagship or risk losing even its undisputed title as the king of khaki.

With a company so large, one or two spot-on guesses could quickly usher in a Gap metamorphosis. "If they hit a trend with innovation, Gap has a lot at their disposal," says David Sievers, a principal at Archstone Consulting. Of course, to make that happen, Gap needs to first find one thing: a CEO who really knows fashion. Fast.