After Years of Phenomenal Success, Top Managers Are Struggling to Close a Wall St. Confidence . . .GAP
Millard S. (Mickey) Drexler is not a man who shrinks from commitment.
“We have a commitment to kick butt,” said Drexler, president of Gap Inc., the powerhouse San Francisco retailer that is waging the turf battle of its life against competitors bent on poaching chunks of its bread-and-butter denim market.
“We’re going to be as aggressive as we have to be. We don’t want anyone in this marketplace eating our lunch,” Drexler said.
With everyone from “Kmart to Armani to Macy’s” nibbling away at the casual clothing market, Drexler and his Gap team have recently cut prices, revolutionized distribution, reordered the company’s management structure and boosted store sizes.
Some Wall Street analysts contend that, even though the stellar growth of recent years has moderated, Gap will continue to outperform most retailers. But the stepped-up competition and Gap’s get-tough response--which is squeezing profit margins on its signature goods--have made many one-time fans skittish.
Having spent the last two years as a textbook case of how to thrive in tough economic times by selling sturdy basics such as jeans and T-shirts, Gap is wearing thin with investors. Since hitting a high in January of $59.125 per share, the stock price has plunged to $30.375.
Once a company that could do no wrong as far as Wall Street was concerned, Gap now appears to be fumbling. When Drexler told analysts and money managers at a recent San Francisco investment conference that the company planned to scale back a costly TV advertising campaign and to cut more prices to bolster market share, the stock price tumbled nearly two points.
Recent negatives aside, Gap is hardly coming apart at the seams. In effect, the company is paying the price for its past superlative performance. Investors who had come to expect miraculous profit have been disappointed in the merely strong.
The company is expected to exceed $3 billion in sales this year. Not long ago, its brand surpassed Liz Claiborne to become the nation’s second-largest clothing label, after Levi Strauss. The company operates more than 1,200 retail shops under the names Gap, Banana Republic, GapKids and--most recently--GapShoes. This year, defying the recession, it plans to open 135 new stores and expand 100.
Although Drexler continues to hammer home the idea that Gap means value and quality, the company’s explosive growth can, perhaps, be chalked up as much to image and cachet. A long-running black-and-white photo campaign seen at bus stops and on billboards features up-and-coming figures in the arts who parade Gap T-shirts, jeans and denim jackets.
During the recession, Gap’s basics were seen as cool, but stiff competition has taken a toll.
In the second quarter ended Aug. 1, earnings rose 10.2% to $37.7 million. But that was in stark contrast with a 79% jump in the same period the year before. Meanwhile, sales in this year’s second period grew 17.4%, a pace that would be the envy of many beleaguered retailers but was well shy of the 29% rate in the previous year’s quarter.
(Analysts estimate that the company is doing about $460 a square foot in sales this year, compared to an industry average of $235.)
Growth of sales at stores open at least a year--a key measure of a retailer’s performance because it discounts the boon from new stores--is expected to slow to a still respectable 5% this year. But to some that seems measly compared to 21% in 1991 and 14% in 1990 (when many retailers were eking out minuscule gains or showing declines).
“There’s nothing wrong with 5%,” said Bernard Sosnick, a retail analyst with Oppenheimer & Co., a New York investment firm, “but many investors see this as decelerating momentum.”
Even so, there are still plenty of believers who say that the recent changes at Gap will help the company better address the increasing competition and regain its edge.
Thomas H. Tashjian, an analyst with First Manhattan Co. in New York, likes the decision, announced in August, to give greater autonomy to each of the four divisions--Gap, which in 1991 accounted for about 70% of the $2.5 billion in sales; GapKids, which includes the hot-selling babyGap line; Banana Republic, and international operations. In the past, a company hallmark has been its centralized management, but Gap’s expansion has made that strategy unworkable.
“It will empower growth in some of the smaller divisions,” Tashjian said of the change, “and will be a catalyst for growth of international.” Gap has, perhaps surprisingly, done little in the way of taking its all-American franchise global, and Drexler indicated to analysts that the company will continue to take its time.
Tashjian also plays down the price-cutting, noting that Gap’s vertical integration--it does everything from designing to manufacturing to promoting to selling--gives it “much more pricing flexibility.” For the important back-to-school season, Gap helped spark a price war by reducing its jeans to $28 from $38 and its denim shirts to $38 from $42.
According to Drexler, the strategy worked. “We beat them badly,” he said of competitors. Since then, Gap has dropped the prices of basic socks to $2.50 from $4.50; cuts on sweaters and other items are also being made.
Among other positives that Tashjian noted are Gap’s state-of-the-art distribution plant in Maryland, opened in February; a new inventory allocation system that enables stores to receive goods more quickly, and the revamped, more stylish Banana Republic, which suffered years of losses in the late 1980s after customers soured on its safari look. Banana Republic--a grown-up Gap for an older crowd--is now said to be modestly profitable.
Gap has also been filling in gaps in its product line, offering intimate apparel, an expanded array of accessories and fashion classics such as plaid blazers.
“They are starting to add different areas to become a total Gap resource,” said Bill Seitchik, vice president of Seitchik Corwin & Seitchik, a San Francisco executive search firm specializing in the fashion and retail trades.
Detractors suggest that Gap recently has lost sight of who its customers are. Current TV ads featuring New York poet Max Blagg struck one retail consultant as being “skewed to an artsy, avant-garde customer that is different from 99% of the customers in the store.”
Gap boosted its ad spending by $15 million in the third quarter over the same period last year, primarily to make a big nationwide splash in TV, a relatively new medium for the company.
The company told analysts that the campaign has had mixed reviews and will be dramatically scaled back in the fourth quarter as Gap analyzes how best to spend its promotion dollars.
Alan Millstein, a retail analyst and publisher of the Fashion Network Report newsletter in New York, maintains that “a certain amount of ennui has begun to set in, in their stores. How much blue can you look at?”
Indeed, Mary Thorsby, 28, a San Francisco writer fond of working in Gap pants and tops, decided recently that “I needed to grow up and wear grown-up clothes. You can only buy so many purple T-shirts.”
But she still values the store for its convenience. “You can match things easily,” she said.
Despite the stock-bashing, there’s plenty of fight left in Drexler. No wonder, considering that much of his personal wealth is tied up in the 3.5 million shares of Gap stock he owns, after having sold 500,000 shares in March.
Key to building market share, he said, will be “renewed efforts on our part” to emphasize value over price. He expects a bumpy road and plenty of that sincerest form of flattery: imitation.
As he told the analysts: “It ain’t easy out there.”
Gap’s Blues Gap Inc.’s fortunes have been fading faster than its blue jeans, if the company’s stock price is any indication: Since January, the stock has lost nearly 50% of its value.
Oct. 2: $30.375, down 50 cents
