Gap Inc Chief Executive Millard Drexler is clearing racks of pinstripe sports coats, ruffled shirts and fashions that fizzled, returning to tried-and- true styles to spur sales after two years of declines.
Analysts say Drexler realizes that straying from Gap's traditional look was costly: The shares fell US$0.06 yesterday to US$16.82, less than a third of the US$51.69 they reached in February 2000. Gap, the largest US clothing retailer, cut prices by as much as 80 percent last quarter to get rid of merchandise. That led to a profit decline.
Drexler is ordering more denim, khaki and classics such as cotton sweaters at the retailer's Gap, Banana Republic and Old Navy stores after saying in February he was through with trendy clothing. Switching back to basics at Gap will take at least until the end of summer, analysts said. That's when Drexler's plan will be tested. Some investors are in no mood to wait.
"There's no guarantee," said Jeff Easter, an analyst at SunAmerica Asset Management's large-cap team, which manages about US$6 billion in assets and sold Gap shares in April. "I'm not sold that summer will save the day or fall will be the savior."
San Francisco-based Gap will report later today that profit in the first quarter ended May 4 fell to US$0.02 to US$0.03 a share, as sales dropped 9 percent to US$2.9 billion. Net income was US$115.5 million, or US$0.13, a year earlier.
Company executives had said they plan to order cautiously until sales pick up in the second half. Meanwhile, discounts to clear slow-selling clothing will keep hurting profits, analysts said. Gap's 24-month slide in same-store sales will extend at least into this quarter and the next, they said.
"We think they'll get it right in about a year," said Ken Roberts of Ken Roberts Investment Management, which has bought and sold Gap shares for about 15 years. The company manages US$410 million in assets, including 515,397 Gap shares.
Gap's inventory at the end of the quarter was 20 percent below a year earlier. When sales fell less than expected in April, some investors took it as a sign that Drexler's strategy might be working. Gap shares had their biggest one-day percentage gain in four months on May 9 when the company announced sales.
"This is not good news, it's just not terrible news," said Gary Furukawa of Freestone Capital Management, which has 690,000 Gap shares among US$800 million in assets. Gap is starting to sell "more of the stuff that people wear."
Drexler, 57, is refocusing on clothing in neutral colors and comfortable fits, analysts said. He cut Gap's television advertising for the spring season, choosing instead to highlight the brand's summer merchandise.
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