FOOL ON THE HILL

10 Tips to Save Gap

After 30 months of lower same-store sales, Gap finally nailed year-to-year improvement at the store level. Last week, the company posted a third-quarter profit, reversing last year's loss. But Rick Munarriz still sees potential for Gap to improve. He counts the ways.

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By Rick Aristotle Munarriz (TMF Edible)
November 18, 2002

From Rule Maker to fashion victim, Gap (NYSE: GPS) has been pounded like a stack of $10 discounted denim. But things change in a world of fickle fashion and seasonal hiccups. The apparel retailer's stock has risen by more than 50% over last month's lows. Last week, Gap reported an end to its same-store sales slide, improved on margins and reversed last year's loss with a third-quarter gain.

This would be fine, except the company still has a long way to go to get back where it used to be. It's like a senior in high school being bumped back to kindergarten, only to graduate into first grade. Gap still has to make the grade, consistently, before it earns the pomp and circumstance.

With that in mind, here are 10 ways to make the company important again -- in the eyes of consumers and shareholders.

1. You can't go back home.
Forget the critics who bash you for straying too far from your fashion basics. If you follow those breadcrumbs, you won't recognize the place anymore. Target (NYSE: TGT) has done it cheaper, and other specialty retailers, who successfully raided your business model circa 1990, are doing it better. There's no harm in mixing patterns with the classics. The consensus may be that you blew it by gambling on leather jeans and Old Navy swimwear, but I think the problem wasn't with the merchandise mix. It was the lack of conviction in your gambles. You're never too big to reinvent yourself. Just keep moving forward and ignore the rearview mirror.

2. Be smart. Be fair.
After 30 consecutive months of lower comps, you finally turned the corner last month. Don't gloat. Sure, third-quarter same-store sales were up by 2%, but that was after being down 17% last year, which was laid out over an 8% slide in 2000. Your sandbagged past performance is practically a lock to keep the comps growing, so do it the smart way. Wall Street is stoked by your higher gross margins. Just make sure the markups are fair. I'd rather see margins slip because you're selling quality goods at retail price than fatter premiums because you're discounting garbage. Down the road, it will ultimately be quality that wins shoppers back.

3. Keep an eye on the mouthpiece.
The celebrities featured in your ads have done more harm than good. No one sees Morgan Fairchild and Joan Collins as accessible fashion mentors. No one aspires to dress like Willie Nelson. Period. Either go the Abercrombie & Fitch (NYSE: ANF) route with pretty unknown faces or feature young celebrities on the rise. Just try to lay off the show tunes.

4. Don't take your brand for granted.
It's funny that you should turn to Disney (NYSE: DIS) for executive leadership when you hired Paul Pressler as your new CEO. Both companies assumed a company's past would be enough to assure the brand could withstand a moratorium on innovation and a cutback on quality. Disney had the bigger blind spot. Because it relies so heavily on foreign visitors, it took awhile to expose the art of scaling back to the masses. Local crowds react to a retail concept immediately. Don't assume a brand is an asset in perpetuity. Actually, approach it as a liability. It's a burden that must be watered, weeded, and maintained. 

5. A novel concept.
As your high-end store, Banana Republic has been the resting place for stylish woven fabrics. That choice target group can be peddled more high-end accessories and novelty items than the stores stock presently. I'm not saying to shove Banana Republic, Sharper Image (Nasdaq: SHRP), and Jamba Juice into a smoothie blender, but there's an eclectic side to high-end retail that has yet to be effectively mined creatively. Do it.

6. Plastic perks.
Gap credit cards are fine, though it probably makes more sense to phase them out in favor of traditional affinity plastic that serves a purpose outside of the stores. Beyond the obvious benefit as a monthly marketing tool, you can use it to inspire higher-margin sales. For instance, allowing double-reward rebates on featured full-price items.

7. Be creative.
Old Navy has bounced back the strongest because it was also hit the hardest. With the economy loving discounters, it's a shock that it took a value concept like Old Navy this deep into the recession to finally show some gains at the store level. Personally, I'm not blown away by the marketing emphasis on painter pants, and I still see too much underutilized space on the floor. Don't let the swimsuit faux pas shrivel up your creative juices. If Target robbed your concept blind, you can steal a page out of their playbook with fashionable home, work, and school accessories and gadgetries.  

8. Experiment. Make lemonade.
Remember when you could slap "Gap" on any leased space, and it was a hit? GapKids. babyGap. Now that the brand is slumping, so are the coattails. I'm not a fan of the strategic surrender, but retreating does work from time to time. You'll shrink your overall square footage by 2% next year, with the namesake chain taking the biggest hit. That's fine. But don't let the closing stores die in vain. If you have an unattractive lease that expires in a few months, let out all of the trial balloons where you have little to lose. See if installing listening kiosks featuring the musical artists in your Gap ads draws in browsers. Give store managers creative freedom to rotate inventory aggressively, reporting back on what works best. Give the dying stores experimental fashions and sneak glimpses. Let them go out swinging to eventually strengthen the surviving stores.  

9. Go incognito. Spy.
Pressler made a favorable impression on me when he spent his first few weeks toiling away at the store level. Over the critical Thanksgiving holiday weekend, he won't be resting at home with a turkey drumstick in one hand and the remote control in the other. He will be scouting out more stores over the busy long weekend. But he's missing the big picture if his visits are announced. Sure, Sam Walton would stop by his stores and see his Wal-Mart (NYSE: WMT) employees at their best, but Pressler needs to see Gap at its worst. Whatever became of the long lost art of the CEO, a.k.a. mystery shopper? That's what Pressler should do, ducking into stores unannounced under the managerial radar to see what the employees are doing and the patrons are saying.

10. Gap.com is vanilla bean.
It's a great flavor that goes with everything, but it's hardly addictive. It's fine for shopping, but what about interactive online incentives to keep consumers close, whether they think they want to buy something or not? The babyGap area should borrow from the NickJr.com playbook of basic games and activities. GapKids can also play up the activities, as well as older fare like a family-friendly online serial, where visitors can help shape the storylines. For the flagship adult site, you don't need the same eye candy. But why not add site content that draws from the varied interests of the Gap shopper -- at the very least, some MP3 downloads of music from Gap ads. Banana Republic can use a more upscale, classy approach, while Old Navy shouldn't be afraid to take chances on mainstream humor and human-interest content.

Will any of these things save Gap? Are they too risky? I don't know. If I had all the answers, I wouldn't be here, now, would I? But I do see Gap's potential. It's not too late to return the company to its former glory. Falling into the Gap is easy. The drop-off isn't as deep as you might think.

Rick Aristotle Munarriz dresses retro, unintentionally. Rick's stock holdings can be viewed online, as can the Fool's disclosure policy.