Gap bets on bolder classics for turnaround

Markets Reuters

By Phil Wahba

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NEW YORK (Reuters) - Gap Inc <GPS.N> is looking to simplify its clothing offerings, dab in more color, and de-clutter its North American namesake stores to help boost sluggish sales at the chain.

The Gap stores, which make up nearly a quarter of overall sales but has been languishing for years, strayed from what it was best known for -- high-quality jeans and casual clothes with an American aesthetic, the president of Gap North America, Art Peck, told Reuters in an exclusive interview.

"What's expected of us is pretty clear," Peck said on Wednesday, the eve of the retailer's investor day. "I think it's been us who've kind of wandered around."

Peck, 56, oversees the Gap stores in North America, but not the company's Old Navy and Banana Republic chains. He took up his job in February after a management shakeup.

Industry experts and analysts say that Gap has confused shoppers, who are not sure what to turn to Gap for anymore.

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Peck intends to remedy that. Although he's only been on the job for a few months, Gap's shelves have begun to reflect his back-to-basics-with-a-twist approach and sparer presentation, which will become even more noticeable during the upcoming holiday season.

At the investor day, Gap reaffirmed its forecast for earnings per share of between $1.40 and $1.50 this fiscal year, in line with Wall Street expectations. It also said it expects profit margins to improve in the second half of 2012 as pressure from higher cotton costs eases.

Continuing its expansion outside North America, where Gap Inc only gets 14 percent of sales now, the company said it plans to triple the number of Gap stores in greater China to 45 by the end of 2012. It also launching its first overseas Old Navy store, in Japan, in the next 18 months.

Gap shares were flat at $17.95 in afternoon trading

RETHINKING WARDROBE

Gap has added more vivid colors to its denim jeans and introduced skinny jean leggings with animal and snake prints as well as colored corduroy leggings, which have sold well.

As Peck walked Gap's showroom on Thursday, he pointed to coral colored women's khakis and a v-neck hoodie as examples of the brands effort to stick with its classics but add a new touch without alienating shoppers. For instance, Gap attempts at more formal, sober clothes for women fell flat, Peck said.

The Body Fit line of yoga and casual clothing for women, introduced last year in a direct challenge to Lululemon Athletica <LLL.TO> is also being well received.

But Peck isn't crazy about how Gap displays clothes on the sales floor. So a big change has been to stack fewer items on top of one another to reduce the clutter that makes shelves look like discount bins and use more elegant shelving.

"We have far better product in our stores than we're getting paid for," Peck said.

Gap currently operates about 890 namesake stores in North America, not including its outlet locations, and at the investor meeting, it reiterated its intention to lower that to 700 by the end of 2013 to help same-store sales.

Gap's sister brands are also tweaking their offerings.

Banana Republic's holiday collection, on display at the investor meeting, reflected how that brand is re-emphasizing its womenswear for the workplace and special occasions, after finding its trendier lines were met with a tepid reception last year.

Old Navy, a lower priced chain and Gap Inc's biggest brand by sales, is adding more activewear like yoga clothes.

Gap has lost sales in recent years to specialty retailers like Abercrombie & Fitch <ANF.N> and could face intense competition at home from rival Uniqlo, owned by Japan's Fast Retailing <9983.T>, which is eyeing about 200 U.S. stores by 2020, up from three.

Sales at Gap's North American stores open at least a year fell by at least 5 percent in six of the last seven years and have kept dropping this year, a far cry from the chain's heyday in the 1980s and 1990s as the go-to retailer for casual American style.

Even as it tries to wean shoppers off of looking for deals, Gap will continue to discount this holiday season, but Peck said the focus needs to shift away from price.

"We need to start talking about the merits of the product versus the merits of the deal," he said.

Peck said Gap must lure a younger generation of shoppers, which means not just selling the same old clothes.

"Predictability ultimately means you fade into the background," he said.

(Reporting by Phil Wahba in New York and Nivedita Bhattacharjee in Bangalore, editing by Saumyadeb Chakrabarty, Bernard Orr)

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