How The Gap might get its groove back

By MarketWatch

Mickey Drexler back at The Gap?

As The Gap (GPS, news, msgs) rethinks branding strategies at its two largest retail concepts, some industry watchers are calling for Drexler's return to the company, more than five years after he was unceremoniously deposed as its chief executive.

The San Francisco parent of the Gap, Old Navy and Banana Republic stores continues to struggle, posting a long string of declining same-store sales (sales at stores open for at least a year). The retail chain has conceded a drastic need to stop the bleeding and restore its once-prominent standing.

"The only person who can fix that is Drexler," said Howard Davidowitz, an industry veteran who is the chairman of Davidowitz & Associates, a retail consultancy and investment bank in New York.

2 decades of rampant growth

Drexler attainted rock-star prominence while leading The Gap through more than two decades of rampant growth.

But the company began to stumble badly in 2000. It posted double-digit declines in same-store sales, the industry's key growth measurement, for 2001 and 2002. Observers blamed a merchandising approach that was too fashion-forward, alienating the long-established T-shirt-and-jeans crowd while failing to attract new shoppers.

The mercurial Drexler, who ahead of the decline had taken himself out of the everyday business of picking fashions and colors, jumped back into the fray to repair the damage. But the retail giant couldn't turn around on a dime, given the nine-month lead time needed to get blouses, pants and jackets from designers to manufacturers and then to the shelves.

Drexler dictated a back-to-basics approach that began to resonate with customers in fall 2002, when same-store sales started to tick up. In October of that year, the company's same-store sales jumped 11%, the biggest one-month surge in more than two years and the first of a short-lived chapter of positive monthly same-store sales into 2004.

Indeed, those next 21 months are the only bright period in recent memory: In five of the past seven years, including the most recent year, The Gap's same-store sales have declined.

But Drexler didn't get to rest on his laurels. He was fired in May 2002 during what has been widely reported as a stunning decision by the Fisher-family-led board and an emotional outburst on all sides. Paul Pressler, who was head of the Disney stores during its biggest growth periods, was hired that October.

Drexler, who wouldn't be interviewed for this story, is now running J. Crew Group (JCG, news, msgs), enjoying plaudits for the resurgence of that retailer's sales and its successful initial public offering.

A J. Crew spokeswoman said Drexler has been receiving a number of media requests but is focused on matters at J. Crew.

The Gap, which is expected to report $16.02 billion in fiscal 2006 sales, is considerably bigger than J. Crew, with more retail concepts, including a handful of fledging concepts such as Forth & Towne. J. Crew is on track to report in fiscal 2006 sales of $1.13 billion.

A veteran at the helm

Even still, Sean Connery is more likely to return to the role of James Bond than Drexler is to reoccupy the corner office at The Gap. Yet that doesn't stop others from pontificating about how great it would be for The Gap if Drexler were running the show.

Analysts have said that Pressler, whose easygoing leadership style is vastly different from Drexler's loud and pointed style, lacks the key merchant experience that Drexler, the son of a buttons and piece-goods buyer, was born into.

If The Gap is to right the wrongs, it needs to put a strong apparel-retail veteran at the helm, analysts assert. That's true even if speculation that the company might be putting itself up for sale turns out to be valid.

But whom? The pickings are slim for capable leadership of an international retail chain with more than 3,200 stores.

Prudential analyst Stacy Pak is convinced that the Fisher family, which owns about 36% of Gap, is shopping the company around.

"We believe the Fisher family is frustrated and interested in selling," Pak wrote in a recent research note. She thinks the company will be sold in pieces, with Banana Republic as the easy sell to a strategic buyer. The Gap and Old Navy chains, however, would "likely" be sold to financial buyers, Pak said.

"The only way the Gap and Old Navy deals work is with having the right CEOs to run the business," Pak added. "We think the right people are Mickey Drexler to run Gap and Jenny Ming, ex-head of Old Navy, to run Old Navy."

Ming, who spent more than 18 years at The Gap and reported to Drexler and Pressler, left the company last summer.

Retail consultant Davidowitz said that he has "never been more sure of anything" than The Gap's need to bring Drexler back.

"Who do they get?" he asked. "This is a very tough problem."

Though there has been no indication from The Gap that Pressler's job is on the line, analysts and observers have suggested for more than a year that if sales didn't pick up, his days would be numbered.

Sales haven't picked up. For December, the retailer's same-store sales tumbled 8%, after a 9% decline the year before. That makes 29 out of 31 months that The Gap has reported flat or negative results at stores open longer than a year.

Pressler conceded that he was disappointed with the results; the company had made huge investments in new merchandise and store remodels, and vowed to rejigger its strategic approach to the Gap and Old Navy stores. Banana Republic stores have enjoyed a string of positive monthly same-store sales results, indicating that they could be turning the corner.

Gap spokesman Greg Rossiter reiterated the company's stance: "The board and the management team led by Paul Pressler are absolutely committed to reexamining the brand strategies for both Gap and Old Navy. They're all totally engaged in what needs to be done right now."

This article was reported and written by Jennifer Waters for MarketWatch.