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Gap's CEO Wears Blame for Firm's Woes but Unveils Strategy to Revive Growth


NEW YORK — Gap Inc. Chief Executive Millard "Mickey" Drexler, often cited as one of history's greatest merchants, issued a mea culpa to investors Thursday for the recent poor performance of his once-glowing company.

The firm's Gap chain and Old Navy chain tried some new things and failed but will work their way out by taking still more risks, Drexler told about 1,000 influential investors gathered at the Plaza Hotel for brokerage Goldman, Sachs & Co.'s annual retail conference.

Taking creative chances is the only way a clothier stays relevant, he said.

"Our recent performance has been bad," Drexler conceded. "We're unhappy about it. I know you're unhappy about it. Our customers who can't find some of their . . . clothes in our stores are unhappy about it."

With Gap's stock down more than 50% since spring amid weak sales and earnings, Drexler outlined his plans to revive growth.

"Collections," Old Navy's new, more-adult fashion line, has begun shipping for fall. The Gap stores, Drexler said, will feature more classics and non-khaki slacks.

Both shifts should address summer and fall clothes that were skewed too young, turning off older customers, he said.

Old Navy also had muddled its message last spring, Drexler said, with its "All-Terrain" campaign--which consumers didn't understand--and plethora of confusing signs crowding the stores.

And both Gap and Old Navy, along with the Banana Republic chain, are working to keep prices in check and to offer a broader range of merchandise to draw more customers, he said.

Gap and Old Navy also will begin issuing their own credit cards, Drexler said, expanding on a successful card test at Banana Republic, the firm's only bright spot in the last several months.

To address one of the company's biggest mistakes, Drexler told the standing-room-only crowd, the Gap will once again use TV ads.

At the critical back-to-school time, Gap pulled its TV ads in hopes of redirecting the money into a store promotion that offered $20 of credit for $100 spent.

Response was so poor, Drexler said, that the company is extending the Oct. 1 deadline for the offer.

Last week, Gap shares hit a two-year low after the company reported a 14% August sales decline in stores open at least a year--worse than the 4% to 7% that analysts had anticipated. The company also warned that it might not meet earnings or sales projections for the second half of the year.

On Thursday, however, Drexler's comments were confident, if self-examining. But the stock (ticker symbol: GPS) still eased 38 cents to $22.94 on the New York Stock Exchange.

Drexler said the company's growth during the last several years--Old Navy, a 6-year-old concept, already has 580 stores--had pressured the firm's infrastructure.

Old Navy, now estimated to account for more than a third of the parent company's sales, has had trouble getting items from its distribution hubs to its stores.

Todd Slater, an analyst at Lazard Freres, said it still seems that Gap executives don't recognize what Slater believes is the biggest risk facing the company: It has plans for a 30% growth rate in new-store square footage at a time consumer spending is slowing.

"Mickey is right when he says there will be winners and losers, and I firmly believe the Gap will be a survivor," Slater said. "However, in the meantime, the increased capacity, combined with the company's internal problems, are adding fuel to the fire."

When an investor asked about Gap's growth plans, Drexler joked that he agrees there is excess retail space--and he wishes the competition would quit adding stores. But he suggested Gap's execution was flawed, not its growth plans.

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