Between 2000 and 2012, Gap, Inc. (Gap) ceded its world leadership position in specialty fashion retailing to Inditex of Spain and H&M of Sweden. These two companies, each less than a quarter of Gaps size in 2000, were now setting the pace in the global mass fashion market, and Gap appeared to be falling ever further behind. In the intervening twelve years, three CEOs had struggled to turn around the fading brand. While several temporary profit boosts appeared to herald a recovery, a sustained rally remained elusive. Mickey Drexler, Gaps CEO since 1983, who had been responsible for Gaps rise to global prominence, was fired in 2002 after two years of double digit, same-store sales declines and a 75% drop in the stock price. 1 His successor, Paul Pressler, appeared to have engineered a remarkable recovery, but was fired in 2007 after disappointing sales and another slump in profits. His replacement, Glenn Murphy, fresh from a successful turnaround at a Canadian drug-store chain, promised tighter price controls, lower administrative costs, and a leaner, more aggressive Gap. He cut costs and drove up earnings per share, but sales continued to decline. After four years of troubles, Murphy brought in former J. Crew President, Tracy Gardner, to consult with the Gap brand and he began a bold program to close one fifth of Gaps North American store base. In 2012, sales had lifted 8%, same-store sales were strongly positive for all of Gaps domestic sub-brands, and the companys share price had lifted nearly 50% from the prior year. After 12 years of poor performance, had Glenn Murphy finally discovered the answers to Gaps problems? Mickey Drexler: 2000-2002 After Gap, Inc. misjudged fashion trends in 2000, its sales growth rate slowed to 18%, below the historical average, and operating profits fell 20% to $1.4 billion.3 CEO Mickey Drexler, was confident that this stumble was a short term problem, but 2001 results suggested otherwise. Sales lifted only 1%, operating profits plunged anther 70% to $426 million and the company made a net loss. 2002 saw sales rise 4% and operating profits recover to $1.0 billion, but comparable stores sales continued to fall. Gaps stock price decreased from a high of $53.75 in February 2000 to $14 in May 2002.4 Several top designers and senior executives left the company disillusioned with how bureaucratic the organization had become. Analysts noted that, while Gap had made button-down shirts, chinos and basic cotton T-shirts the boomer uniform, it was struggling to resonate as well with some members of Generation Y (those born in the late 1970s to early 1990s) who were looking for individuality, not conformity.6Chairman Don Fisher had had enough. The night before the Gap board meeting on May 22, 2002, Steve Jobs, a board member, called Mickey Drexler to warn him that the board was planning to fire him the next morning. Drexler entered the board meeting aggressively and a board member later described it as a very emotional scene.Despite his shock and disappointment, Drexler quickly recovered. In 2003, he became the CEO of J. Crew, a quality basic clothing chain which was incurring heavy losses. Within two years, he had returned it to profitability and, within five, he had more than doubled sales. Paul Pressler: 2002-2007 Paul S. Pressler replaced Drexler as the CEO of Gap, Inc. Pressler had spent 15 years with The Walt Disney Company and ended his tenure there as the chairman of Walt Disney Parks and Resorts. The press noted the difference in the two mens leadership styles: whereas Drexler flew by the seat of his khakis, relying on his honed intuition to direct apparel development, Pressler was researchoriented and left decisions about apparel to Gap, Inc.s designers. 8 Pressler stated, I had to demonstrate to everyone that the general manager is here to lead the peoplenot pick the buttons.9 Pressler moved quickly to close 200 underperforming stores, slow the rate of new openings, and reduce excess inventory, 10 resulting in a spectacular turnaround in 2003. 11 Between 2002 and 2003, operating profits rose 87% to $1.8 billion, marginally beating the all-time record set in 1999. Gap Brand Pressler hired Canadian Pina Ferlisi as executive vice president of product design in March 2003 to define the divisions style aesthetic. Before joining Gap, Inc., Ferlisi worked at Perry Ellis, Tommy Hilfiger, and Theory; she also helped launch the successful Marc by Marc Jacobs line. Her Gap design team was located in New York City and included Vice President of Womens Design Louise Trotter, who formerly worked at Calvin Klein, and Vice President of Accessories Design Emma Hill, who previously held a similar post at Marc Jacobs. Both Trotter and Hill hailed from the U.K. Scores of consumer and employee insights indicated that female Gap customers felt that the brands offerings were too androgynous and boxy. Hence, Ferlisi made the womens lines more feminine and focused on fabric and fit. Banana Republic For years, Banana Republic had a reputation of being a purveyor of chic basicscasual office wear in black or beige27i.e., an upscale Gap. However, under the direction of President Marka Hansen, the division focused on making its product assortment more fashionable and trendy, minimizing the overlap between Gap and Banana, and catering to 25- to 30-year-old professionals . Hansen explained, Whats the hook or differentiation? . . . Its an affordable, covetable luxury . . . . Were bringing fashion to a wider audience. Old Navy Under President Jenny Ming, Old Navy continued its focus on families, rolling out underwear, maternity, and infant lines to raise margins.32 The division expanded to Canada in Presslers first year as CEO and it targeted Hispanics with its first Spanish television spot at the end of 2003. The companys localization strategy was tested in select Old Navy stores in 2004, and the company planned to extend the program to all Old Navy outlets in 2005. Forth & Towne Gap, Inc. established five test stores for Forth & Towne in Chicago and New York by fall 2005. Under Gary Mutos leadership, the firm positioned Forth & Towne to appeal to women aged 35 50. Gap Online Toby Lenk, a 1987 Harvard MBA, headed the companys online division, Gap, Inc. Direct. In 2004, Gap, Inc. was the largest U.S. online apparel retailer with sales of over $500 million. It was redesign[ing] and rebuild[ing] all of [its] websites from the ground up to enhance visitors online shopping and to improve online and in-store integration.47 Lenk noted that 35% of the companys Web site visitors were pre-shoppers preparing for store visits, and 13% of those who entered a Gap, Inc. store had visited the stores online site beforehand. The firms new e-commerce platform would allow the sites to take back orders and preorders. Lenk explained, This means we will never have to walk a sale on a basic item, and at the same time it will allow us to run our basic inventory much tighter.48 The company planned to have most of the Web site enhancements completed by the 2005 holiday season. Marketing Along with reworking Gaps main brands, Pressler also overhauled Gaps public image and publically positioned its divisions as lifestyle brands. The CEO remarked, We need to bring more theatrics, storytelling and consistency [to retail]. If you cant tell me what a Gap dinner party, Banana Republic car or Old Navy vacation looks like, then we havent built our stories.49 Pressler had also been focused on differentiating the brands and upgrading the marketing functions at all of Gaps brands, including the hires of new head marketers at all three units.50 Recent Gap-brand TV advertising featured actors and singers. The company paid 40-year-old actress Sarah Jessica Parker, former Sex and the City star, $38 million to appear in television and print ads for three seasons during 20042005. It replaced Parker with 17-year-old British soul singer Joss Stone as its Gap spokes-model in the summer of 2005.51 In an effort to tout its vastly expanded variety of fits in jeans, the company planned to use more nontraditional types of advertisingi.e., guerrilla marketing and grassroots tactics, according to Jeff Jones, executive vice president of marketing at Gap. After lackluster results in 2005 and six consecutive quarters of declining same-store sales, Pressler pointed to 2006 as a key year to prove Gaps recovery and justify his rebranding efforts.60 Pressler noted, We are acting with a tremendous sense of urgency to win back customers.61 Pressler also increased the annual cash dividend 78% for 2006 and the board authorized a further $500 million for a share repurchase program, $250 of which would be repurchased in Q1 and Q2 of 2006. Fisher: Interim CEO, 2007 Although Fisher was interim CEO for less than a year, he made a number of moves that undid much of Presslers previous work. Less than a week after firing Pressler, he cut many of Presslers hires from Disney. Cynthia Harriss, the president of Gap U.S., was replaced by Marka Hansen, the previous president of Banana Republic and an employee since 1987. Fisher also closed all Forth & Towne stores by the end of June, taking a pretax charge of $40 million.67 Although Forth & Towne has been open since 2005, financials were never disclosed for the brand. Fisher also began to reduce Gaps workforce to bring down expenses, cutting a relatively small percentage of the 150,000 workers. Glenn Murphy: 2007-2012 On July 26, 2007, Gap appointed Glen Murphy, as the new CEO. Since 2001, he had been the CEO of Shoppers Drug Mart, a Canadian drugstore chain. Murphys first major move as CEO was to cut expenses and control inventory discounting. Quarter three profit for 2007 lifted 26% due to lower marketing spending and better product margins. In 2008, Spains Inditex overtook Gap, Inc. as the worlds largest specialty apparel retailer, reaching $3.3 billion in sales for the first quarter of 2008 compared to Gaps $3.25 billion.86 With over 200 designers and rapid supply chains that could produce and stock hot items within weeks. Problems returned in 2011. Sales remained steady at $14.5 billion, but operating profits fell 27% to $1.4 billion. Murphy hired former J. Crew President, Tracy Gardner, to consult with the Gap brand. Gap announced plans to shut more than one fifth of its North American stores over the next two years and aimed to shrink the U.S. store base to 700 by the end of 2013.91 Murphy noted that China was Gaps biggest market for further growth. However, by the end of 2012, Murphys strategy appeared to be working. Sales lifted 8% to $15.6 billion, a six-year high, and operating profit recovered to $1.9 billion. Store closings lifted sales per store in the North American Gap to $3.7 million (from a low of $3.3 million in 2009) and comparable store sales were strongly positive for all of Gaps North American divisions. Gap had also made significant steps toward streamlining its production and engaging more closely with trending fashions. By 2012, Gap had cut its lead time from more than nine months in the early 2000s to less than four months for key items.96 Across all lines, production time had been cut by nearly one third. 97 In January Gap acquired Intermix Inc. for $130 million, which promised expansion into the luxury market as well as greater access to of-the-moment fashion pieces. Although Intermix didnt manufacture its own clothing, it has established relationships with a variety of high street designers. What else could Murphy do to restore Gaps leading position in fashion retailing? Would Murphys international and online focus be enough to sustain this turnaround?

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