The Gap, Inc.

Address:
2 Folsom Street
San Francisco, California 94105
U.S.A.

Telephone: (650) 952-4400
Fax: (415) 427-2553
http://www.gap.com

Statistics:
Public Company
Incorporated: 1969 as The Gap Stores, Inc.
Employees: 169,000
Sales: $14.4 billion (2003)
Stock Exchanges: New York
Ticker Symbol: GPS
NAIC: 448140 Family Clothing Stores


Company Perspectives:
At Gap, Inc. we never stop moving. It takes thousands of passionate, dedicated and talented employees around the world to deliver the merchandise and shopping experience our customers expect and deserve. From color to concept, it all begins with inspiration--whether it's people-watching on the streets of Tokyo, a flash from a dream, or a visit to a local art gallery.


Key Dates:
1969: Don and Doris Fisher open their first store in San Francisco, California.
1976: The company offers 1.2 million shares to the public.
1983: Millard Drexler is named president; the firm acquires Banana Republic.
1986: The first GapKids store is opened.
1987: The first international store is opened in London.
1990: BabyGap is launched.
1994: The Old Navy brand is established.
1997: The Gap Web site debuts.
2002: Drexler retires; Paul Pressler is named CEO.


Company History:

The 1st Of Many Gap Stores

Founded as a single store by Donald G. Fisher and wife Doris, The Gap, Inc. has evolved into a major retail company with well known brands, including its namesake, Banana Republic, and Old Navy. The firm sells a variety of casual-style and urbane chic clothing to men, women, and children in over 4,250 stores across the United States and in Canada, France, Japan, Germany, and the United Kingdom. The Gap flourished through the 1980s and 1990s under the leadership of Millard "Mickey" Drexler but has battled tough times in the early years of the new century. Drexler retired in 2002, and Paul Pressler was named CEO while Fisher remained chairman.

Capitalizing on the Generation Gap: 1969-75

Donald Fisher was not of the generation to whom The Gap owes its popularity. A member of a family that made its home in California for generations, Fisher was 40 years old and a successful real estate developer in 1969 when he took note of a new trend among the city's increasingly disaffected youth. Blue jeans, for years made chiefly by Levi Strauss & Co. for laborers and outdoorsmen, were suddenly becoming a part of the counterculture's standard costume. Durable, cheap, comfortable, and acceptably offbeat, jeans were the perfect uniform for a generation of young people anxious to demonstrate its antipathy to corporate America.

Fisher was said to have conceived of The Gap when he was unable to find the right size of Levi's in a department store in Sacramento, California. He realized that jeans had become more popular than current merchandising outlets could accommodate, and like hamburgers, stereo equipment, and gasoline, they could be sold through a chain of small stores devoted solely to that product. With the help of his wife, Doris, Fisher opened a shop near San Francisco State University in one of his own buildings, offering a combination of records and jeans. Their intention was to attract jeans customers by means of the records, but at first no one noticed the jeans, and Fisher was driven close to bankruptcy. In desperation, he placed ads in local newspapers announcing the sale of "four tons" of jeans at rock-bottom prices, and the clothes were soon gone. To emphasize the youthful ambiance of his new store, Fisher named it The Gap, an allusion to a then hot topic, the Generation Gap.

When Fisher incorporated his business as The Gap Stores, Inc., it was an immediate success. Although the Fishers had no experience in retailing, their stores' combination of jeans, low prices, and wide selection proved irresistible to the huge market of 14- to 25-year-olds. Fisher added new outlets in San Francisco and was soon enjoying the benefits of chain store merchandising: centralized buying and advertising, excellent name recognition, and uniform pricing. Initially, The Gap Stores' buying program was singularly uncomplicated, as the stores carried only one product, jeans by Levi Strauss & Co. The stores were brightly painted, often orange, filled with circular metal display racks known as "rounders," and usually enlivened by rock and roll music. To hold down rental costs, the Fishers kept stores small--about 3,000 to 4,000 square feet. They located most of their stores in shopping centers, many of them enclosed in malls.

Two years after opening its first stores, The Gap's sales were running at $2.5 million annually, and the Fishers converted the company into a public corporation, though they retained the great majority of stock. With extraordinary celerity, they opened stores across the United States while maintaining tight control over the critical accounting, purchasing, and marketing functions of what was soon a sizable corporation. In five years, sales had increased almost 50-fold, to $97 million, and the number of stores had grown to 186, spread over 21 states. Analysts credited the company's success to the Fishers' observance of a few cardinal rules of retailing: Gap stores replaced its stock with maximum speed; its prices were low and stayed that way; big sellers were kept on the rack until they stopped moving, rather than being retired in favor of new styles simply for the sake of novelty; and only a few items were stocked--jeans, shirts, light jackets--each offered in its complete range of colors and sizes, ensuring a minimum of disappointed customers.

The company's growth was also made possible by the extensive national advertising of Levi Strauss, which provided 100 percent of The Gap's merchandise during its early years. Such dependence on a single supplier had obvious dangers, however, and around 1973 The Gap began marketing several labels of its own, as well as national brands other than Levi's. These proved crucial to the company's short- and long-term health; by 1975 Gap stores generated $100 million in net sales.

Ups and Downs: 1976-80

Actress Jessica Alba

By 1976, the Fishers were ready to make their first substantial public stock offering. The company's spectacular growth had attracted widespread interest, and its offering of 1.2 million shares sold quickly at $18 per share in May. Coincidentally, however, the retail industry went into a steep slide, which, when combined with The Gap's large expenditures for new stores, pushed the company into the red for the final quarter of its fiscal year, ending July 31. The value of the newly issued stock fell to $7.25, prompting nine separate class-action suits from outraged stock purchasers who alleged that the Fishers had tried to dump their holdings before The Gap announced its bad news. These charges came despite the fact that the Fishers sold only about 10 percent of their holdings during the period in question. Rather than wage endless litigation, The Gap settled the suits in 1979 for a total of $5.8 million, or 40 cents per share, and did its best to mend its frayed relations with Wall Street.

By the end of the 1970s, the company could pay such a figure without undue strain. Adding between 50 and 80 stores annually, The Gap pushed its sales to $307 million in 1980 and was close to achieving nationwide representation. The jeans market was no longer quite so straightforward, however. Members of the great wave of youngsters who had come of age wearing blue jeans in the 1970s were now older, wealthier, and more conservative, and the Fishers were busily attempting to break out of the jeans niche by expanding The Gap's selection of clothing. Several experimental chains featuring upscale fashions were essayed and brought together under the Taggs name but later liquidated because they were unprofitable. Gap stores were enlarged to handle increasing amounts of what became known as casual wear and were frequently moved outside of shopping centers to freestanding locations, where space was plentiful and rent lower per square foot.

Along with the search for a line of clothes to appeal to an older clientele, the Fishers also faced Levi Strauss & Co.'s decision to supply big mass marketers such as Sears and J.C. Penney with its jeans. Levi's were now sold everywhere, underscoring The Gap's need to develop a label and look of its own. The company's own brands, created during the 1970s, generated about 45 percent of Gap sales in 1980, with Levi's adding an equal amount and other national brands making up the balance. Considering that ten years earlier essentially all of The Gap's sales were Levi Strauss & Co. products, the 1980 figures represented an achievement, but it was clear that if the company were to avoid inundation by the rising tide of jeans discounters it would have to fashion a new, exclusively Gap image.

Mickey Comes to Town: 1981-86

To accomplish this task, Donald Fisher hired Millard "Mickey" Drexler as president in 1983. Drexler, then 40, had just solved a similar problem with AnnTaylor, creating a more chic image for the chain and quadrupling sales in the bargain. Drexler was born in the Bronx to a family with roots in the garment business and by age 23 was a buyer for Bloomingdale's. After a stint at Macy's, he became president of AnnTaylor in 1980, where his work caught the eye of Donald Fisher, who was contemplating the future of The Gap. Drexler accepted the job as president at the end of 1983 (sales $480 million) and was given a block of stock that would make him one of the country's wealthiest retail executives.

Drexler immediately began The Gap's wholesale transformation, in spite of the company's currently excellent financial status. The new president found little that he liked; proliferating competition in jeans and The Gap's youthful marketing image had forced the company into a price-driven volume business. Its orange-painted stores were cluttered with rounders displaying merchandise of many labels that Drexler later described to the New York Times as "trendy but not tasteful ... well, just plain ugly." Worst of all, most consumers perceived The Gap as strictly for teenagers at a time when people who grew up in the 1960s were developing more upmarket tastes. It would be difficult to overcome The Gap's 15-year tradition as the place where kids went to pick up a pair of Levi's.

Drexler began by eliminating all private label brands but one: Gap. Levi Strauss products were kept but relegated to the background; henceforth, The Gap would be known not only as a store, but as a line of clothes as well. Drexler created a large in-house design staff to develop clothes that would be casual, simple, made of natural fibers, and more clearly differentiated by gender than were jeans. The look was informal but classic--still denim-based but including a variety of shirts, skirts, blouses, and sweaters in assorted colors and weaves. It was clothing for people who wanted to look and feel young without appearing slovenly or rebellious, a description that fit a vast number of U.S. consumers in the 1980s.

Gap stores were substantially revamped. Neutral grays and white replaced the garish orange, and the ubiquitous rounders gave way to shelves of neatly folded clothing under soft lighting. The company's advertising, as devised by Drexler's longtime colleague, Magdalena (Maggie) Gross, shifted from radio and television to upscale magazines and newspapers and featured older models engaged in familiar, outdoor activities that were not necessarily connected with the youth culture.

A few years later, Gross launched the "Individuals of Style" campaign, a series of black and white portraits of both famous and unknown subjects by a team of celebrated photographers. The ads stressed style, not The Gap, whose clothes did not always appear in all of the photos, and they were enormously successful in helping to change the public's perception of the company. The Gap came to mean good taste of an informal variety, and the brand name Gap soon acquired the cachet needed if the company were to compete with other retailers of casual wear such as Benetton and The Limited. In addition, the word "stores" was dropped from the company's name.

Drexler's revolution at The Gap cost a good deal of money, and financial results for 1984 were poor, with profits down 43 percent to $12.2 million. By the middle of the following year, however, it was clear he had pulled off something of a miracle. Gross revenue, profits, and same-store sales were all up; more importantly, the company had fresh energy and a merchandising focus that could carry it for years to come. In the meantime, The Gap had acquired a number of other retail chains, for better and worse. Foremost among these was Banana Republic, founded in 1979 by another California husband and wife team, Melvyn and Patricia Ziegler.

The two-store chain of safari and travel clothing outfits, bought by The Gap in 1983, had a well-established catalogue business. After its acquisition and the introduction of private-label clothing lines, Banana Republic's sales doubled each year through the mid-1980s but slowed quickly thereafter. Despite the mixed results of the Banana Republic acquisition, the company continued to seek out other chain stores. Pottery Barn was a housewares chain of about 30 stores in New York and California; after several problematic years, it was liquidated in 1986. That same year, Drexler sought to fill another clothing need of the baby boomer generation with the debut of GapKids, featuring comfortable, durable clothes for the children of parents who shopped at Gap stores. The concept was a huge success, and along with Banana Republic (which peaked in the late 1980s with revenue of more than $250 million a year) figured largely in The Gap's long-range planning.

The Gap Continues Its Climb: 1987-96

By 1987, The Gap decided to try its wares outside the United States, and its first international store was opened in London. Additional stores soon sprang up throughout the United Kingdom, Canada, and France. Unfortunately, stateside, Banana Republic's safari gear bubble burst, and it became a money-losing liability. The Gap also tested the higher end of the clothing market with Hemisphere, a nine-store chain of upscale U.S. sportswear with European styling. Created in 1987, the same year the company broke $1 billion in sales, Hemisphere offered elegant fashions but soon ran afoul of a severe recession. Disposed of only two years later, neither the Hemisphere mistake or the demise of Pottery Barn was serious enough to cause more than a few tremors at the parent company, whose spectacular rebirth in the Drexler era left ample room for such experimentation.

In 1990, as Banana Republic searched for secure footing, GapKids prospered and launched a new venture, babyGap. Like its sibling, babyGap was a phenomenal success and became a popular attraction in GapKids stores. For the start of a new decade, The Gap was looking very good indeed: a stock split occurred in September, and at year-end the company's 1,092 stores pulled in $1.9 billion in sales with net earnings of $144.5 million. In the early 1990s, Banana Republic was busy refocusing its image while GapKids and babyGap flourished. Overall, though, revenue, net income, and return-on-equity were all outstanding ($2.5 billion, $229.8 million, and 40.2 percent respectively due to another stock split in June) in 1991 and virtually every year since Drexler's program had taken effect in 1985. The Gap's transition from a discount jeans warehouse to a sleek fashion arbiter was not altogether painless, yet the result had been more successful than Donald and Doris Fisher ever imagined. In 1991, the Fisher family still held more than 40 percent of the company, which now operated more than 1,216 stores in the United States, Canada, and the United Kingdom, with plans to expand total sales area by 15 percent annually. Not only had The Gap followed its Baby Boomer clientele as they grew older and wealthier, it provided for their children, too. GapKids was the fastest-growing segment of the company as a whole, with most of the more than 223 GapKids stores housing a babyGap department for infants and toddlers.

Though 1992 marked a dip in profits and sales growth due to slower turnover and increased competition, the company addressed these problems by turning away from unisex clothing to more gender-specific items. Along with refurbishing stores and placing more emphasis on women, The Gap came back with record numbers in 1993 and a new franchise, originally called Gap Warehouse, because for some it had become increasingly cool not to spend money on clothes (i.e., the "grunge" and "slacker" looks). Lacking the trademark flare associated with the company, Drexler hired an outside to firm to come up with a new name to no avail. Then when strolling in Paris with colleagues, Drexler saw the perfect moniker for the down-market stores painted on a building: Old Navy. Hence Old Navy Clothing Company, with stores nearly twice as big as other Gap stores, filled with sturdy, value-priced (20 to 30 percent lower) clothing for the entire family. Despite the circumstances of its birth, Old Navy became another Gap sensation.

Banana Republic, meanwhile, was gaining ground with urbane elegance as a hip alternative to The Gap's casualness. To shore up its product line, the upscale clothier initiated a shop-within-a-shop concept, featuring different collections, jewelry, and leather accessories. By 1994, there were 1,507 Gap-owned stores (188 were Banana Republic) contributing to the company's $3.72 billion in sales. Within a year, there were 1,680 stores--210 Banana Republic, 902 Gap, 437 GapKids, and 131 Old Navy. International stores had surged from 1994's 124 (72 in Canada, 49 in the United Kingdom, and 3 in France) to 91 in Canada, 55 in the United Kingdom, 12 in France, 4 in Japan, and 2 in Germany in 1995. Likewise, The Gap's statistics were robust: a two-for-one stock split paid out dividends in March; sales leapt 18 percent to nearly $4.4 billion; and net earnings rose 11 percent to $354 million over the previous year's $320 million.

Banana Republic, once a blemish on the perfect Gap picture, had blossomed with more new products, including footwear, personal care items, a sharper focus on women, and five new stores in Canada. At the same time, Old Navy increased its market share by doubling in size, exceeding the company's hopes for its newest division, while Gap and GapKids lost some of their momentum, although babyGap maintained its prominence. New directions for GapKids and babyGap included plush toys, other non-clothing items, and freestanding babyGap stores; The Gap debuted GapScents and continued to broaden its age range and clothing lines to include work attire. Yet perhaps the biggest news of 1995 was Donald Fisher's decision to relinquish his duties as CEO of The Gap, Inc. His successor was Mickey Drexler, who added the responsibilities of CEO to those of president. Fisher remained chairman, however, and still kept a hand in running the company he founded nearly 30 years before.

By 1996, The Gap's dominance of the fashion scene was fixed; consumers of all ages could find something in one of its stores. The industry even honored the company in the April issue of Elle when such high-brow designers as Giorgio Armani, Nino Cerruti, Carolina Herrera, Todd Oldham, and Cynthia Rowley paid "tribute to the little company that became master of the universe." Though it began with a singular purpose, The Gap, with its burgeoning cluster of stores and subsidiaries, changed fashion for not only baby boomers but for generations to come. The Gap's success was in no small part due to Donald Fisher's and Mickey Drexler's business acuity, especially through vertical integration. By keeping the design, manufacture, inspection, packaging, shipment, display, advertising, and ultimate sale of every item with its name in-house, The Gap maintained exceptional quality and consistency in an increasingly erratic marketplace. If The Gap's clientele was not quite as broad as some department stores or mass marketers, its sophistication and ever-growing consumer base more than made up for it. The Gap--its name formerly a quirky play on generational unrest--came to mean the ultimate in fashion and taste for both younger and older generations.

Late 1990s and Beyond

By the late 1990s, Drexler felt The Gap had strayed too far into the trendy genre and was losing customers as a result. As such, he retooled The Gap's image in 1997, emphasizing a return to simplicity and the company's most basic offerings--pocket tee's, jeans, and khakis. Long-time advertising director Maggie Gross left the firm after Drexler pulled the plug on a print campaign that did not gel with The Gap's new basic image. That year, the firm went back to television advertising with commercials that highlighted Gap Easy Fit jeans featuring well-known celebrities that included Lena Horne, LL Cool J, and Luscious Jackson. In 1998, the firm launched another round of highly successful television commercials--this time the star being its line of khaki pants. The company also began its foray into e-tailing and introduced gap.com along with gapkids.com and babygap.com. Banana Republic and Old Navy began catering to online shoppers shortly thereafter.

Thanks to Drexler's efforts, The Gap grew at a rapid clip during the latter half of the 1990s, securing record sales and earnings. In 1997, sales at Old Navy surpassed $1 billion while overall company sales grew to $6.5 billion. Sales climbed to $9 billion the following year, bolstered by the opening of 356 new stores. The company could now claim that one new store opened each day. In 1999, 570 new stores were added to the company's arsenal as net earnings exceeded $1.1 billion. According to the National Post, the company had grown by 24,000 percent from 1984 to 1999. Drexler's reign at The Gap had become one of the retail industry's amazing success stories.

The new century, however, brought with it rocky times for the 30-year-old retailer. During 2000, the company opened 731 new units and sales grew to $13.6 billion. On the other hand, net income fell to $877 million while comparable store sales fell by 5 percent. In April 2000, sales began declining. Disaster struck in 2001 when the company posted a $7.7 million loss. "Simply put," wrote Anne Kingston of the National Post, "The Gap has lost its groove. Its merchandising is unfocused and it has lost ground to competitors. The formula that made it great no longer has the same currency. More damningly, Gap Inc. has alienated shoppers."

Indeed, the company was losing market share in the over-30 category and was having difficulty appealing to a younger audience. The Gap had also come under fire for its labor practices in third-world countries. Various labor groups claimed The Gap advocated sweatshop labor overseas. In response, the company created a global monitoring program to supervise factory conditions where its clothes were manufactured.

Not surprisingly, Drexler announced his retirement during 2002. He later took a job to head up rival J. Crew Group Inc. After Drexler's departure, Fisher began his search for a new leader, one whose management style could catapult The Gap back into the upper echelon of retail fashion. Paul Pressler, an executive from Walt Disney Co., was tapped to revive the company just as Drexler had been called up to do in the 1980s. Pressler began to implement a series of sweeping corporate changes focused on customer research, strategic planning, new advertising, and store closures. Net income for fiscal 2002 bounced back to $477 million; however, Pressler knew he had his work cut out for him. The retail environment in 2003 remained fiercely competitive, prices were down, and the economy remained questionable. Despite these distinct challenges, both Pressler and Fisher were convinced that The Gap and its brands would carry on as a mainstay in the retail fashion world in the years to come.

Principal Operating Units: Gap; GapKids; babyGap; Banana Republic; Old Navy Clothing Company.

Principal Competitors: Abercrombie & Fitch Stores Inc.; American Eagle Outfitters Inc.; Spiegel Inc.