Refashioning Gap: CEO Sees the Future in Outlets, Overseas, OnlineGap might be undergoing an extreme makeover, but the chain is no longer the key growth engine of Gap Inc., (GPS) Glenn Murphy, chairman and chief executive officer of the retailer, told a packed room of investors at the Piper Jaffray Consumer Conference in New York Wednesday.

The apparel giant is shifting its emphasis away from its embattled namesake brand -- as well as its other specialty divisions, like Banana Republic -- to stoke its major growth initiatives.

These include expanding its outlet store business and growing its newer divisions, such as the Piperlime e-commerce site and yoga and athletic apparel chain Athleta.

"We're mitigating our dependence on the specialty business in North America [Gap and Banana Republic] ... to mitigate risk," Murphy said.

To that end, the chain will shrink its Gap chain down from about 900 stores today to an estimated 700 stores by 2013 as part of an ongoing contraction of the 41-year-old brand that almost single-handedly redefined casual dressing in America.

Everyone's Going to the Outlets

By contrast, Murphy envisions the addition of about 50 to 60 Gap outlet stores in the U.S, bringing the total to around 250, and also foresees its Banana Republic outlet business expanding by about 40 new stores to around 150. Gap Inc.'s outlets have been a bright spot for the company in in recent years -- consistent with a pattern across the retail industry in this recessionary climate. The outlet business has generated "the highest return on sales," Murphy said. "It's where customers are gravitating."

These are not your mother's outlets, selling castoff blouses and pants from the parent chain. Gap's plan is to increasingly stock its outlet stores with on-trend merchandise, Murphy said. "I don't want them bringing stripes in the stores if stripes are last year's idea," he said.

Growing the outlet business abroad is another focus. The retailer opened an outlet store in Milan, Italy, this month, and recently expanded into Canada and Japan. China, too, represents a "huge potential" market for the format, he said. It's all part of Murphy's plan to build a "global runway" with the expansion of not only outlet stores, but also flagship stores overseas.

The retailer is not new to foreign soil: In fact, its international business has recently been outshining the North American stores. Stateside, Murphy is also bullish on the growth of Piperlime, Gap's online business, which will add men's product this fall, and Athleta, where the "real estate opportunities are exploding," he said.

Getting Back on the Forefront of Fashion

But that doesn't mean the company is abandoning its U.S. Gap stores, which have been struggling with poor sales, hurt by fashions that have left shoppers cold.

In a bid to reverse the downward trend, Murphy spearheaded a management shakeup and restructuring this year that included the high-profile ouster of chief designer Patrick Robinson; the introduction of new leadership, with Art Peck replacing Marka Hansen as president of Gap North America; and the formation of the Gap Global Creative Center in New York. The division will chose about 75% of the merchandise content for the Gap, Banana Republic and Old Navy divisions, among others.

What's more, the merchants who have been behind the company's international business, competing adeptly against popular global clothing retailers such as Uniqlo, Inditex Group from Spain (which operates Zara in the U.S.) and H&M, "will have a much bigger influence over design and product" for its North American retail brands, Murphy said.

Come fall, when more trend-right product hits the stores, Murphy hopes the Gap stores will "delight" consumers once again, he told DailyFinance. While Murphy said little about what the new Gap merchandise will look like, he was frank about what has gone wrong at the chain.

For one, Gap missed out on opportunities last year to build on its highly successful 1969 jean collection with items like "hot, complementary tops," he said. Although the Gap chain has been the company's Achilles heel, the other divisions have also stumbled.

Old Navy has faltered because it tried to be too much like fast-fashion retailers such as H&M. Meanwhile, Banana Republic got too casual: More work-appropriate clothes will begin to show up in its stores in July, he said.

The overall apparel business has been pummeled by the worst inflationary pressures and raw material cost increases -- specifically, cotton -- in 30 years, Murphy said. Could Gap Inc. have prepared better by ratcheting up product orders before cost increases kicked in? Yes, Murphy conceded.

To mitigate ongoing commodity price hikes, the retailer is now working more directly with fabric mills, and is using fewer vendors, as well as choosing ones more willing to keep costs down, Murphy said. "For spring, we've completely changed our strategy," he said.

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Larry The Hedge

10 years ago the Gap Basic Polo was the Bestttt.....sorry not today.!

June 13 2011 at 4:57 PM Report abuse rate up rate down Reply

To be sucessful stop making shirts so low and thin. The good fitting kahkis that doesnt go so low was always a good buy. Now there is too many different fits & sizes dont mean anything anymore. Being a quality staple even if it costs more never hurts and having different colors choices always worked in the past. Lets get back to making quality clothes in this country. A good piece of clothing used to last alot longer and you didnt have to get a whole new wardrobe every season. Now after you laundry them, the clothing and you are done. There are enough working people in this country to buy clothes that are not the lastest "fad". Everyone is not 15 and skinny. I would love to see a petite section, too.

June 13 2011 at 3:48 PM Report abuse rate up rate down Reply

exactly what is "gay wear" G-$, baby? It appears you know a lot about what"gays" wear, maybe you are?
Personally, I don't think about ''gay" or "straight" clothes, clothes are the person who wears them, clothes do not define a person either way!

June 13 2011 at 3:27 PM Report abuse +1 rate up rate down Reply
G - $, baby

I really have not been to Gap or Banana in a long time because their clothing has seemed to become tailored for, frankly, the homosexual crowd! I do not like anythink at Banan for a long tme. I am a white heterosexual male, about 6' tall, 180 pounds, athletic, wear a 44 jacket - but nothing at Gap or Banana seems to fit and or looks rather gay . . . Sorry. I guess i am not realy fashion forward but i dont like the slim fitting button up shirts in pink, bisque and fuschia . . . nothing there seems normal anymore.

June 13 2011 at 2:55 PM Report abuse -1 rate up rate down Reply

Gap used to be my go to retailer for wardrobe basics like t-shirts, but not so much anymore. Their fabric is cheap and thin, the manufacturing quality is poor at best, and their colors (bisque? seriously?) and styling are drab and dumpy. And don't even get me started on their sweaters. They practically pill up the moment you put them on.

Unfortunately, there aren't too many alternatives out there for people who still like to shop the brick and mortar stores on occasion. Most retail chains seem to be in the same boat as the Gap: pedaling the same poor quality merchandise and wondering why their bottom line looks so bad season after season.

June 13 2011 at 2:11 PM Report abuse +1 rate up rate down Reply

Banana Republic is also tending to out price itself also. Chill on the prices 10-15% and volume would go up.

June 13 2011 at 1:28 PM Report abuse +1 rate up rate down Reply

The Gap is just so awful now. Except for babies and toddler clothing, it is just consistently bad. Honestly, Target makes a far superior product in that price range.

June 13 2011 at 12:49 PM Report abuse +1 rate up rate down Reply

I don't undestand the gap and I don't understand their clothes. Nothing in there I'd want to buy. They did well when the economy was booming, then people came to their senses.

June 13 2011 at 12:46 PM Report abuse rate up rate down Reply

How about going back to basics??? Sweats and Jeans? I would love to see basic good quality sweats again...and SHORT SLEEVE SWEAT SHIRTS ....yes...SHORT SLEEVE SWEAT SHIRTS. There is a market for them....

June 13 2011 at 12:44 PM Report abuse rate up rate down Reply

Gap and Banana started to loose their focus several years ago when they moved away from their classic Basics(with a few and I mean a few fashion trends thrown in), the reason Gap made the cover of Vogue's 100th anniversary addition was their consistency with their basics. The fit and quality of design and fabrics in both stores has plummeted in the past years. How I miss the days of the basics one of my favorites was the white sleeveless button down with the straight edge bottom a true classic that has not been seen since 2000 - yet still remains a classic that could be worn 3 seasons a year, or the fabulous trench from Banana that zips into a 9 inch square great for every day and travel, the hand of the fabrics at Banana Republic and Gap for that matter has just deteriorated it is quite sad I would hate to loose these brands they have been an American staple in the market and my and family's wardrobes. If only they could return to who they were when they excelled. Also whatever happened to their great ad campaigns? As if we needed to loose that many more jobs too. Such a sad situation

June 13 2011 at 12:40 PM Report abuse +3 rate up rate down Reply