- The Washington Times - Wednesday, November 13, 2002

SAN FRANCISCO
After 2 years of bad fashion statements and financial humiliation, Gap Inc. doesn't look so scruffy anymore. The San Francisco-based company's 3,158 stores have been restocked with more basic clothing designed to appeal to mainstream tastes and its catchy ads appear to be luring back once-alienated customers.
Those factors translated into a surprisingly strong October that marked the end of a 29-month sales slide at Gap. The improvement raised hopes that the long-slumping retailer was poised to regain its former flair.
Despite the encouraging signs, no one not even Gap itself is ready to say the company's comeback is complete. It still must prove it can string together several successive months of sales growth. To do that, Gap will have to overcome a shaky economy that is keeping consumers on edge.
"Coming back is always hard, but coming back in an environment like this is even more difficult," said industry analyst Holly Gustafson of Legg Mason.
The challenge facing Gap is complicated further by the labor situation in West Coast ports, where much of the company's merchandise enters the country. A 10-day shutdown of the ports earlier this fall meant some of Gap's holiday shipments would arrive at stores a month later than anticipated. Gap expects that to lower its profits by as much as $42 million during the holiday season.
That setback still won't wipe out an unexpected windfall from a busy October at the company's three chains Gap, Old Navy and Banana Republic.
The company's sales at stores open at least a year rose 11 percent in October, halting a slide that began in May 2000. These sales, known as same-store sales, are a key measure of a retailer's health.
The October surge fattened Gap's profits far beyond investors' expectations. When Gap reports its third-quarter results tomorrow, the company expects earnings to range from 12 cents to 14 cents per share, more than twice the previous consensus estimate of 6 cents per share of analysts polled by Thomson First Call.
"This is a very positive step in the right direction, but we are still cautious about the company's outlook," said industry analyst Adrienne Tennant of Wedbush Morgan Securities.
The October rebound represents a measure of redemption for Gap's longtime leader, Millard "Mickey" Drexler, who retired in late September. Long regarded as one of retailing's smartest executives, Mr. Drexler's reputation suffered as he presided over Gap's downfall.
During the final months of his tenure, Mr. Drexler vowed to get Gap back on track by returning to the staples that made the company one of the hottest retailers of the 1990s.
"He made some powerful changes before he left," said Wells Fargo Securities analyst Jennifer Black. "Mickey has laid the groundwork for a turnaround and deserves a lot of credit."
It will be up to Gap's new chief executive, Paul Pressler, to keep sales growing. Mr. Pressler joined Gap after running Walt Disney Co.'s theme parks.
Wall Street was trying to figure out whether October represented a return to form for Gap or an aberration driven largely by bargain-hunting consumers who flocked to its Old Navy stores.
The discount chain appeared to touch a nerve with a television commercial revolving around actress Morgan Fairchild and the theme song of the old TV series "Green Acres."
At Old Navy, same-store sales rose 24 percent in October compared with a 6 percent gain at Banana Republic and a 1 percent increase at the U.S. stores of the flagship Gap division.
"Can that momentum keep building or did people just take advantage of some low prices in October and things will start to fizzle again in the holiday season?" Miss Gustafson wondered.
Miss Gustafson and other analysts also are worried that a sluggish holiday season will force retailers to slash prices to attract business.
Optimists see plenty of upside for Gap.
The company's return to more basic fashions even bodes well in a weak economy because those clothes always have sold well in uncertain times, said UBS Warburg analyst Richard Jaffe.
Another encouraging sign: October's same-store sales were higher, although customer traffic was down from a year ago. The traffic decreases ranged from 3 percent at Old Navy to 8 percent at the Gap chain.
Those figures suggested that shoppers who came to the stores liked what they saw so much that Gap didn't have to discount merchandise as deeply as last year to generate sales. This phenomenon produced higher sales per customer and boosted the company's profit margins.
"What we saw in October could be just the tip of the iceberg," said Miss Black, a one-time harsh Gap critic who has been converted into one of the company's biggest boosters. She expects Gap's stock to soar to $30 as the company continues to woo back shoppers.
Gap's shares are trading in the $13 range, up from a 52-week low of $8.35 but still sharply below the $36.75 of May 2000, when sales began their slide.

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