Gap Gains 157,988% In Two Hot Decades

Investor's Business Daily

Gap founders Donald and Doris Fisher had already built their company into a specialty-apparel retail powerhouse by the time a new growth era took off in the mid-1980s.

Gap's name comes from the "generation gap." The Fishers built the company from one store in 1969 — selling teenagers records, tapes and Levi's jeans — to an international chain of 500 stores posting $480 million in annual sales in 1983.

Despite early success, the time came for a fresh perspective. Gap's performance had begun to lag, and "change was necessary," says Howard Davidowitz, chairman of retail-consulting and investment-banking firm Davidowitz & Associates.

So in 1983, the Fishers hired Millard (Mickey) Drexler, a savvy merchandiser dubbed the "Merchant Prince," whose innovations sparked rapid growth at Gap (GPS) — and in its stock price. From a March 1980 low to a February 2000 peak, Gap stock surged 157,988%, making the clothing company one of the 30 great stock leaders of the past three decades.

A Generation Of Gap

Drexler was hired because the Fishers wanted someone who had turned around an apparel chain. Drexler had spruced up Ann Taylor — which today is the public company Ann (ANN).

As executive vice president for merchandising and president for the Gap brand, and eventually as company CEO 1995-2002, Drexler "reinvigorated" Gap, Davidowitz said, and "put the people and systems in place that could execute what he wanted to do.

The overhaul ran from merchandising, store layout and marketing to clothing design, and Gap transformed the retail landscape in the process.

"One of Drexler's talents is the ability to select people, motivate them and manage them effectively. He built an in-house team of designers who developed products, communicated with the factories and were a key part of the planning process that determined merchandise assortment, quantity and flow," Davidowitz said. "This gave Gap a significant competitive edge.

On the sourcing side, Drexler used his familiarity with apparel manufacturing in China to select reliable factories that provided consistently high quality and shipped on time. He also put in place a planning and distribution method that supported frequent changes of merchandise sets at stores to keep things fresh.

Quite a far cry from that $480 million in 1983 sales, Gap delivered $16.15 billion in revenue last year.

"The company's success over more than four decades goes back to the Fishers' constantly staying ahead of customers and staying true to our value of doing more than sell clothes," Bill Chandler, Gap's senior vice president of global affairs, told IBD in an email interview. "The company has grown, first in North America and now around the world, by making fashion accessible for all customers and generations. Our mission is to become the world's favorite for American style.

Gap introduced its own clothing label in 1972, but the big transformation began when Drexler came onboard a little more than a decade later. The company acquired a two-store mail-order business called Banana Republic, which became the high end in Gap's innovative segmented approach to retailing. Old Navy would later become its low end. In 2003, Drexler moved on to helm preppy J. Crew.

1980s Power Brand

Retail began a period of transformation in the 1980s and early 1990s, and Gap led it, says Lawrence Creatura, vice president and portfolio manager at Federated Investors.

"The foundation of their success and innovation was a lucky intersection of correct personalities and strategies in a world when systems and distribution were becoming simultaneously more sophisticated, so that great people with great ideas could power these concepts broadly in an efficient manner and reap economies of scale," he said. "That's what led to an explosive experience for shareholders of Gap.

During its high-growth period in the 1980s, Gap "pioneered" an approach to retail that took into account the "psychology" of its customers, Creatura says.

"They were better at looking at the shopping experience through the customer's eyes and maximizing the fulfillment a customer got when they walked into the store, including everything from the layout and fixtures to the color palettes used," he said.

Prior to the changes in the Gap store experience in the 1980s, Creatura adds, stores weren't "customer-centric.

"Gap made the trip into the store not about clothing but rather about feelings, and that led to a deeper and ultimately more successful connection with their customers," Creatura said.

'Newfound Flair For Fashion'

How important was Gap in the transformation of the American clothing-store landscape

NPD Group chief industry analyst Marshal Cohen said, "They were at the beginning of the apparel surge we saw in the 1980s. They had a really good run at the beginning of that and were part of the impetus to create that run. They were one of the catalysts to help drive the newfound flair for fashion because they made it affordable and convenient (with so many locations) and so simple for people to engage in fashion.

Underpinning its marketing, Gap leveraged technology to track costs and plan product development, manufacturing and distribution.

"Decisions were made based on the information gleaned from the ERP (enterprise resource planning) software," Creatura said. "ERP was fairly new as Gap was ascending — Gap was among the first retailers to leverage its capabilities.

The approach let Gap scale up, putting a "homogenous retail concept in many different locations, in a cookie-cutter fashion, rolled out in similar spaces in malls across America," Creatura said.

In merchandising, Drexler's approach was to bring "key items" such as jeans, khakis and T-shirts that had fashion flair and were cost-efficient, says Cohen. They produced in big quantities so they could sell at good prices. They had a high margin, Cohen adds.

Cohen says that Gap took casual dressing to the "street" and made it a lifestyle rather than a category.

"They were able to say: This is the best (pair of) khakis or jeans, and this is how to put them together," he said. "They made dressing simple.

A Lock On The Look

The biggest thing that Drexler did for Gap was create a "gigantic" in-house design staff, Davidowitz says. Drexler closed the New York office and brought designers to Gap's San Francisco home base, where they developed simple, casual clothes.

Another innovation came with Gap's ability to "exploit niches" in the marketplace, says Davidowitz.

First came buying Banana Republic in 1983 to cater to higher-end tastes. Later, he says, Gap perceived retailers such as Target (TGT) as a "real threat and underselling" Gap stores with low prices. So in 1994, Gap developed a concept to attack low-priced chains: Old Navy. It later developed other niche concepts such as GapKids and babyGap.

"All the niches they were able to exploit in the marketplace beyond their core business were key to making them successful," Davidowitz said.

Today, Gap has more than 3,500 stores in almost 50 countries and is the largest apparel-specialty retailer in the U.S. by revenue .

"We transformed retail before, and we're now ready to transform it once again with world-class digital capabilities, helping us bridge digital and physical worlds and empower customers to fully experience our brands whenever and wherever they choose," said Chandler.

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