NEW YORK (CNN/Money) -
Gap's theme for spring may be "Feelin' Groovy" -- the song for its new TV ad campaign set to debut Tuesday -- but the retailer has a lot of work to do before it gets there.
San Francisco-based Gap Inc., which also operates the Old Navy and Banana Republic chains, has been working hard to mend its image with customers over the past year. A big part of the turnaround effort involves a return to its concept of offering jeans, khakis and cotton shirts in basic styles at attractive prices.
"The mistake Gap (GPS: down $0.09 to $12.95, Research, Estimates) made was that it decided to move away from its core customer and become more about fashion by offering younger and trendier looks," said Tom Julian, a fashion trend analyst with marketing firm Fallon. But, he added, Gap's own Old Navy and Banana Republic stores "were already doing that."
A breakdown of the company's sales results for last year shows that for the first time sales at its Old Navy chain -- offering trendy, affordable items such as cotton T-shirts for $10 -- outpaced those at Gap, which was struggling to define its product mix.
While sales at stores open at least a year rose 4 percent at Gap in the fourth quarter ended Feb. 1, they jumped 14 percent at Old Navy and 5 percent Banana Republic. But sales for the 2,309 Gap stores slipped to $5.1 billion last year from $5.2 billion in the preceding fiscal year, while annual sales at Old Navy's 842 stores rose to $5.8 billion from $5.1 billion.
Analysts who follow the stock aren't nitpicking about who's winning the sales race at the company. The stock has been doing well, up about 60 percent from its low in October. Over the past 12 months the stock has outperformed the retail index by 39 percent and the S&P 500 by 34 percent.
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But it looks like there could be turbulence ahead. Gap warned of a sales shortfall in February and indicated that the business outlook remains hazy for the rest of the year.
At the same time, Gap knows it has to raise the stakes in an environment where its customers are becoming more discriminating about what they buy. One worrisome trend for the apparel retailer is that its customers were reluctant to buy at full price, forcing it to lower prices more than expected.
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| The "Crazy Stripes" ad from 2002. |
Gap's decision to ramp up its advertising and marketing expenses by about 10 percent in the first half of 2003 as a means to leverage its brand, despite merchandise margins below last year's levels and still high inventory levels, drew some criticism.
"Gap has to know that it can't spend its way to success," said Todd Slater, retail analyst with Lazard Freres. "The marketing message may be good, but if they can't get their product right, it won't help. The consumer ultimately votes with the wallet."
The retailer is obviously hoping the "Feelin' Groovy" campaign, following its successful "Crazy Stripes" campaign last winter, is another hit with its customers. The "Crazy Stripes" theme launched last year's popular winter accessories -- the striped scarves, woolen caps and gloves.
"The striped sweaters and scarves blew out of the Gap stores over the holidays," said Ellen Schlossberg, retail analyst with William Blair & Co.
Industry watchers said improved market research over the last six months has helped Gap to improve its merchandise and become more in sync with its customers.
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| Still shot from Gap's "Feelin' Groovy" TV ad, which debuts Tuesday. |
The new campaign set to the Simon & Garfunkel tune "Feelin' Groovy (The 59th Street Bridge Song)" showcases female models wearing Gap Stretch pants when they're caught in an "everyday" moment, like getting splashed by a puddle of water.
"The stretch pant is a big and well-known segment for us. We chose the song because we wanted to create an upbeat, energetic and fun mood for the spring," said Gap spokeswoman Erica Archambault. She declined to comment on the retailer's sales results.
William Blair's Schlossberg said the "everyday" theme for the TV ads, as well as the Gap's first-ever open casting call for its print ads due later this year -- during which 24 "finalists" were chosen -- were clever ad strategies.
"It's really pegged to the reality TV trend that's big right now, and it's a good idea," she said. "The real question is whether it will have an impact in terms of unique product positioning."
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