Gap's New Guy Upstairs Can former Disney hotshot Paul Pressler make this retail wreck a growth company again?
By Patricia Sellers

(FORTUNE Magazine) – "It took me weeks to start wearing jeans here," admits Paul Pressler, settled into his window-lined L-shaped office on the 14th floor of Gap's San Francisco headquarters. An admitted clotheshorse whose taste runs to Armani and Zegna suits, he was known as the best-dressed executive at Disney, where he ran the theme-park business. Now he is six months into his new job as CEO of Gap, and it's obvious that this is not a natural fit. Pressler is the first-ever outsider to run the world's largest specialty-apparel retailer (2002 revenues: $14.5 billion). And he comes from neither the retail nor the apparel world. Pressler has found it tough to shake the Disney-speak, early on referring to Gap's customers as "guests." And he still can't get the name of the company right: He calls it "the Gap," even though the old guard remind him the corporation is called "Gap."

A lot of people wonder whether Pressler, 46, is the right guy to run Gap. Others insist that a fresh eye is what this famously troubled company desperately needs. The story of Gap's rise and fall is, like its image, classic. Under Mickey Drexler, who joined Gap in 1983 when the company had just $500 million in sales, Gap grew gloriously by spurring--and then riding--America's casual-dress trend. Whenever growth appeared to slow, Drexler came up with something new: GapKids, babyGap, and then discount Old Navy, which opened in 1994 and became the first-ever retail chain to reach $1 billion in sales in four years. (Gap acquired the more upscale Banana Republic chain in 1983.) But in the mid-1990s the company began building too many stores, expanding its retail square footage by more than 20% annually. When laid-off dot-commers stopped loading up on casual clothes, Gap took desperate measures to lift sales, stocking trendy duds like miniskirts and low-rise jeans to chase teenage shoppers. Grownups, once Gap's mainstay, fled to rivals such as value retailers Target and Kohl's.

The fallout was disastrous. Gap's per-store sales declined for 29 months straight. Profits vanished. "It took us 30 years to get to $1 billion in profits and two years to get to nothing," laments Gap founder and chairman Don Fisher. Meanwhile the company's debt, which had fueled that store expansion and now totals $3.4 billion, was downgraded to junk. Gap's fall guy was the once-infallible Drexler. Gap announced his "retirement" last May, but clearly, according to various sources, he was pushed out. (Drexler, who declined to be interviewed, is now CEO of rival clothier J. Crew.) Seeking what Fisher calls "much more professional management," Fisher and the directors signed up Pressler after a four-month search.

The new guy at Gap has already made big changes. He's cranked up customer research--which Drexler, who famously flew by the seat of his khakis, dismissed. He has introduced strategic planning, which former management had eliminated. He is changing Gap's advertising, which he says had become too edgy. He is also closing lots of stores, aiming to get Gap's profits up and its debt down. There's doubtless more change on the way. On his first day at work, speaking to 400 employees in Gap's first-floor auditorium, Pressler said, "I've got a gazillion ideas, many of which are really stupid. But what the hell--you'll let me know!"

He can act goofy, but the real Pressler is deliberate and diligent in everything he does--as he demonstrated in learning Gap's business. On vacation in Hawaii the week before he settled in, he lugged reports and binders to the beach each day. Oceanside he wrote a plan for his first 100 days as CEO. His plan included one-on-one meetings with Gap's 50 top executives. He asked each executive the same questions, picked up from Jim Citrin, a Spencer Stuart recruiter who had learned them from Amgen CEO Kevin Sharer: What about Gap do you want to preserve, and why? What about Gap do you want to change, and why? What do you hope I do? What are you concerned I might do? What are you concerned I might not do? Pressler added one question of his own: What is your most important tool for figuring out what the consumer wants?

He took voluminous notes and then convened with the group of 50 for two days to discuss the feedback. One major thing Pressler learned: When planning product lines, "They'd been relying on sales numbers and anecdotal evidence. All that tells you is what people bought, not what they need." It also doesn't tell Gap's merchants and designers what's missing in the stores when customers walk out empty-handed.

Pressler took it upon himself to learn how to sell at Gap. On so-called Black Friday, the frantic shopping day after Thanksgiving, he spent 11 hours working the sales floor, the stockroom, and the men's fitting room of a Gap at the Glendale Galleria in Southern California. (He still lives in Los Angeles, commuting weekly to San Francisco until his two kids, ages 13 and 17, finish the school year.) He also studied Gap's logistics at ground level. One day last December, after he visited a company distribution center in Fishkill, N.Y., he met Old Navy president Jenny Ming in Manhattan. "Do you want to go down to the stores at 34th and Broadway?" Pressler asked Ming over dinner at Town, a tony Midtown restaurant. It was 11 P.M. Ming wondered whether her new boss was crazy.

She went. (Wouldn't you?) Standing on a chilly street corner at midnight, Ming and Pressler watched boxes of clothes arrive from Fishkill for delivery to two enormous Gap and Old Navy stores. "I was most interested in how the stores looked. Paul was most interested in the shipments," Ming recalls. In particular, Pressler was concerned that a lot of boxes were sitting unopened. He asked the night managers why they didn't move more merchandise directly from the trucks onto the store floors. "Every product that is not sitting in front of the customer is a bad use of capital," he says. "Some people see boxes. I see dollar bills."

Pressler has deeper retail roots than most people think. His father worked for 29 years in operations at Robert Hall, a now-defunct men's clothing chain. Pressler's first job was selling women's handbags and jewelry at a store on New York's Long Island. After graduating from the State University of New York at Oneonta, he did a stint in the toy industry. (Remember Care Bears? He was on the original design team.) Precocious and gutsy, Pressler used his 1987 interview for a job at Disney to criticize the company's product licensing. "Why don't you come and fix it, pal?" the interviewer asked him. He did.

Disney CEO Michael Eisner noticed Pressler early on and in 1992 put him in charge of Disney Stores. In three years there Pressler upgraded the merchandise, revamped the stores, and expanded from 160 to 335 units in eight countries. "People say this guy is not a retailer," says Steve Burke, who preceded Pressler as head of Disney Stores and is now president of Comcast Cable. "But Paul is extremely well suited to be CEO of the Gap."

During his 15 years at Disney, Pressler was known as a problem solver, a team player, and a savvy manager. In 1995, when Eisner offered him the top job at Disneyland, he declined, telling the boss that he had more to fix in the stores. "I was a fool," Pressler says. "It took me about 48 hours to realize that." He accepted the assignment. As Disneyland's president, he doubled the size of the California park--a major accomplishment, since previous management had struggled unsuccessfully for years to get expansion approvals from city officials and Disney higher-ups. In 1998 he took charge of all the Disney parks and resorts--a gig that had a nice perk: He oversaw Disney's Anaheim Angels, who won the World Series last year.

Life at Disney was not easy, though. Terrorist threats devastated theme-park profits, down 26% last year. Even so, Pressler said he wasn't interested--three times--when headhunters Hal Reiter and Gerry Roche pitched him the idea of becoming Gap's new CEO. "I told Paul he was out of his mind," says his friend Burke. (Gap also considered Polo Ralph Lauren president Roger Farah, Avon CEO Andrea Jung, and former AOL Time Warner executive Bob Pittman.) Chairman Fisher's eagerness to win Pressler over was stoked last summer when he sat next to eBay CEO Meg Whitman at a Princeton board of trustees' dinner. As they chatted about Gap's search for an A-list marketer and operator, Whitman said, "If you get Paul Pressler, you get the best in the country." She had worked with Pressler at Disney more than a decade before.

Fisher called Pressler at his Disney office. Over a 90-minute breakfast at a diner near Disney's headquarters, Fisher hooked him by laying out a vision of what Gap could become. It took a month to iron out Pressler's lavish pay package: up-front compensation of $4.3 million and options that Gap values at $27.9 million. When Pressler told Eisner he was leaving, Eisner asked what he could do to keep him. "Nothing," Pressler replied. As unhappy as Eisner was, "In the end, he was a mensch," Pressler says. The next day they met again at Disney's offices in Manhattan. Eisner was wearing a Gap hat.

Pressler is smart, obviously, but he is also lucky. He arrived just as the company was starting to recover. Gap posted a 14% fourth-quarter revenue increase and profits of $249 million, vs. a disastrous $34 million loss in the same period a year earlier. (Gap's full-year net income was $477 million, vs. an $8 million loss in 2001.) "It isn't me. That's for sure," says Pressler about the improved numbers. He credits the three brand presidents--Gap's Gary Muto, Banana Republic's Maureen Chiquet, and Old Navy's Ming--who were "taught by the master," he says, acknowledging Drexler. Better quality and bright colors, which sell in gloomy times, fueled the holiday success.

This spring, most analysts believe, all three chains are headed in the right direction. Gap is targeting grownups with stretch khakis. Banana Republic is getting more stylish with dress chinos. Old Navy, Gap's biggest U.S. business at $5.8 billion in revenues, is furthest along in its turnaround. Last year, before Pressler came onboard, Ming shifted Old Navy's focus from teens to families. "Teenagers are a narrow and fickle segment," she says. "We realized that we're too big to focus on them." She also rolled out various lines--maternity, infant, underwear, and socks--to boost sales and margins in existing stores. Ming says that Pressler has urged her to accelerate the rollouts.

Pressler realizes how difficult it is to take charge at a company with a deeply embedded culture. "This organization has gone through a lot of pain and angst," he says. "The guy who was their mentor and leader in so many ways left, and it was like a kick in the stomach for the people here. They need to be put at ease." He says his job is to "provide the resources and remove the barriers" so that Gap's managers can succeed--and not trip again.

But that doesn't mean he's not busy upgrading management. He recently brought in a new CFO, Byron Pollitt, who was with him for seven years at the theme parks. "Byron's my main strategy partner. He's not a treasury guy," Pressler says. Pressler also created a new position, vice president of consumer insights, and has been searching for someone to fill it. Ravenous for research, he has commissioned Leo Burnett, the ad agency he used at Disney, to do extensive brand-segmentation studies (basically, to survey consumers, divide them into types, and determine who wants what from Gap). "We don't own the brand," he says. "The shareholder doesn't own the brand. The consumer owns the brand."

Unlike Drexler, Pressler doesn't want to pick products himself. "That's not why I was hired," he says. Rather, he's guiding Gap to be more strategic. Critical of Gap's one-size-fits-all advertising (remember "For every generation"?), Pressler wants to customize marketing. For the first time Gap is running different campaigns for men and women, for example. That targeted approach extends to the merchandise. Surprised to learn that a Gap in Minneapolis carries pretty much the same items as a Gap in Miami (so were we), Pressler says one of his priorities is to tailor each store's offerings to its location.

Can Gap become a growth company again? Probably. But it will be a tough slog. Pressler is operating in a dire retail environment--low consumer confidence, price deflation, and fierce competition. Plus, Gap's weak balance sheet is a drag. To shore it up, this year--for the first time--Gap will reduce its total store square footage, by about 2%. Analysts speculate that will free up enough cash so that Gap can reduce its debt-to-capital ratio from 48% now to below 40% by year-end.

While analysts praise Pressler's turnaround effort, they're mixed on the stock. Banc of America Securities' Dana Cohen recently downgraded Gap to neutral because of its valuation. At $15, it's up 80% from its October low and doesn't deserve to trade at a premium to its competitors, she says. But Sanford Bernstein's Emme Kozloff, who raised her rating to "outperform" in January, says that if Gap's operating profit margin, once 15%, rises just to the industry average of 9.2%, Gap's earnings will be 53% higher than last year. She likes the stock, even though, she says, "it's easily two years of rebuilding until they can even contemplate a new concept or acquisitions."

Pressler is already contemplating. "A company with our size and abilities absolutely has to consider acquisitions," he says. He's also thinking about Banana Republic travel stores, which would build on Banana's safari-store roots. And he's eager to expand Gap's international business, currently 12% of sales. "There are a lot of people out there. Most of them wear clothes," he says. "Our styling is absolutely relevant around the world." Pressler bets that Old Navy would do well in Germany, where consumers are particularly value-conscious. And he thinks that GapKids would score in Spain; he learned at Disney that Spanish parents and grandparents buy extravagantly for children. (He's studying those markets, of course.) His vision five years out? "More people will be dressed in our stuff. Period!"

A lot of people are watching the new guy's progress--and not just Gap investors and rival retailers. The folks at Disney are also keenly interested. Some believe that if Pressler succeeds at Gap, he could be the next CEO of Disney. Michael Eisner is 61. He, among others, is known to have concerns about Bob Iger, Disney's president, succeeding him. Besides Iger, no other Disney executive is an obvious candidate. And then there's Pressler.

"Really?!" Pressler bellows when asked about the speculation. His incredulity is a bit too excessive to be convincing. He tosses out a joke about replacing the Mickey Mouse tattoo on his backside with a Gap tattoo. "Don't print that!" he says. He adds, "I'm the CEO of the Gap. My plan is to retire in this job." Even if it means never donning another Armani suit.