(FORTUNE Magazine) - During an investor conference call last spring, Gap Inc. CEO Paul Pressler did a mea culpa, admitting he was "disappointed" by the retail firm's sagging sales. Pledging that a turnaround was in the works, he indicated that improvements in the company's clothing lines should appear by year's end.

Yet when the holiday season arrived, the flagship Gap (Research) brand's annual TV ad campaign--a critical tool and ostensibly a competitive advantage for a true national clothing chain--was shelved. "We had more work to do with Gap's in-store experience and product," explains investor-relations chief Sabrina Simmons.

In other words, the clothes weren't up to snuff. By this February things had only gotten worse, with customer traffic across the Gap, Banana Republic, and Old Navy brands down 13% from the same point in 2005, same-store sales off 11%, and talent fleeing in alarming numbers. As for the turnaround that was laid out a year ago, Pressler now says it will come in the fall.

That was not the plan when Pressler took over in 2002 from his embattled predecessor, Millard "Mickey" Drexler, who had built Gap into a retail powerhouse but then stumbled badly. Gap's stock fell by two-thirds in Drexler's last two years, and the firm was drowning in $3.4 billion of debt.

Pressler, a longtime Disney executive, swiftly imposed the financial rigor that the business sorely needed. Cash flow improved radically, and investors cheered. "He has made the company financially strong again," says Gap board chairman Bob Fisher, whose parents founded the company in San Francisco in 1969. "We cannot underestimate how the debts on this business crippled us."

But fashion retail is not strictly a numbers game, and the quantitative orientation that made Pressler so appealing as an antidote to Drexler--and initially so successful--has ultimately come back to bite the company. Running a FORTUNE 500 fashion retailer is a tricky balance between the art of conjuring styles and the discipline of managing an enormous and far-flung operation.

Gap seems to have swung from one extreme to the other. The stock, after initially rebounding under Pressler from $10 a share to $25, has since drifted back down to $18. Same-store sales have declined for 18 of the past 21 months. By summer 2005, Pressler was referred to as "DMW," or "dead man walking," in the private-equity community. The Gap board declined to pay Pressler a bonus in 2005, and director Meg Whitman of eBay, who recommended him for the job and whom Pressler considers a strong backer, has announced she will step down when her term expires in May. (Whitman declined to comment.)

Members of the Fisher family own at least 37% of Gap Inc. stock. As long as they support Pressler--which chairman Fisher insists they do--the CEO is secure. Still, the question remains: Is a numbers guy from Disney the right person to lead Gap out of fashion limbo?

"Doesn't this look great?" Pressler asks, as he browses through Banana Republic's upcoming summer line in a showroom at Gap's headquarters. Wearing Ferragamo loafers, a Banana Republic wool blazer, and pressed Gap jeans, the 49-year-old looks every bit the suave fashionista.

But during an extended interview, it becomes clear that Pressler is much more comfortable talking corporate strategy than clothing styles. "I think I have good taste," he says, "but [having good taste] is not my job. I am not a merchant." Instead he defines his task as "meeting investor expectations, building platforms, and building a vision of where we want to go."

He could not be more different from Mickey Drexler, whose fashion instincts made Gap's classic, colorful clothes into America's uniform. As president of the Gap division starting in 1983 and then CEO of Gap Inc. In 1995, Drexler made khakis and T-shirts cool as Gap struck a chord with everyone from hip teens to suburban moms to Sharon Stone, who wore a Gap turtleneck to the Oscars in 1995. The stock soared too, by 862% from 1995 to 2000. But overexpansion and a series of fashion faux pas (including an ill-fated experiment with purple leather pants) brought the Drexler reign to a halt.

When Pressler arrived, he attacked Gap's challenges from a different angle. His previous retail experience had nothing to do with fashion; it consisted of stints running Disney's consumer stores (which were later sold) and the Disneyland theme park (where he expanded the souvenir shops and restaurants), and oversight of all Disney parks and resorts. But he knew how to streamline operations and cut costs.

Working with CFO Byron Pollitt, whom he had brought over from Disney, Pressler shut down hundreds of stores, consolidated production among fewer suppliers, and revamped inventory management. He hired what he calls a "chief algorithm officer" to analyze the sales from every cash register.

It turned out that Gap was sending the same size assortments to stores with different selling patterns, so the company customized deliveries--for instance, sending more extra-larges to places that needed them. Each chain also instituted "guardrails" that defined what portion of a store's inventory should go toward basic colors and styles (regardless of how varied the floor displays). It all served to cut the need for discounting, and profit margins improved.

When it came to the merchandise, Pressler also leaned on the numbers. "Our consumer-insight research showed that the three brands were sitting on top of each other," Pressler recalls. So he pushed them further apart: While Gap stayed in the middle, Old Navy focused on lower prices and basic items, and Banana Republic raised prices and experimented with runway-influenced designs.

It all worked. The business bounced back after 29 straight months of same-store sales declines under Drexler. Cash flow from operations leaped (since Pressler's arrival, the company has paid off $2.9 billion in debt), and Gap's credit rating rose.

But in July 2004 the turnaround hit a snag. Each of the three chains' sales headed south, pushing Gap's comparable sales down 5%. The problem: After initial success spreading the brands apart, Pressler's reliance on metrics prompted him to separate them even further. And it backfired.

Old Navy, known for its specialty sass at discount prices, disappointed its faithful by emphasizing the kinds of commodity T-shirts and jeans you could buy at Target, rather than the trendy-but-cheap looks it had feasted on earlier.

Banana Republic went over the top, devoting too much of its space to embellished pieces unsuitable for the office. As for the Gap brand, it started marketing outfits instead of individual staples like khakis and denim. "In a store you'd see a 'going out' section, a 'go to work' section--it became hard to navigate," Pressler admits. Shoppers who had once considered Banana, Gap, and Old Navy as default choices gravitated to fresher competitors like Abercrombie & Fitch, Urban Outfitters, and J. Crew, where Drexler had become CEO in 2003.

An avalanche was underway inside the company too. Soon after Drexler's departure, a stream of talented executives who had helped make Gap great in its heyday began to head for the exits, from executive vice presidents to in-the-trenches designers. Some were fired, as always happens when a new leader takes over; others left unprompted.

"From the day I got here, we've had to assess our talent," says Pressler, who calls the turnover healthy and normal. Not everyone is so sanguine. Morgan Stanley analyst Michelle Clark has an underweight rating on the stock; she fears that with other ex-Disney players, such as Gap-brand head Cynthia Harriss, now in key roles, the company's lack of fashion expertise at the top is being exacerbated by a drain of youthful morale and energy. "Ten of the best 15 executives in all retail were working for the company," says a former head of one Gap division. "Now they've lost the creative people, almost all the merchandising and design leadership."

By the time Pressler faced investors in that spring 2005 conference call, the momentum he'd built up in his first 18 months was gone. He tried to shift Wall Street's focus to the future, announcing that the company would introduce a new store chain, Forth & Towne, for women 35 and over.

More privately, he went back to the core brands, working with their respective presidents to analyze customer surveys, past hits and flops, and Gallup research. The identity of each chain was recalibrated: Gap would offer high-quality basics with style; Banana Republic would emphasize fashionable classics but avoid the cutting edge; Old Navy would rededicate itself to disposably priced trendy items.

Pressler also cut the nine-month production cycle on some Old Navy clothes to three months--so it could adapt to emerging trends more readily--by moving designers from New York to its San Francisco headquarters, positioning some merchants closer to factories in Southeast Asia, and sourcing more items in North America. "This business is legalized gambling," says Pollitt, referring to the fast-changing whims of fashion, "and we're working to have house odds."

All the changes make sense. They may even have staved off steeper decline. But they have not yet delivered anything that looks like a turnaround. As of Christmas, Gap's clothes and stores weren't good enough to merit buying TV ad time. "The last couple of campaigns didn't have the return we were hoping for," explains Pollitt. Fourth-quarter revenues fell 2%, and earnings slid 11%, while operating margins dropped to 10.9% in 2005 from 12.7% the previous year.

Will GAP bounce back again? That depends on the fashions--the area where Drexler was markedly adept and where Pressler is less instinctively inclined. FORTUNE got a sneak preview of Gap's fall line, and it does look promising. The collection features Gap's classic navy, gray, crisp white, and denim, plus some richer materials--washed leather and cotton cashmere.

Meanwhile, Banana Republic has pulled back from fashion extremes and is focusing on the classics Pressler admired in the showroom. At Old Navy--to which Pressler is looking for a big chunk of the company's growth--product quality has improved noticeably.

Pressler is also investing more in the stores, where Gap's minimalist look too often appears dated and shabby, replacing it with darker-wood fixtures (like Abercrombie), painted walls (like J. Crew), and more dramatic window displays. A back wall dedicated to denim and a colorful "T-shirt bar" highlights Gap's traditional expertise.

New spotlighting, hand-drawn chalk signs, and artful displays of intertwined jeans create a sense of theatricality. "When I was building theme parks [at Disney] we needed to build stories," Pressler says. "Specialty retail is no different. The background experience is what's relevant." Sixty Gap stores have been redesigned so far, with another 220 of the chain's 1,335 stores scheduled to get the new look this year.

All this comes at a financial cost, pushing Gap's capital expenditures to among the highest in specialty retail. Pollitt says the investment will draw customers into stores, so they'll notice the better-designed, higher-quality products. It also means operating margins will drop to between 10% and 10.5% this year, he says, but he predicts a rebound to the mid-teens once more products sell at full price.

Yet Gap faces a perception problem--a struggle to recapture customers who have abandoned it. Bob Buchanan, a retail analyst at A.G. Edwards who has a hold rating on the stock, says that in 23 years covering the industry he's seen only one chain (J.C. Penney) shake an extended slump like this. When frustrated shoppers change their buying habits, he says, they tend to stay changed.

Fiscally and operationally, Gap is a tighter, stronger business than it was in 2002. Pressler has hedged its fashion bets. Company-commissioned research is directing brand presidents on how they can expand the chains into what Pressler calls "lifestyle brands," with line extensions like accessories and babywear.

While creating the Forth & Towne chain may seem a gamble, Pressler says the numbers point to an untapped market. Still, no matter how carefully calibrated Gap's fashion choices are, the nature of the business requires a certain degree of risk taking. No one knows what consumers will actually buy until the goods are on the shelves.

Pressler takes great pride in the fact that Gap was financially strong enough to make a string of fashion mistakes through 2004 and 2005 and still stay profitable. His first priority remains modest: protecting the company from financial swings and heavy debt. As he describes his accomplishments in 2005, "We didn't turn this past year into another financial crisis."

If Gap's ambition in this phase of its existence is simply stable growth, then Pressler--through his use of metrics and the cautious addition of new brands--may be the right man for the job. But without a defining product vision, Gap is unlikely to be the cultural presence it once was, when the dream was not just to deliver dividends but to become a global brand on a par with Coke and McDonald's.

The man who inspired that dream is doing just fine these days as the CEO of J. Crew. Rather than staving off crisis, Drexler finds himself once again at the helm of a fashion front-runner. (Drexler is in an SEC quiet period before J. Crew's pending IPO.) If only the two CEOs' disparate strengths--aesthetic instinct and fiscal ingenuity--could be combined in one place, well, that would be the kind of store where anyone would shop.