GAP (cont.)

Malls like Dallas's Galleria featured all three major brands, sucking up 120,000 feet--and the size of the stores, too, grew dramatically, with total square footage up 31% in 2000. In a 1998 Fortune story, COO Wilson summed up the strategy: "To see how high we can go," he said, "we will throw more stores in until the last one fails."

It was a perfect storm. "The dangerous combination of Don and Mickey in the late 1990s was that Mickey had huge confidence and Don had grandiose visions about real estate," says another executive, who quit last year. "When the merchandise stopped being competitive, we had the big albatross of too many stores close together," the executive says, using the example of the three huge and outrageously expensive Gap-brand stores on London's Oxford Street (one is set to close at the end of April).

Debt ballooned to $3.4 billion from $587 million in 1998; same-store sales slumped for ten straight quarters between the end of 2000 and 2002, and the stock collapsed from over $50 to a low of $8. On May 21, 2002, Fisher abruptly fired Drexler--and in the classic tradition of fighting the last battle, went off in search of his antithesis.

The search went on for months, until Fisher's fellow Rosewood Capital board member Meg Whitman (who would join Gap's board in 2003) threw out the name of Paul Pressler, who ran Walt Disney Parks & Resorts, as the best marketing person she knew. Pressler wasn't interested, but "Don called him and convinced him to have breakfast in Anaheim," says A.G. Edwards's Buchanan. By the following Tuesday, Pressler had changed his mind.

By all accounts, Don and board member Bob were thrilled with the new hire, in part because he was in many ways the anti-Drexler. He was analytical rather than intuitive, measured rather than voluble. He liked to back up ideas with research, do his homework, ignore his gut. He was a lot like ... Don Fisher. "Don responded to Paul because Paul was like Don," says a former executive. "That's exactly the reason that he shouldn't have hired Paul. There was no yin and yang."

Pressler started with a bang, working to reduce the company's leverage and finding ways to cut costs, including a program to close some underperforming stores. He convened focus groups on graphic T-shirts (what should they say?) and used store data to predict future demand. (Pressler wouldn't comment to Fortune.)

It seemed to work: Gap stock rose over 30% in 2003, debt fell, and same-store sales increased four quarters in a row, although with the lag time in retail, they were based on Drexler's last collections.

Gap looked to be on the mend--and Fisher finally felt comfortable enough to step back. "I believe that running a business is like riding a horse," Fisher writes. "If the horse behaves, you give him his head. If he doesn't behave, you pull back on the reins. That's how you manage people." So in December 2003, the 75-year-old Don announced that he would remain on the board but that Bob, still a director, would replace him as chairman.

Though Don would still show up to eat at the cafeteria and look over leases, more and more the founder spent his time riding horses, collecting art, and helping build the well-regarded charter-school organization Knowledge Is Power Program (he and Doris have pledged over $45 million to the group since 2000). With KIPP, Don was eager to share what he had learned about the pressures of growth at Gap.

"There is a focus on the values and the culture," says Michael Feinberg, KIPP's co-founder, "and how it becomes more of a challenge to keep it consistent as you grow." True to form, Fisher watched every extra dollar. On a KIPP outing to Washington, Feinberg chuckles, remembering dining with the benefactor. "I'm with Don Fisher so I think I'm going to get a nice meal out of this. He hands me two hot dogs and says, 'You want mustard on these?'"

Meanwhile, Fisher also ramped up his interest in San Francisco politics, flexing his muscles behind the scenes along with son John to help defeat liberal causes like California's Proposition 82 (the Robert Reiner-sponsored plan to provide preschool for all children in 2006).

He also co-founded a controversial organization (with Feinstein and F. Warren Hellman, founder of investment bank Hellman & Friedman) called SFSOS to address "quality of life" issues like homelessness in San Francisco. Feinstein and Hellman later quit the group for its aggressive tactics against people and policies it opposed. "We did not think we were creating a right-wing sort of attack vehicle," says Hellman, who remains a close friend of Fisher's. "He has this rich person's megalomaniacal concept that he can control the politics in a democracy," charges Aaron Peskin, chairman of San Francisco's Board of Supervisors and a frequent foe. "I can sit down with [other prominent San Francisco businessmen] any day of the week, but with Don, it's 'my way or the highway.'"

Back at Gap, clothes had once again been relegated to secondary status. Pressler swung the cultural pendulum, changing Gap from a place that was frantically entrepreneurial to one that subjected the creative process to only one boss--the calculator.

"He asked questions like, Why do we need merchants and not just planners?" says one former executive. "It was like asking, Why do you need actors in a movie?" Stores weren't regularly renovated because no one could prove in advance that sales would improve; an ambitious move to centralize purchasing only created confusion. "Everything had to be measured," says another former merchandiser. "There was literally an ROI for every idea."

The creatives--many of them Drexler protégés--headed for the exits in droves. Board members like Steve Jobs of Apple and Whitman of eBay also resigned. Morale at the once-proud company plummeted along with same-store sales.

Don and Bob seemed, at least in public, oblivious to the problems, expressing firm support for Pressler well into the second year of falling comps. "Any other guy, [Don] Fisher would have fired a year ago," says analyst Kloppenburg. "He held on because he wanted to show Mickey he was right." But when 2006 holiday comp sales fell 7%, the board finally voted to remove Pressler and named Bob interim CEO. In March it hired search firm Egon Zehnder International to search for a new leader, citing specifically the need for someone skilled at harnessing creativity.

On his first day as CEO, with Don and Doris watching, Bob made an emotional speech from the company's headquarters. He spoke without notes, and his talk was videoconferenced to director-level employees around the globe. The memo that went along with it, titled "How we'll be great again," oozed with caring. "We'll let creativity flourish," he wrote. "Our future is only possible because of our talented, passionate people. Let's never lose sight of that again." Employees, at least, seem to feel a little bit better. "It was comforting to have someone from the family there," says one current executive.

Over the past two months Bob and Don have reached out to former employees in hope of wooing them back (no high-profile names have returned so far), and Don and Doris have traveled to Chicago and New York City to visit stores and encourage workers. Bob has also begun what he hopes will be a turnaround plan for the company, moving longtime loyalist Marka Hansen, former head of Banana Republic, to head up the Gap brand; closing some distribution centers; and shutting down both the Old Navy discount outlets and Pressler's boldest experiment, the Forth & Towne chain for older women.

In classic Fisher tradition, Bob is also betting on real estate by pushing forward on Pressler's $300 million plan to remodel 80 of Gap's existing stores. On San Francisco's Flood Street, the 37,000-square-foot Gap flagship is partway through a makeover that will be completed in May. Gone are the white walls, blond wood, and open spaces, and in their place are dark wood floors, seasonal tones, prismed lighting, and a more "boutiquey" feeling. (The markdowns, however, are still abundant.)

With the stock down 8% since Bob took over and $2.6 billion in cash on its balance sheet, parts of the company are enticing to some private-equity players. "For Old Navy, I know of five or six buyers," says Gilbert Harrison, chairman of retail investment bank Financo. "And for Banana they would be lined up outside the door." But the sticking point is consistently the same--the family's involvement and control, which few think they'd be willing to relinquish. Although the Fishers have been selling stock over the past two years, Gap has spent over $4 billion in the past four years on stock buybacks, so the family's ownership remains steady at 34%. "I think that Don and Doris Fisher have a tremendous pride in what they have built," says Harrison, "and that they desperately want to see it continue as a viable public company."

The family's tight grip is making the search for a new leader equally difficult. Gap needs someone who has the retail bandwidth to run a struggling $16 billion company and doesn't mind being second-guessed by a controlling shareholder who has billions on the line. There is, however, one candidate who seems comfortable with Gap as a family affair. Though Bob has insisted to friends he doesn't want the job permanently, "it would be a nice set of epaulets to say Don started this company and Bob rescued it," says family friend Hellman.

Might that be what Don has in mind too? When Gap was still a small local chain, Don writes that he would leave work early to watch Bob's tennis and Little League games. "I memorized the mistakes in his technique as well as the good things he did on which I could help him build," he writes. "I stood on the sidelines, calm and composed outside, but living and dying on the inside."

Fifty years later the playing field has changed. But the patriarch, one imagines, is still on the sidelines, studying, cheering & and doing everything he can to avoid the bitter humiliation of a loss.

Marilyn Adamo contributed to this article. 

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