I'll make a bet the short-sleeve stretch shirts now available for $38 in rainbow colors at your local Gap will hit the sale rack by early August.
I'm working on a tip. Gap Inc. announced last week that it would fall short of its expected second-quarter earnings, largely because it had to mark down an unusually high number of its more-fashionable clothes. More surprisingly, budget-bonanza Old Navy -- seen as an essential growth engine for the roughly $13 billion-a-year company -- stalled; its same-store sales dropped 9 percent. Despite Banana Republic's solid results, dire reports of the Gap's demise were not exaggerated.
Two ironies here. The first has to do with how the Gap got into this pickle. After all, it did just what Wall Street wanted it to do.
Last summer, the Gap caught analysts' flak for failing to offer more exciting and innovative apparel, unlike such competitors as Abercrombie & Fitch and American Eagle Outfitters. The Gap's incessant emphasis on the same basic stuff just wasn't drawing in customers, who last year wanted racier, trendier styles. So, the famously flexible company decided to take more risks with its product line.
That, of course, was then.
The Gap fumbled by putting itself in an unfamiliar position -- chasing trends rather than setting them. As Deutsche Banc Alex. Brown analyst Marcia Aaron said: The Gap was "definitely a victim of fashion problems; they tried to take their fashion too young." The company's warning revealed that store managers had to put lots of stuff on sale to move it out the door. Aaron also attributed the Gap's shortfall to a lack of exciting spring fashions, uppity gas prices, chilly spring temperatures, high credit card interest rates and the fact that "it's a strong music year, so kids are spending more money on music." (Hey, Metallica, call off the dogs! Turns out Napster isn't your problem, it's the rag trade's!)
Whatever the reasons, the Gap already is responding as it best knows how -- with fresh marketing. Its men's department on its Web site offers a glimpse of what I expect to see a lot of this fall: an emphasis on the office. Trendy stretch shirts were just a transitional item, something the company introduced for "fashion" that it has now recast as "wear to work." That utilitarian imperative will be the Gap's big theme in the coming months. Look for more clean-cut, conservative designs that no boss could question and fewer bright-pink Capri pants (now on sale at Gap stores nationwide).
The second irony is that the pickle the Gap got into seems to be remarkably unsour. After last Thursday's announcement that June's same-store sales declined by 2 percent, Gap stock actually jumped more than 26 percent, to 37 7/8 at Monday's close. The shares had hit a 52-week low of $28 less than a month earlier.
You see, the key to investing in fashion is to be forward looking. (Just not too much, lest you risk overexposure.) Before last week's mea culpa, investors knew the Gap would be making some type of confession, they just didn't know how bad it would be. Now that everything's out in the open, and the news wasn't as bad as some had thought, they're looking ahead to the retailer's promise that it will meet analysts' expectations for the second half of the year.
If you play the fashion stock market, you can't always rely on a company's new products to match mercurial consumer tastes. You can only count on its management's ability to adapt quickly and consistently. Industry insiders almost universally regard the Gap as a well-managed company, its current troubles notwithstanding. Now that prodigal CEO Mickey Drexler has returned to play a role comparable to the one Steve Jobs filled at Apple, investors expect a Gap renaissance. (Granted, a less flamboyant renaissance, with designs just left of boring rather than barely right of radical.) So look for the Gap's flagship chain to become less teen-centric, and instead saturate us with a five-day-a-week casual campaign. Also, expect more family-friendly messages from Old Navy. As for Gap stock, consider this a pre-back-to-school sale. It's a good time to buy, especially below $35 a share.
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