US: Gap Admits Strategic Errors After $34m Loss

NEW YORK -- Millard "Mickey" Drexler, Gap's chief executive, on Tuesday admitted that the company had "misread fashion tea leaves" and violated its own principle of "keeping things simple" in making a series of fashion mistakes that led to its reporting a $34m loss.

Gap pledged to return to "simple" fashions and go back to its roots as a retailer of casualwear such as white T-shirts and denim jeans.

The struggling US retailer on Tuesday also announced a broad senior management shake-up and confirmed it would offer $1bn in convertible notes, giving it enough cash to temporarily strengthen its balance sheet and stave off a looming credit crunch.

Gap, which also owns the more upmarket Banana Republic chain and the Old Navy stores, said it would complete the offering next week. It is part of the company's strategy to "fund itself conservatively."

However, analysts were critical of the move, saying that although it was needed, it would still dilute earnings in the near future.

Despite the company's financial woes, however, analysts do not think that Gap will follow in the footsteps of Kmart and file for Chapter 11 bankruptcy protection.

Richard Jaffe, analyst with UBS Warburg, said: "Gap's financing issues are directly negotiated with lending institutions. There are no third-party factors as is the case with Kmart."

As part of its management shake-up in its critical merchandising division, the company said that Marka Hansen will become executive vice-president for the Gap adult brand. With her appointment, Gap will split its adult merchandising unit into a men's and a women's division, in a bid to better pinpoint fashion trends along gender lines.

Gap's attempt to break out of two years of earnings disappointments were again thwarted on Tuesday when it reported the fourth-quarter loss.

The company lost $34m, or 4 cents a share, from a profit of $272m, or 31 cents, a year ago. Results included a $15m after-tax charge.

Gap said same-store sales declined 16 per cent in the quarter. Net sales decreased 11 per cent to $4.1bn.

Mr Drexler said last year had been Gap's most "difficult year ever."

But he added: "We know what we need to do. We're putting the right teams in place", in a reference to the management shake-up.

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