Khakis Get the Blues

When the retail world's bright lights gathered Jan. 15 at investment bank Financo's annual dinner in New York City (a can't -miss annual event for the apparel crowd), the gossips, according to Fortune.com, had one juicy no-show to chatter about: Where was Gap CEO Paul Pressler? Fashion insiders had been numbering Pressler's days for months. And sure enough, after nearly two years of limping sales and yet another holiday season in which the Gap's big idea (more hoodies?) drew yawns from shoppers, Pressler agreed a few days later to step down.

His departure--"a mutual agreement between him and the board," according to a Gap spokesperson--marks a low point in the history of a brand that not so long ago epitomized smart, affordable fashion. Named for "the gap in the market it hoped to fill," the Gap had something for everyone. You got your khakis there; your grandmother got her cardigans; Sharon Stone got her outfit for the Oscars. So what went wrong?

Perhaps it was just too much of a good thing. When Pressler joined Gap as CEO in 2002, he took over the reins of an unwieldy empire, home to the Gap, Old Navy and Banana Republic brands. The kingdom had become so enormous--$16.3 billion in sales at its peak, with 2,994 stores--that the only way for Gap to keep growing was to push clothes with broad appeal that could sell millions and millions of units. But once everyone had bought a pair of khakis, a white button-down and a few pocket Ts, what next? Pressler, a novice to fashion who came to Gap after a 15-year career at Disney, took his time figuring that out. Meanwhile, competitors surged ahead, as Gap's sales fell 2%, to $14.8 billion last year. "It used to be that the Gap dictated fashion, but now customers have so many resources, they dictate what they want and see if a store has it," says Marshal Cohen, chief analyst at the NPD Group. And they found what they wanted everywhere, from Target to Wal-Mart to Abercrombie & Fitch. The Gap may have invented cheap chic, but it steadily lost customers to stores that were cheaper, chicer or both.

To his credit, Pressler did rid the company of most of the $3.2 billion debt he had inherited by tightening inventory, closing underperforming stores and managing the supply chain more efficiently. And while Gap's stock still lags its competitors', the company's shares rose 66% on Pressler's watch. "Under his leadership, the company has meaningfully improved its operations, strengthened its balance sheet, greatly enhanced its online presence and improved our standing as a global corporate citizen," Robert Fisher, son of Gap's founders, told TIME in an e-mail.

But Pressler's penny-pinching may have turned off the Gap's core customers. Sweaters that were once 100% cotton or wool, for example, showed up in stores as acrylic blends, and people noticed. Banana Republic tried to woo the same high-end consumers as J. Crew but didn't go far enough in offering luxury fabrics, like cashmere, that those shoppers wanted. In 2005, while department stores couldn't sell enough $100-plus premium jeans, the Gap skipped denim and tried to push khakis. "Pressler went too far in focusing on costs at the expense of merchandising," says Christine Chen, senior research analyst at Pacific Growth Equities. "Sometimes you just need to go with your gut and do what makes sense to get customers in the door."