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`Old Navy' Store Is Gap's Answer To the Penny-Pinching Shopper

Company attempts to revive sales and tap into overlooked market

GAP Inc. is getting back to basics - again.

After years of success as a distinctive, mid-priced retailer, the San Francisco-based parent company of Gap, GapKids, BabyGap, and Banana Republic stores felt it was missing out on the ``value priced'' end of retail. The company's answer: ``Old Navy Clothing Co.''

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Since the first Old Navy opened its doors in Colma, Calif., in April, 31 more stores have sprouted up across the United States, and an additional 18 are expected by year's end.

Old Navy, which offers a bread-and-butter mix of apparel items such as jeans, T-shirts, sweaters, khakis, and button-down shirts, is part of the Gap ``three tier'' strategy. Banana Republic is the high-end store, Gap takes the middle-range, and Old Navy is intended to rival discounters such as Marshalls and Target, and department stores such as Sears, Roebuck and Co. and J. C. Penney Company.

``We identified a market segment we weren't reaching,'' says Robert Crisman, vice president of marketing for Old Navy. The company wanted to go after consumers with less disposable income than typical Gap/Banana Republic shoppers - shoppers who want affordable but well-made clothing, he explains.

Aside from making blue jeans and khakis available to people of all income levels, Gap Inc. says it was also looking for new growth, since profits had begun to level off. Net sales increased 14 percent for the first six months of this year over the same period last year, says Joe Enos, a Gap spokesman. However, since July, individual store sales have fallen, says Janet Mangano, a retail analyst with Burnham Securities in New York. This has prompted a 36 percent slide in share prices.

``The Gap is maturing - you can only expect sales to expand by so much,'' Ms. Mangano says. ``If it were to rely on its existing concepts, it would have limited opportunities.''

Many American malls already have Gap stores (there are 776 in the United States and 181 Banana Republic stores), leaving little room for expansion in this country, she explains.

But as a sign of confidence in all its stores, including Old Navy, Gap Inc. announced a stock buy-back program on Tuesday. The company ``is using its money to buy back their own stock,'' Mangano says. ``They feel they will get a good return on it.''

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Old Navy is reminiscent of Gap stores of yore. Though the company denies that the original Gap has moved away from its basics - T-shirts, jeans, and khakis - it has introduced trendier and more-expensive items such as dresses, shoes, and blazers. Like Gap stores, Old Navy carries men's and women's clothing, but it is about twice as big and also carries children's, babies', and larger women's sizes.

An Old Navy recently opened at Cascades Town Center in Sterling, Va., 45 minutes west of Washington. Devoid of Gap and Banana Republic's polished touches - wooden floors and leather door handles - this Old Navy features concrete floors, high ceilings with exposed ducts, shopping carts, and pressboard counters. Though it is more warehouse-like than Gap stores, displays are creative and attractive. Clothing is well-organized on racks and in neat stacks.

Old Navy Jeans cost $22 (compared with about $36 at the Gap) and T-shirts go for $7 (about $11 at the Gap); most clothing is under $30.

``I think people are thinking very frugally,'' Mangano says. ``They're spending, but for durable or home-related goods.''

Frugal consumers are good for Old Navy but may be bad for Gap and Banana Republic, Mangano says. ``[The three chains] might become cannibalistic to a degree,'' she says.

``Yes, there will be crossover'' of Gap customers shopping at Old Navy, Crisman admits. But the company is forging a separate image for Old Navy that it hopes will not eat into Gap's profits.

Old Navy clothing carries its own tag, and is produced by separate designers and merchandisers. Apart from a small ``Gap'' above the Old Navy sign outside the stores, Gap reminders inside are absent.

Gap Inc. says it is choosing its sites for expansion carefully. Old Navy is being targeted for strip centers, which are cheaper than malls and could turn a profit more quickly.

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