Goes 364 stock certificate

Offering value to the brand-conscious consumer has quickly propelled Old Navy to virtual icon status among American retailers.

Old Navy customers have a foot in two retail worlds. They have a strong identification with brand names, especially as guarantors of fashionability, but they are turned off by the prices associated with upscale labels.

The Gap is quick to affirm Old Navy's position, contending that a landscape crowded with "price-slashing discounters and megastores" has turned off value-conscious shoppers who want attractive, quality, inexpensive clothing offered in an exciting retail environment for the entire family.

Old Navy. The Gap contends, has made shopping for value fun once again.

Most observers expect. 01(1 Navy to be The Gap's growth vehicle for the immediate future. The Gap's 1997 annual report pointed out that Old Navy was the first apparel retailer to grow to $1 billion in annual sales in just four years-and with only about 300 locations. The company expects to add about 115 more this year.

Growth in outlets and same store sales has been propelling The Gal) to a very good year, and Old Navy has made a substantial contribution to that success. Profit in The Gap's third quarter ended Oct. 31 was up 45% over the same period a year ago. The $238 million net income surpassed Wall Street estimates and last year's $165 million earnings for the quarter. Total sales grew to $2.4 billion from $1.77 billion.

Those results are particularly impressive considering that comparisons were being made with a strong 1997 quarter. CIBC Oppenheimer analyst Dorothy Lakner noted that this year's third quarter same store sales at The Gal) were up 14% over 9% comps in the 1997 quarter.

But the growth of 01(1 Navy helped the bottom line as well. Given the rate of store growth alone, Old Navy might be expected to turn in about $1.4 billion in sales this year. While third quarter comps for Old Navy weren't available at press time, same store sales in the second quarter were up over 20%, according to BT Alex. Brown.

Old Navy, like The Gap and Banana Republic-the company's other retail concepts-has had its image carefully honed to communicate a specific message. In its store design, Old Navy embraces Americana to create a look associated with old-fashioned values. The stores are decorated with vintage trucks and washtubs, which often double as selling space.

However, the company's marketing also emphasizes fashion orientation, particularly through retro-hip commercials employing '60s and '70s television icons such as The Smothers Brothers and Morgan Fairchild.

Indeed, noted Argus analyst Alan Mak, Old Navy's aggressive marketing ignited the cargo pants rage. While 01(1 Navy wasn't the first retailer to offer the multipocketed pants, it did a lot to make them popular among mass market consumers. "The advertising puts out the brand message, which is that the products the stores offer are fashionable," he said.

In-stocks and inventory control are critical for Old Navy, particularly since its selection tends to be built around a core jeans-and-khakis presentation.

"The merchandising goes back to price clubs, to Home Depot," Mak said. "All the inventory is on the floor. They let the consumer shop. And Old Navy customers know what they want will be there."

Appealing to the family is another factor in the Old Navy equation. The pricing is set to appeal to parents, but the fashion message resonates with the kids.

"A lot of people don't want to shop Kmart and Wal-Mart because for them those stores still have a negative image," Mak said. "Those people can go to Old Navy and pick out a whole wardrobe for themselves or for their kids. And it's cheap."

In many ways, Old Navy completes The Gap's market positioning. The company's Banana Republic division competes in the high end, The Gal) against the mid-tier and Old Navy at the mass end. Old Navy is considered the growth vehicle because it has a huge potential audience at the mass market level. More importantly, Old Navy seems to be growing without cannibalizing sales at The Gap's other chains, according to a report by the Web site The Motley Fool.

Typical of The Gap approach to stores, Old Navy opened a flagship store at Sixth and Pine in Seattle on Sept. 23. Flagship stores, located in high profile and hip addresses, surpass typical outlets in size and entertainment focus. For example, the Seattle store is 38,000 sq. ft. and includes a bolstered decorative package in the historic former I. Magnin building. A grand opening promotion offered a certificate for a free pair of jeans for the first 500 people willing to line up for a peek at the store.

A more typical Old Navy outlet opened on Nov. 14 in the Valley Plaza mall in Bakersfield. Calif. That store is 13,817 sq. ft. and located across the street from a Sears and a food court. It includes the 1952 navy Chevy truck prop found in Old Navy stores nationwide as well as a tribute to Magic the dog. A sound booth permits shoppers to play CDs provided by the store.

Any frivolity in the shopping environment is decidedly intentional. The Gap intends in all its communications-whether through television or in-store decor-to keep reminding consumers of the same message: We're casual, we're fun, we're fashionable and we're value-driven.

OLD NAVY FACTS(A division of The Cap)

Headquarters: San Francisco

Number of stores: 364

'97 sales: $1 billion

Projected '98 sales: $1.4 billion

Corporate strategy: To Offer branded merchandise with a value orientation in stores that combine the marketing and merchandising approach typical of specialty stores, at price point that put the chain on equal footing with discounters.

OLD NAVY NAVIGATES DISCOUNT SEAS WITH LOW-PRICED FASHION

The Gap has carefully positioned Old Navy to reflect the concerns of the value-oriented, name-brand consumer. Old Navy doesn't stay nearly as close to the cutting edge of fashion as do department stores, but the chain takes a fashion point of view-as it proved with its emphasis on cargo pants-and so builds a position for itself as stylish even if it remains on the safer side of the fashion curve.

Old Navy is particularly effective with families because it offers low-price, good-value children's clothing. That orientation makes it a potentially potent competitor to Kmart and, to a large extent, Target, both of which have worked hard to establish their own brands. Wal-Mart's customer may be less brand conscious and, thus, less susceptible to Old Navy's charms.

Because its range of merchandise is narrow and deep-and because the casual shopper, almost by definition, isn't going to be the most diligent shopper-it's critical that Old Navy remain in stock on all sizes, especially children's sizes.

The challenge Old Navy poses to discounters is this: Can discounters establish apparel programs that overcome the negative perception brand-oriented consumers retain?