Gap aims to reverse fortunes

For 25-year-old Freas, Gap is no longer a source for trendy items. "Now, I just buy jeans," she said.

Such indifference is a serious problem for the San Francisco-based chain, whose already strong reputation was boosted by its khaki and cargo pants styles in the late 1990s. This year, it has fallen out of favor with many shoppers, largely because its three divisions -- Gap, Banana Republic and Old Navy -- have lost their fashion leadership.

The company has been struggling with sluggish sales at the three units over the past 12 months. It says it's taking steps to improve results -- shoring up management; returning to TV advertising for its Old Navy and Gap brands after an absence this fall; scaling back its expansion plans for next year; and retooling its merchandise -- but some Wall Street analysts believe that the moves aren't being executed fast enough.

Many predict that Gap, which had $11.6 billion in sales in its last fiscal year and operates more than 3,500 stores worldwide, might not see a turnaround until at least the middle of next year.

"It just doesn't fill me with a sense of confidence in the near future," said John Morris, an analyst at Gerard, Klauer Mattison & Co., who predicts a 16 percent earnings decline this year.

The latest disappointment was Gap's 41 percent drop in third-quarter profits, announced Thursday. "Third quarter was very challenging," said Millard Drexler, president and chief executive officer, in a statement. "We're moving quickly to fix our problems and make sure we execute more consistently."

Gap has had hard times before, suffering a big earnings slump in 1992, but analysts believe it's confronting its biggest challenge yet due to external and internal factors ranging from a harsh retail climate to a management brain drain.