Banana Republic May Slip on Its Own Schpeel Unless It Can Reach New Customers

Last Updated Aug 26, 2010 2:32 PM EDT

Gap (GPS) has turned things around at its Banana Republic unit, which is good for the company's stability -- but, unfortunately, still not enough to guarantee that the Gap's comeback has legs.

In Gap's first quarter conference call, CEO Glen Murphy acknowledged that the company has shifted marketing dollars to win more sales from its credit-card holders. Promotions to Old Navy, Gap and Banana Republic cardholders have included 10 percent off purchases and alerts about discount events and other money-saving deals. It's an effective strategy for a retailer that lost shoppers to the recession. Banana Republic comparable store sales, those in locations opened for at least a year, gained five percent in the quarter but only after losing 13 percent in the period a year earlier.

The real test for Banana Republic will come when it gets back as many of its lost customers as it can. Then, the chain will have to compete with a lot of retailers who are after the fashion and budget-conscious customer it covets. TJX, with its Maxxinista marketing pitch for designer-loving shoppers on a budget, is after the same shopper. A little higher up on the luxury scale, department stores such as Bloomingdales are getting into the discount outlet business. Saks (SKS), which plans to open five new Off Fifth stores, already has more outlets than department stores. And Nordstrom (JWN), which operated 69 Rack locations at the end of the 2009 fiscal year, announced plans to open 16 more in 2010.

In an increasingly crowded discount-fashion field, Banana Republic is trying to define what affordable luxury means. Murphy said the stores are mounting "new price of luxury" displays each month featuring conspicuous discounts and touting "the value Banana Republic brings." Even if the strategy is proving effective at coaxing sales from recognized patrons, the chain has yet to prove it will work with prospective customers who are being enticed by an array of rivals.

A strong Banana Republic is important for Gap. Old Navy, the best-performing Gap brand lately, is denim dependent. And Gap's namesake stores have turned around based on the success of their 1969 Premium Jeans. Banana Republic builds its fashion presentation around pants, with women's pants (pictured) performing particularly well of late, Murphy said. A solidly performing Banana Republic provides a hedge against the day, and the fashion cycle will bringing it around again, when shoppers next temporarily lose interest in denim.

After a fashion, Banana Republic finds itself in the situation Pier 1 confronted in last year's third quarter. Then, the retailer turned a corner and began making up sales it had been losing after a long decline. Heavy marketing to its credit card holders was crucial to driving revenues. Pier 1 still hasn't gotten to the point where its advances demonstrate an ability to take customers from William-Sonoma (WSM), Bed, Bath & Beyond (BBBY), Cost Plus World Market (CPWM) and multi-department stores such as J.C. Penney (JCP). It might be worth checking in on Pier 1 to see what prospects might be like for Banana Republic.