Jeans and T-shirts are hardly haute couture, so they can't be hard to produce and sell, right? Delivering basics may be more challenging than you think. Just ask the executives at Gap ( symbol), which oversees the once-popular, now tarnished Old Navy brand. Clothing retailers have been hit hard by the slowdown in consumer spending. For most people, clothes are discretionary items; fashion comes second to paying your mortgage or health-insurance premiums. But Old Navy's lesson applies to any industry: If you veer too far from your mission, you risk losing loyal, long-time customers. The key is to figure out how to expand your offerings without diluting your brand. When the first stores debuted 15 years ago, the chain emphasized low prices. It became the place to go for cheap basics. That allowed the previously low-key Gap brand to add more sophisticated items at higher prices. The stores were marketed as welcoming and inclusive; places where women's, men's and children's clothing were stocked side by side. The chain became a family destination that could attract a suburban mom, her teenage son and tween daughter. They could buy their own versions of the same fleece pullover or flip-flops. Last year, Old Navy started going after trendy, young shoppers with mini slip dresses and tiny bikinis. The chain's TV commercials went from peppy, '50s-inspired spots featuring retro celebs such as Morgan Fairchild to ones with slinky models.
The suburban moms were turned off and sales plunged. Last spring, when all those flirty dresses and bathing suits began filling up the racks, Old Navy's same-store sales dropped 27%. For the 2008 fiscal year, same-store sales at Old Navy fell 17%, doubling the drop at Gap and Banana Republic, its higher-end brand. Waning demand came at a time when shoppers started reining in spending, causing sales to fall at most retailers. Old Navy should have been in a good position to capture bargain hunters. Comparable sales at discounter Wal-Mart ( WMT) rose 3.5% in its most recent fiscal year, which ended in January. Sales at Macy's ( M) department stores fell 4.6% during the same period. Gap headquarters got the message and recently hired a new president and chief merchandising officer for Old Navy. Its clothing line has shifted back to staples like graphic T-shirts and loungewear. A new advertising campaign has launched, starring perky talking mannequins, harking back to Old Navy's original, upbeat message. Will it be enough? So far, the signs are promising. March same-store sales at Old Navy were little changed. That's considered a good sign, especially since Gap and Banana Republic saw declines of 14% and 16%, respectively. The chain also plans to remodel stores to showcase clothing better and add play areas to attract families. Old Navy is trying to restore the image of inclusiveness it fostered in its early years. Like Old Navy, companies large and small often lose their way while chasing dreams of expansion. The key is to remember where you started. What were the products that helped your company grow? Skimpy bikinis might get attention, but you'll get more mileage out of a T-shirt.