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SAN BRUNO, Calif.-It's not old. It's not nautical. But the Old Navy Clothing Co. is riding to the rescue of No. 2 apparel marketer the Gap.

Answering the consumer call for convenience and value, the Gap believes it has found a solution to the retailer's apparel woes with the new store concept, which offers Gaplike fashions at lower prices, in large, warehouse-style outlets.

The company says initial results are good. A total of 50 Old Navy outlets are set to open this year in various markets, selling a broad array of casual apparel basics priced about 20% to 25% below the Gap's traditional offerings.

If the company's instincts are right, Old Navy may help the Gap find its way back to smoother seas after a few years of erratic sales results.

"The Gap ran into problems when competitors figured out its formula and started offering the same kind of merchandise at lower prices. Now it's fighting back, and so far it has every sign of succeeding," said Kurt Barnard, president of Barnard's Retail Consulting Group, New York.

Located mainly in strip malls, Old Navy's cement-floored stores evolved from approximately 45 Gap Warehouse stores the company has been experimenting with for several years, as it struggled to find a more affordable-but chic-retail niche.

Targeting the mass middle market of households with annual income of roughly $20,000 to $50,000, estimated to account for about half of the nation's $150 billion apparel market, analysts say Old Navy is likely to be the right formula for these times.

"We saw a marketplace for Old Navy," said Richard Crisman, VP-public relations and marketing, without elaborating on specific marketing plans. "We're going to school on this business."

About a dozen Old Navy stores have opened since March in New York, Texas and California, and more are expected to open in other, yet-undisclosed markets within the next several months, company officials said.

The Gap is already reaping results from its new direction. First-quarter sales for fiscal 1994 were 16.8% above the previous year, at $751.7 million, and the company forecasts sales gains averaging 15% to 20% for the next four years.

The Gap is also using its manufacturing muscle and in-house design and marketing strengths to gain the best advantage with Old Navy.

"The Gap has special merchandising techniques and is applying them to the middle market," said Alice Ruth, analyst with Montgomery Securities, San Francisco. "Given their sourcing power [ability to manufacture merchandise cheaply overseas], the Gap provides more value than mass merchandisers."

And while the new concept is generally applauded by retail insiders, the Old Navy strategy contains significant risks. It pits the Gap directly against fierce competitors in the value-apparel sector at a time when consumers have become very picky about spending money on new clothing.

"There's a danger that the Gap could cannibalize itself; this year will be very telling for the company," Mr. Barnard said. There is "a possibility" some core Gap stores now saturating malls and downtown storefronts nationwide may close.

The Gap is trying some unusual marketing methods at Old Navy. Already, supermodel Cindy Crawford has appeared at the Colma, Calif., store's opening, and several short-term promotions for discounts on purchases of at least $50 have been offered, in a sharp departure from traditional Gap activities. Advertising so far has been limited to local print and outdoor ads produced in-house. The ads-simply announcing the new store's name and location-have carried no one themeline.

Other unique Old Navy features include an all-under-one-roof department store style collection of men's, women's, girls', boys' and babies' merchandise. Included are some new departments, such as women's sizes 14-20.

Even more unusual: Old Navy will occasionally stock the Gap's first non-clothing, non-accessory products and gifts, like picture frames, address books, gift sets, and decorated shopping bags and boxes.

Reflecting a strong focus on families and family department store competitors like Dayton Hudson Corp.'s Mervyn's, Old Navy is going to extra lengths to woo the clan. An in-store playhouse, giant ticktactoe game, and a variety of child-size distorted mirrors, charts and scales adorn the Colma store to keep kids happy.

But the bottom line at Old Navy is value, underscored by a lack of pricey items, more synthetics and less detailed stitching and workmanship than traditional Gap merchandise. Some 49% of Old Navy's clothing is fleece apparels, compared with 15% at the Gap. About 80% of the merchandise sells for less than $22. But Old Navy, employing its own design group, won't be a markdown outlet for the Gap, company officials say.

"At Gap Warehouse, we offer merchandise that's separate and distinct from the Gap stores, and Old Navy's merchandise will be yet another new direction," said an Old Navy store manager who declined to be identified.

Most Gap Warehouse stores are expected to be converted to Old Navy stores in the next several months, as the Gap carves out three distinct positionings for its array of apparel stores.

At the lowest end of the price spectrum is Old Navy, and the Gap's 770 traditional apparel outlets with GapKids and Baby Gap spin-offs, mainly in enclosed shopping malls and urban and suburban storefronts. Its 180-store upscale Banana Republic chain will be the priciest and most fashion-forward. The Gap also operates 59 Gap and Gap Kids stores in Canada; 40 in the U.K.; one in France with more expected to open overseas this year.

Kate Fitzgerald in Chicago contributed to this story.

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