This month, Gap, the American clothing retailer that dressed a million baby-boomers, announced that, after years of declining sales, it is "reviewing its strategy" to stem the losses. It was also reported that Goldman Sachs, the American bank, has been lined up to oversee a possible sale of the company.

Gap has always been viewed as one of corporate America's biggest success stories. From its 1960s bohemian West Coast origins, it grew into a global giant with more than 3,000 stores and annual sales of US$16 billion (HK$124.8 billion).

Its advertisements featuring celebrities such as Madonna and Sarah Jessica Parker helped make the company as big an American brand as Coca- Cola or Disney. For years, Gap's khakis, denims and white T-shirts defined the very essence of laid- back, vaguely louche, preppy American-ness.

Its reputation for modish nonchalance reached its zenith in 1996 when the actress Sharon Stone wore a US$25 Gap black polo-neck to the Oscars.

But somewhere along the way, Gap lost its groove. The company's shares closed last week at US$20, down from a US$50 peak in 1999. Observers say that the group, which has more than 130 stores in Britain, needs a radical overhaul.

It looks as though it is happening already: the company has axed two of its top designers. People have also questioned its relevance in an era of low- cost, smaller, more fashionable chains.

"Gap has gone from being a destination store that everyone wants to shop at to being a store that no one cares about," says Marshall Lester, who was a director in America in the 1980s.

The company's origins lie in an almost mythical era of American pop culture. The first store was opened in the summer of 1969, on San Francisco's Ocean Avenue, by Don Fisher and his wife, Doris, whose family remain involved in running the company and own more than a third of the shares.

Don was a real estate developer who was fed up with being unable to find decent jeans in department stores. The original shop was called Generation Gap and sold Levi's jeans and records. The place became a counter-culture mecca and sales reached US$2 million within a year.

By 1976, Gap, as it was renamed, had 200 stores and floated on the New York Stock Exchange. But it was not until 1983 that it became the company that is recognisable today. In that year, Fisher bought Banana Republic, a chain that sold khaki clothing and travel trunks.

But, more importantly, in 1983 he appointed an energetic new chief executive, Millard Drexler. Drexler, a New Yorker, was part-showman, part- sage and a brilliant merchandiser. He was dubbed "Mickey the Merchant Prince" because of the skills he picked up as a teenager in the Bronx's garment district.

Fisher has said that Drexler took Gap to "unthinkable heights." Drexler binned the mish-mash of 14 own-label ranges that the company sold in order to focus on one: Gap. He also embarked on a massive expansion drive, increasing the number of stores from 566 to more than 2,000.

"Mickey introduced the private label thing and focused on the products that the average person lives in; blue denim jeans, polo shirts, T-shirts, sweat pants. Gap became the world's best at basics. They were well- priced, good quality, had no logos.

"He put them all under one roof, which had never been done before. He turned it into Ralph Lauren for the masses," Lester says.

It was for this simple, yet classic, look that Gap, and its blue box logo, became famous. Crucially, its original customers grew up with the chain: Gap was almost single- handedly behind the chino-and-polo-shirt look that became the uniform for thirtysomethings in the 1980s and 1990s.

No retail conference in the late-1990s was complete without global chief executives lauding Gap for being the perfect synergy of product, brand and price. Gap had the holy grail for brands: its own personality.

The company effortlessly surmounted blips. Sales stalled in the mid 1990s so Drexler launched Old Navy, a discount-store concept that hit US$1 billion of sales in three years. Drexler knew the value of Gap's iconic status. His advice to one prospective director was simply: "Don't f*** around with the blue box."

But in 2001 Gap did just this. It moved away from its classic apparel and started chasing the teenage market. The move backfired and heads rolled. In 2002, Fisher replaced Drexler with the former Disney executive Paul Pressler, who as chairman of the parks and resorts division oversaw the development of Hong Kong Disneyland.

Pressler, who is still in charge of Gap, was cut from different cloth to his predecessor. He had no experience selling clothes. Instead, he delegated decisions on the clothing ranges and imposed traditional business disciplines on the company.

He returned Gap to the 18-30 market and launched new store concepts: Forth & Towne, a chain for 35-plus women, and Piperlime.com, an online shoe shop.

Sales have been falling or flat continually for two years. Last month's sales of US$2.3 billion were 10 per cent lower than two years ago. This month Gap lowered its earnings forecast for the third time in six months.

City analysts say that Gap became too obsessed with its epoch-defining status. "Gap has been blindsided by the feeling that it has to have an overall vision. It seems to me to be more of a concept than a shop, which works if you're Gucci but not if you're selling jeans," says Rob Mann, of the broker Collins Stewart.

There are numerous reasons why the icon stumbled. First, rivals caught up. H & M, Zara and Topshop, in Britain, and J Crew (which, ironically, Drexler now heads), in America, offer cheap basics. Gap's was a classic look, but easy to copy.

Observers argue that Gap opened too many stores and lost its cachet. "You start off being a cool brand and if you get ubiquitous you are no longer cool," says a former European executive.

But mainly there is a generational problem. Children rarely want to shop at the same store as their parents, and this is particularly true at Gap. The mantra of "Gen Y" is individuality, the opposite of the sense of community their baby- boomer parents hankered after.

So where now? With Don Fisher in his late seventies there are growing whispers that he plans to sell. His son, Bob, is still the company's chairman, but private equity groups are reportedly circling. Former employees suggest that the "vast machine" of Gap should be split into three companies: Gap, Old Navy and Banana Republic (which is still doing well and the only bit not "under review").

"All three brands are brilliant. They'd do better separately," says one, adding that as part of the same group the chains are, nonsensically, stealing sales from each other.

This would lead to question marks over Gap's operations in Europe and Japan. There was speculation last year that the European arm, headed by Stephen Sunnucks, the former New Look chief executive, might be sold to its management. But this was denied by Gap's publicity machine. Whatever happens, the wounded company desperately needs to reinvent itself for a new era.

THE SUNDAY TELEGRAPH