Old Navy, once the powerhouse in the Gap's stable of stores, has struggled mightily in recent years. On Thursday, the Gap said sales at Old Navy stores open at least a year tumbled an astonishing 27 percent in March.

The Gap has begun an overhaul, but it faces major challenges. Old Navy's previous success centered on its quirky, family-centric vibe (remember the "performance fleece" jingle?) and a strong emphasis on value-price basics.  

Of late, however, its offerings have failed to stand up against even more wallet-friendly basics offered at Wal-Mart, Target, and Costco.

So Old Navy is going to have to do more than produce better value-price basics; the brand can't beat the big discount chains in the margin game, and consumers have made it clear that its image and identity are going stale.

"It's too difficult to create enough differentiation in basics, because there are too many alternative places to buy basic apparel," says Jeff Klinefelter, a research analyst with Piper Jaffray.

Gap executives say that part of the problem is that Old Navy has placed too much emphasis on fashion in women's apparel, the Wall Street Journal reports.

But the experience of some "fast fashion" retail chains suggests that perhaps Old Navy really needs to double down and target fashion-conscious twentysomething women, a demographic for whom apparel remains a priority even in hard times.

Even in a sluggish spending environment, retail brands with trendy yet inexpensive offerings have fared among the best.

After conquering Europe, H&M of Sweden entered the U.S. market with enormous success. It reported a 15 percent increase in U.S. revenue in the first quarter of 2008.

Spanish brand Zara is another wildly "cheap chic" entrant; while Zara's parent company Inditex does not break down its sales figures by country, that company has seen a 25 percent rise in overall profit so far in 2008.

Now it's time for Old Navy—better late than never—to see if there's room for one more in the fast-fashion business.  

That means pumping up a fashion-forward image, and dramatically shrinking the time between concept and execution for merchandise.

The brand already brought in bold-faced fashion name Todd Oldham as creative director last fall, and earlier this year showed signs of moving in the fashion-forward direction with a snazzy new marketing campaign and merchandise targeted at the twentysomething woman.

Old Navy has already introduced the idea of creating mini  "collections" that change in theme monthly. February was an "urban safari" concept; March is bright colors and whites.

Klinefelter of Piper Jaffray believes that the way forward for low-price retailers these days is to grab a piece of consumers' mindshare by providing a differentiated offering.

As for to judging Old Navy's steps so far, it's too early to judge the potential for a big rebranding.

"It's a very difficult time to interpret results of new strategy," says Klinfelder. "It's the wrong time, and it's too soon."