SAN FRANCISCO — For years, Stefan Larsson was Gap’s worst nightmare, as he led H&M’s dizzying expansion in the United States with a combination of designer chic and rock-bottom prices.

Three years ago, Gap Inc. hired him, and gave him its most challenging brand, Old Navy.

Since his arrival, Mr. Larsson has led a striking turnaround at the low-cost label, transforming Old Navy from a butt of jokes to its parent company’s crown jewel. Last year, Old Navy took in almost $6 billion in sales in the United States — almost as much in sales as the Gap and Banana Republic brands put together — and made up 40 percent of the company’s global revenue. Earnings due this week are expected to underscore Old Navy as Gap’s biggest driver of growth as its other big labels are struggling.

Still, Old Navy faces a challenge in sustaining that strong growth in a world of cheap fashion that increasingly seems a race to the bottom.

Mr. Larsson is unfazed. “I saw an unpolished diamond in Old Navy,” Mr. Larsson said in a recent interview — his first since taking the helm at the brand — in a corner of a bustling staff cafeteria at Old Navy’s San Francisco headquarters. “Everything starts and ends with product.”

Old Navy’s success so far under Mr. Larsson has been built on a level of attention to design that sellers of low-end, family-oriented clothes — including the old Old Navy — had not put into their wares. (Mr. Larsson calls that view of fashion the “clothes by the pound” approach and says it ignores the aspirations of low-income shoppers.)

The label’s newfound strength also points to a fundamental shift in the way people shop for clothes, as well as a new frugality for all but the wealthiest of shoppers in the United States. Matching a $10 T-shirt with a designer bag has become much more common, as shoppers grow more selective about what they will splurge on. And even as consumers benefit from lower gas prices and a stronger job market, cautious households — especially those with children — have preferred to invest in fundamentals like their cars or homes rather than their wardrobes.

All that has been a boon to Old Navy. Sales at established stores jumped 11 percent in the fourth quarter, by far the fastest rate shown by a mass apparel brand in the critical holiday season.

“Old Navy’s approach used to be selling commodities,” said Betty Chen, a retail analyst at Mizuho Securities USA. But the more stylish clothes and marketing that Mr. Larsson has brought to the brand have had “a strong halo effect,” Ms. Chen said, that has bolstered the brand’s image. “And price points are so much lower than Gap or Lululemon.”

Conceived by Gap in the early 1990s as a response to efforts by rivals to undercut Gap on price, the marked-down version of itself was wildly successful at first. Shoppers were drawn by Old Navy’s promise to combine the style and quality of Gap clothing with the low prices and big selection of a Home Depot. The whimsical layout of the stores, with concrete floors and display cases fashioned from stripped-down school lockers, was a hit in the working-class neighborhoods where they opened. Within four years, sales at Old Navy reached $1 billion, the fastest rate at the time for any retailer. (Even Google took longer to reach that milestone.) Gap opened Old Navy stores at a breakneck pace.

Read more: Old Navy Thrives After a Style-Conscious Rebirth

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