Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

The Gap Inc. (GPS) and Fast Rumored to Talk Merger

Page 1 of 2

In the acquisition food chain, the big fish usually eat the small fish, but the big fish are occasionally eaten by even bigger fish. So it’s no surprise that there was speculation last week that The Gap Inc. (NYSE:GPS) — a company that bought out Intermix last year — could now be the target of a buyout itself. The alleged suitor is Japan’s Fast Retailing, owner of the Uniqlo brand and one of the bigger apparel retailers in the world. Fast has a market cap well over $20 billion, while Gap is floating along near $16 billion.

Fast has published its merger or acquisition criteria, and it has two main boxes that brands need to check before they’ll be considered: growth and profitability. According to the company, “The key condition for growth is whether the brand has the potential to develop globally. If the brand has a solid underlying concept, we can actively share our infrastructure.” Let’s see if Gap meets the standard and look at what would be in it for both companies.

The Gap Inc.What’s in it for Fast
Gap’s growth has been strong over the past year, with the stock and margins rising. Since the beginning of 2012, its stock is up 77% due to the work that has been done to turn the company and the brand around. That’s reflected in the 41% gross margin and 13.5% operational margin, both of which climbed four percentage points in the last quarter. Those increases were supported by Gap’s refinement of its brands, most notably its Old Navy brand. Comparable sales at Old Navy were up 8% this January, after falling 6% in Jan. 2012. One of the big focuses at Gap has been the differentiation of Old Navy from its core Gap brand. Work at both brands has made Banana Republic stand out from Gap and has supported comparable store growth there as well.

The success at its main brands has also given the company a chance to support growth at its other brands. Notably, Gap’s Piperlime and Athleta segment increased revenue by 31% last quarter. It also added eight new Athleta stores in the third quarter, and was on track to open another 15 to 20 by the end of 2013, bringing the total store count close to 50. Finally, Gap added the high-end Intermix brand to its portfolio at the beginning of January, purchasing the company and its 32 locations for $130 million in cash.

What’s in it for Gap
With all that growth, it’s easy to think that a buyout would be one-sided. But Gap has a lot of international growth potential that it hasn’t been able to tap, yet. Looking again to fourth-quarter sales, international comparable sales fell 2%. That’s a step in the right direction from the 8% fall a year ago, but it’s still not the kind of performance that’s going to unlock the value of Gap overseas.

Fast is already a successful international brand. In its last fiscal year, the Uniqlo brand recorded $1.9 billion in sales outside Japan. Gap only hit $934 million in international sales in its last fiscal year. Due to the strong overlap in product type between the two, a merger would allow Gap ample opportunity to take advantage of Fast’s existing manufacturing and logistics capabilities. That would help international stores get product onto the shelves more quickly and help Gap keep up with quickly changing international trends.

In addition to those obvious physical benefits, Gap would also have access to the cultural understanding that Fast’s management team possesses. One of the biggest hurdles that American brands face going into Asia is cultural. Where does the target market shop? How are trends spread? Which brands signify a “good” shopping center? All of these questions require deep insider knowledge that Gap has seemingly been lacking in its international operation. Fast would bring answers to the company.

Page 1 of 2

Biotech Stock Alert - 20% Guaranteed Return in One Year

Hedge Funds and Insiders Are Piling Into

One of 2015's best hedge funds and two insiders snapped up shares of this medical device stock recently. We believe its transformative and disruptive device will storm the $3+ billion market and help it achieve 500%-1000% gains in 3 years.

Get your FREE REPORT and the details of our 20% return guarantee today.

Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.
Loading Comments...

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 102% in 3 years!! Wondering How?

Download a complete edition of our newsletter for free!