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The Gap Inc. (GPS): Why Should You Bet on this Outperforming Retailer?

The Gap Inc. (NYSE:GPS)Shares of The Gap Inc. (NYSE:GPS) have increased by 61.76% in the last year. It has added new brands Athleta, Piperline, and Intermix to its brand portfolio over that period of time. In its first quarter 2013 results, its comparable store sales increased by 2% and revenue increased by 7%, despite a prolonged winter. It has focused on square footage growth across all brands in new economies and markets. Its core brands will continue to play a key role in overall sales growth, and it will look for more margin growth through its direct-to-customers channel. Now, let’s discuss a few points in detail.

International expansion across the brands is part of the long term growth strategy

The company has square footage growth plans across the world to drive its long term growth. It has focused on emerging Asian economies like China and Japan for international stores growth. The Chinese market is one of the largest apparel markets of the world, with a growing population and rising income levels. It opened 30 stores last year in China and will add 35 more stores this year. It also has plans to launch its “Banana Republic” brand in China and open 15-20 new Old Navy stores in Japan. China is estimated to provide 1/3 of luxury market share by 2015 and will drive sales growth in the long term.

Direct-to-Customer sales will drive sales growth with omni-channel initiatives

The Gap Inc. (NYSE:GPS)’s direct business was the major growth driver for it in the first quarter this fiscal year, where its direct sales increased by 27% YOY. The online market in the US is a very big opportunity for retailers as it is going to double in size by 2016 from $45 billion in 2012. The company has taken omni-channel initiatives and invested in mobile and media technologies to attract customers. Its Old Navy brand has initiated “ship from store” in the 1st quarter. Meanwhile, Banana Republic will launch a “reserve in store” program, which enables customers to book products online and reserve the stock in a local store. It will continue to enhance customer experience in the online channel to attract more customers in the future.

Stores consolidation and new brands expansion in North America will help it to gain market share

The company has faced low productivity problems in North America because of the market cannibalization effect and high concentration of stores. It has taken steps of closing down underperforming stores, which has helped it to achieve 5% higher productivity level. It has increased the presence of its smaller brands Athleta, Piperline, Intermix, Gapkids and Baygap. It will also expand Banana Republic and open 30 Athleta stores in the US.

Peer Analysis

In the specialty fashion apparel segment of the retail industry, two of The Gap Inc. (NYSE:GPS)’s peers are Urban Outfitters, Inc. (NASDAQ:URBN) and Express, Inc. (NYSE:EXPR). Urban Outfitters has focused on its online channel to drive its sales growth in last few years. It has plans to increase its online sales, and it expects to achieve 50% share in total sales in the long term. It has shifted its product mix of its Anthropologie brand to more sensual and elegant brands, and it has seen positive results from it. Urban Outfitter has increased its product assortments on the direct channel and it has benefited from high online sales growth. It will also look for square footage growth and increase its store base to drive sales growth.

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