Gap Inc. (NYSE:GPS) recently announced that it plans to open its first store in Brazil in the second half of 2013.  Brazil is not a new market for the retailer as it has been offering its products through duty-free channels in this region. However, the decision to open its branded stores will help the retailer in further expansion and help take advantage of the untapped market potential.
Brazil is the largest economy in Latin America and the fifth largest country in the world, which offers good market potential for the U.S. retailers. Moreover, the lack of competition from Gap’s U.S. counterparts such as Abercrombie & Fitch (NYSE:ANF), American Eagle Outfitters (NYSE:AEO) and Aeropostale (NYSE:ARO) works in Gap’s favor. With this decision, the retailer will look to strengthen its international presence. Apart from Brazil, Gap has a presence in Panama, Columbia, Mexico, Chile and Uruguay. 
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International Expansion Is One Of Gap’s Main Strategies
Gap has emphasized on international expansion as one of its main growth strategies. The retailer’s stores are located in prime international markets such as Canada, the U.K., France, Ireland, Japan and recently it entered China as well. Gap opened four outlet stores in China during the third quarter of fiscal 2012, and the results have been good so far. 
In addition to its own stores, Gap has a significant international footprint via its franchise business. The retailer opened its first franchise store in 2006 and currently operates around 300 such stores in 40 countries across Europe, Asia, the Middle East, Australia and Latin America. 
As far as Brazil is concerned, Gap will be opening its first Gap store in Sao Paulo (the largest city in Brazil) in fall 2013.  Apart from its namesake brand, the retailer will also offer other brands such as GapKids and babyGap through its stores. Gap eyes a strong foothold in the region within the next five years. 
Why Is Brazil A Lucrative Market For Gap
Gap already has a presence in five Latin American countries and entering Brazil will help the retailer further strengthen its foothold in the continent. As one of the major emerging markets, Brazil can provide a large base of fashion conscious customers with higher disposable incomes in the future.
We note that Wal-Mart‘s (NYSE:WMT) Brazilian operations have been growing rapidly. For the past two quarters, its revenues have increased by 11% and 10%, respectively, while comparable store sales have grown by 6.6% and 5%.  Although the comparison of an apparel retailer with Wal-Mart is not exactly valid, it can be regarded as a measure of confidence that the customers have in brands that offer good quality products at compelling prices.
Moreover, Gap’s main competitors such as Abercrombie & Fitch, American Eagle Outfitters and Aeropostale do not have a presence in Brazil. Even if these retailers plan to enter this market in the future, Gap will still have the first mover advantage.
Assuming that Gap is able to add 150 Gap stores in the next 5 years, upside to our estimated stock price will be negligible. However, this decision enables the retailer to strengthen its position in Latin America and reduces its dependence on the sluggishly growing U.S. economy.
Our price estimate for Gap Inc. at $39, implying a premium of about 20% to the market price.Notes: