Gap Inc. (NYSE:GPS), which is primarily focused on moderately priced casual apparel, is now extending its product range to the luxury segment. The retailer recently announced the acquisition of a women’s fashion boutique, Intermix, which has partnerships with several designers across the country.  With this acquisition, Gap intends to expand its product portfolio, something that it has done well in the past. It acquired Athleta in 2008, and started a multi-brand e-commerce site, Piperlime, in 2006. 
Intermix has limited presence in the U.S. market and generates around $130 million in annual revenues. Gap plans to double Intermix’s store count. The immediate financial benefits from this acquisition are likely to be minimal, but it provides Gap a new business proposition.
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Intermix Will Broaden Gap’s Product Portfolio And Improve Its Competitiveness
Gap has a wide presence in the U.S., with strong brand recognition. It is also expanding in the lucrative international markets of Asia and Latin America (Read: Brazil Will Be The Next International Frontier For Gap). Moreover, Gap’s decision last year to restructure its global brand management indicates the retailer’s strategy to allow the individual segments to focus on gaining market share in their respective markets (Read: Gap Readies For Global Future With Brand-focused Leadership And E-Commerce). The retailer also launched its e-commerce site in the world’s third largest economy, Japan. Clearly, Gap is taking several steps to improve its competitive position in the market, and the decision to acquire Intermix is in sync with its efforts.
Gap offers high quality casual apparel at moderate prices for men, women and children, but Gap was missing a footprint in the luxury apparel market. With the acquisition of Intermix, Gap will be able to expand the range of its product assortments by adding a luxury brand to its portfolio that offers exclusive clothes from different designers under a single roof. Before Intermix, Gap acquired Athleta in 2008, which offers workout gear and started its multi-brand e-commerce site, Piperlime, offering various brands such as Elizabeth & James and Trina Turk. ((Gap to Buy Luxury Retailer Intermix, Wall Street Journal, Jan 2 2013)) The retailer also ventured into kids line by partnering famous designer Diane Von Furstenburg.  These strategies have helped Gap in expanding the range of its product offerings.
Although Gap’s Banana Republic provides sophisticated apparel and accessories at higher prices than Gap Stores, Intermix adds a pure luxury brand offering exclusive products. Other value based retailers that sell apparel like Target (NYSE:TGT) have had success in offering exclusive apparel from various boutiques under its shops program, and this shows that retailers are looking for new ways to expand their product portfolios into the luxury segment.
Significance For Gap
Intermix offers collections of designers such as Herve Leger, Brain Atwood, Yves Saint Laurent and Rag & Bone through its stores.  Providing such exclusive clothing can be appealing for a retailer and provide new opportunities for growth other than its core Gap brand. However, it will face a stiff competition from existing retailers such as Ann Taylor (NYSE:ANN).
Intermix only operates 30 stores in the U.S.  Gap plans to double the store count, followed by international expansion. Gap bought Intermix for $130 million, which is roughly the same as Intermix’s annual revenues.  Compared to this, Gap earns close to $14 billion in revenues, indicating that any near term growth in Intermix’s revenues will not move the needle for Gap’s stock.
However, there is more to this decision than just numbers. As mentioned above, Intermix adds a different business proposition to Gap’s portfolio, and the retailer can leverage the brand’s strength to establish itself in the luxury market. This acquisition will also help Gap in international markets such as Brazil and China, where the luxury market is likely to surge in the future due to increasing personal wealth, spending capability and fashion consciousness. One such example is Coach’s (NYSE:COH) rapid growth in China, where it registered 40% growth in its Q1 fiscal 2013. 
Our price estimate for Gap Inc. at $39, implying a premium of about 25% to the market price.Notes: