Gap Inc. (NYSE:GPS) already has a substantial presence in North America with over 2,600 stores, which limits its expansion opportunities domestically. Yet, the retailer needs to find ways to gain share in the $300+ billion domestic apparel market to maintain its growth.  Gap Inc. stated that its apparel market share increased by 20 basis points to 3.9% in 2012, and it believes that the figure can further increase to 4.5% going forward. 
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Since Gap Inc. is already consolidating its Gap and Old Navy stores, much of the growth will need to come from Banana Republic’s expansion. (Read: Why Is Banana Republic Important For Gap?) In addition, the retailer is looking to expand its relatively younger sportswear brand Athleta in the U.S. It is also opening physical stores for its exclusive online brand Piperlime and boosting online presence of its recently acquired fashion boutique, Intermix. Additionally, GapKids and babyGap have yielded encouraging results so far, and the retailer plans to convert these brands into larger product categories. All of these brands offer distinct products and should allow the company to acquire a larger customer base and gain apparel market share.
Expanding Athleta’s Footprint
Through Athleta, Gap Inc. offers performance driven sports apparel and footwear for women.  Compared to the retailer’s other brands, Athleta’s presence in the U.S. is very small with only 35 stores as of 2012. It started out as an exclusive online brand, but the retailer initiated its physical expansion due to good customer response. Gap opened about 25 Athleta stores in fiscal 2012 and plans to add 30 more in the current fiscal year. 
We believe that Athleta can successfully expand in the U.S. as its main competitor Lululemon has suffered from bad publicity due to its see-through yoga pants and reliance on child labor.    In addition to this, a murder case involving two of its employees further hampered its image in the media.  Although this is something that cannot be associated with the brand, it did raise questions regarding the work environment of Lululemon, which proclaims peaceful living through its yoga outfits. With Lululemon struggling with bad publicity, it might be a good time for Athleta to expand.
Physical Expansion Of Piperlime And Online Expansion Of Intermix
Piperlime was launched in 2006 as an exclusive online brand offering shoes, accessories and handbags for women.  To ensure the brand’s growth, Gap Inc initiated its physical expansion last year. At the end of fiscal 2012, the retailer operated one Piperlime store in New York and we expect it to open more such stores in the future. According to the brand’s management, Piperlime’s physical presence will enable it to better connect with customers and maintain a strong relationship. 
Recently, Gap Inc. acquired Intermix to extend its reach in the luxury segment. Intermix is a women’s fashion boutique which has partnerships with several designers across the country.  However, it has a limited presence in the U.S. (30 stores) and generates only around $130 million in annual revenues.  Although the retailer plans to double this store count, it alone might not make a significant difference. Gap Inc. recently stated that it will also add Intermix’s products to its online product portfolio.  This will allow it to reach a broad spectrum of customers across the country and could result in a noticeable increase in the brand’s revenues.
Strengthening GapKids and babyGap
Gap Inc’s management stated that the market shares of GapKids and babyGap in their respective segments are significantly higher than the retailer’s market share in adult apparel. It also stated that there is a huge demand for Gap’s baby products in its own stores as well as franchisee stores.  This presents a good opportunity for the retailer to leverage these brands and fuel its long-term growth.
Last year, GapKids launched its first limited edition collection in partnership with designer Diane Von Furstenberg.  The company stated that its customers resonated well with the signature silhouettes, color palettes and ionic prints. We expect GapKids‘ recently launched second collection to be successful as well. Such partnerships add to the brand’s appeal and help drive store and online traffic. Additionally, the lack of competition from American Eagle Outfitters‘ (NYSE:AEO) discontinued 77kids brand should work in GapKids’ favor. 
Our price estimate for Gap Inc. at $39, implying a premium of about 15% to the market price.Notes:
- The Gap’s CEO Hosts 2013 Investor Meeting, April 17 2013 [↩] [↩] [↩] [↩]
- Gap’s SEC filings [↩] [↩]
- Gap’s Q4 fiscal 2012 earnings transcript, Feb 28 2013 [↩]
- Gap to use multi-brand platform to increase U.S. market share, National Real Estate Investor, April 23 2013 [↩]
- Lululemon Admits to Bad ‘Testing Protocols’ in Aftermath of See Through Yoga Pants Debacle, Fashionista, April 4 2013 [↩]
- Murder At Lululemon: Yoga’s Heart Of Darkness, Huffington Post, Nov 9 2011 [↩] [↩]
- Gap’s Piperlime Whips Web Into Reality With SoHo Store, Bloomberg, Aug 31 2012 [↩]
- Gap Inc. Acquires Intermix, Gap Inc., Jan 3 2013 [↩]
- Gap to Buy Luxury Retailer Intermix, Wall Street Journal, Jan 2 2013 [↩]
- Gap And Don von Furstenberg To Launch Second Kids & Baby Collection, The Wall Street Journal, Jan 30 2013 [↩]
- American Eagle Outfitters’ SEC filings [↩]