Gap Updates: Opens Banana Republic Store in France

-34.41%
Downside
27.55
Market
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Trefis
GPS: Gap logo
GPS
Gap

Continuing with its strategy of international expansion, Gap Inc. (NYSE:GPS) announced the opening of its first Banana Republic flagship store in France. [1] The flagship store is located in Paris on Avenue des Champs Élysées, one of the most popular international shopping destinations in the world. We believe this move makes sense and will help the company to improve its margins, which have declined significantly owing to heavy promotions across the board in the U.S. apparel market. Gap competes with other specialty retailers like Aeropostale (NYSE:ARO), American Eagle (NYSE:AEO), Abercrombie & Fitch(NYSE:ANF) and Urban Outfitters (NASDAQ:URBN).

We have a Trefis price estimate of $26.75 for Gap’s stock — a premium of around 40% to the current market price.

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The affordable luxury store will help Gap to improve its margins:

In the recent three quarters Gap has been plagued with the shrinking margins. The situation has exacerbated during the holidays as Gap has been forced to increase the depth of its promotions in order to woo holiday shoppers. Banana Republic is the most high-end brand for the company under the affordable luxury.

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Banana Republic EBITDA margins are higher than those of Gap and Old Navy, two of its most well known brands. We believe that the opening of Banana Republic will help Gap to fight the margin woes because luxury brands can pass the cost pressures to customers more easily compared to value-based brands. As the contribution from Banana Republic to the net sales increases, we expect the margins to improve going forward.

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Notes:
  1. Gap opens first Banana Republic flagship store in France, Source: Gap Inc. IR, December 8, 2011 []