Gap Outlines Expansion Plan

Taking forward its intention to penetrate deeper into the $1.4 trillion global apparel retail market, The Gap Inc. (GPS) outlined its growth strategies at the Investor Meet held yesterday. The premier international specialty retailer stated that it would increase focus on widening its international presence, enhancing omni-channel strategies, building an efficient inventory model and streamlining its supply chain.

As part of its global expansion plans, Gap intends to speed up its Asian operations, particularly in China. Gap evidently views China as a country with high growth potential, as reflected in its strategic moves over the past few years. The company expects to treble its revenues from the country over the next three years from over $300 million at the end of fiscal 2013.

Reporting on The Boston Consulting Group projections, The Wall Street Journal revealed that apparel sales in the urban areas of China will expectedly reach $156 billion by 2017, registering a 58% rise from 2013. This high growth potential has attracted many U.S.-based retailers including Ralph Lauren Corp. (RL), V.F. Corp. (VFC) and Tiffany & Co. (TIF) that have led to an overcrowding of the Chinese market.

In such a scenario, we believe that if Gap intends to remain on top, it has to make its products and services distinct and unique.

In order to capitalize on the Chinese market, the company has been aggressively increasing its store count in the country, enhancing e-Commerce capabilities and tailoring its brands to suit consumer aspirations.

Beginning with four stores, two each in Beijing and Shanghai in 2010, the premier specialty retailer has increased its store count to 81 at the end of fiscal 2013 across the country. The company now has plans to open 30 more stores in the country by the end of 2014. Moreover, in 2011, Gap became the first international retailer to launch an e-Commerce operation in China, along with opening stores.

Since its venture into China in late 2010, the company has made extensive analysis of consumers’ buying habits and found that the country’s people preferred to go shopping in groups. Hence, Gap has been increasing its store count in China to attract a higher footfall.

We believe that capturing the Chinese market is both a strategic and ambitious move by the company, given the rising middle class and expanding retail sector. The fading brick-and-mortar retailing concept in the United States is another major reason for retailers to expand footprint overseas.

We believe that Gap’s initiatives are furthering its idea of establishing a network of multi-channel consumer markets in China for its various brands. This involves opening a considerable number of stores in the coming years.

Further, Gap declared that it would continue to enhance its online capabilities and develop the omni-channel platform to deal better with changing consumer preferences. Gap has observed that the brick-and-mortar retailing concept in the United States has been losing its luster over the past few years as consumers are increasingly resorting to online shopping. Therefore, in a move to streamline its North American business, the company is enhancing its e-Commerce capabilities through a number of initiatives.

As part of these endeavors, Gap intends to extend the Reserve-in-Store facility to all of its Gap and Banana Republic stores across the United States by the end of second-quarter fiscal 2014, which we believe will boost its top line.

In 2013, the company had introduced two online platforms – “find-in-store” and “Reserve-in-Store” in select locations. Find-in-store facilitates buyers to locate the nearest Gap store where their selected merchandise are available while through Reserve-in-Store, consumers can reserve up to five items online and get the same by the next business day. The company received a positive response from shoppers as it saved their time and effort for selecting merchandise from store to store.

Moreover, Gap revealed that it would increase focus on athletic gear Athleta brand. We believe that Gap’s international presence and infrastructure would help the brand to evolve as a globally recognized trade name.

Furthermore, in an effort to quickly respond to the consumer demand, the company declared that it was working on building an efficient inventory model as well as streamline supply chain, which will help increase both revenues and gross margin.

Gap pointed out that its strategic initiatives will help in achieving the long-term target of striking a balance between top and bottom-line growth and increase shareholders’ wealth through share repurchases and dividend payments. Gap has generated additional revenues of $1.6 billion in the past five years while its earnings per share have grown at a compounded annual growth rate of 15% per annum over the same time frame. Moreover, the company has returned approximately $1.6 billion to stockholders in the form of share buyback and dividend payouts.

We believe that the company’s recently outlined global expansion plan, omni-channel, and domestic productivity bode well for future long-term growth. Moreover, the company’s globally recognized brands complement one another, thereby enabling it to leverage its position in the sector.

Currently, Gap carries a Zacks Rank #3 (Hold).

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