Yahoo! Finance named its first "Company of the Year" December 21 and it was none other than Gap (NYSE:GPS), one of the nation's largest specialty retailers. The financial website says it wasn't a clear-cut choice, but I would beg to differ. With the exception of Michael Kors (NYSE:KORS), there wasn't a better performer in specialty retail this past year. Looking ahead to 2013, I'll examine why Gap will continue to be a good bet in the coming year.
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Exactly one week before Christmas, Gap announced plans to open stand-alone stores in Brazil as part of its global expansion strategy. Partnering with Tudo Bom Comércio, it will begin opening stores in Sao Paulo in the fall of 2013. Brazil is the fifth largest country in the world and the largest economy in Latin America, so it makes sense for it to be operating there. Brazil will be its sixth Latin American country of operation. Expect big things out of Brazil. As for China, Gap CEO Glenn Murphy will oversee its expansion personally. That's how important the country is to its global efforts. At the end of 2011 it said that China could deliver $1 billion in revenue in the next three to four years. One year after the bold prediction; things are looking good.
In its third-quarter conference call, Murphy commented that its lifestyle brand, which competes directly with lululemon (Nasdaq:LULU), was doing well in all sorts of locations: street stores, malls, lifestyle stores and strip centers. With prices that are 13% lower than lululemon's, Athleta's 50 stores that will be open by the end of 2013 will likely take market share from the hugely successful lifestyle brand. Look for very strong sales from Athleta in the coming year. Within five years it will share the limelight with its other three main brands.
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Poor old North America. Battered and beleaguered, it can do no right - until now. For the first nine months through the end of October, its North American revenues increased by 6% to $9.3 billion. That's only marginally lower than the 9% increase for its international sales growth. Leading the charge in North America is its namesake brand with 5% same-store sales growth in the first nine months of the year. Thanks to the opening of 20 Athleta stores in North America in the first three quarters of 2012, Gap's North American net store closings (openings minus closings) amounted to one solitary location. It's opening Athleta stores as fast or faster than its closing underperforming locations at its three main brands. Business actually looks very bright at home for the first time in a long time.
Its other ecommerce brand (shoes, etc.) is also transitioning into a bricks-and-clicks operation with the opening of its first full-scale retail location in the SoHo neighborhood of New York City in September 2012. While I doubt Piperlime will have the immediate success that Athleta stores have experienced to date, it does provide a good one-two punch for growth. In the first nine months of 2012, the combined sales of the two brands was $212 million, 30% higher year over year. Both originally online sales exclusively, the foray of its two newest brands into physical locations should provide customers with a better and more convenient shopping experience.
All five of its brands achieved online sales growth of at least 16% in the first nine months of the year led by the combined efforts of Piperlime and Athleta, followed closely by Banana Republic, Gap and Old Navy. At the end of October, online sales represented 12% of overall revenue, 200 basis points higher than in the first nine months of 2011. At this pace of growth, I'd expect online revenue to hit 20% by the end of fiscal 2016, making Gap that much more profitable.
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The Bottom Line
Wanting to be prepared for its international expansion, Gap realigned its operating segments in October so that all three of its main brands would have the global infrastructure in place to handle what comes its way. It also created a fourth segment that will foster innovation including the management of its digital strategy. For now, Athleta and Piperlime will be operated under its fourth leg, but expect Athleta to be rolled out on its own in three to five years.
Glenn Murphy's definitely thinking ahead. If he doesn't watch out, Gap just might be a repeat winner in 2013.
At the time of writing, Will Ashworth did not own any shares in any company mentioned in this article.
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