This Apparel Retailer Is Attractive for 2013

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The Gap (NYSE: GPS) has decided to enter the luxury retail market with its acquisition of Intermix Holdco for $130 million. Right after that, it also announced that the Board approved $1 billion share buyback program to return excess cash to its existing shareholders that was estimated to complete in the fourth quarter of fiscal 2012. Standpoint Research has upgraded Gap from Sell to Hold. Should we get excited about Gap after these events? Is Gap the apparel retail stock for 2013? 

Smart Acquisitions

The acquisition of Intermix, with 32 boutiques in North America, would help Gap to expand its business into the luxury retail market. Intermix sold accessories and apparel of many well-known brands including Yves Saint Laurent, Jimmy Choo, along with its retail website. The chairman and CEO of GAP has commented on the deal: “INTERMIX has a distinctive position in this growing market with clear competitive advantage. Their record of merchandising with a keen eye towards mixing multiple designer labels, complemented with exclusive product, is appealing to their loyal customers. This strategy reflects the strength of their brand vision and leadership team.” For Intermix, it could leverage Gap’s infrastructure on the global scale for the business growth.  Khajak Keledjian, the co-founder of Intermix expected to offer “the most exciting fashion trends with the finest designers in the world”.

In the past, Gap also made a successful expansion in the women’s athletic apparel business by acquiring Athleta for around $150 million in 2008. At that time, the acquisition was positive for Gap when it was suffering from same store sales declines in its existing Gap, Old Navy, and Banana Republic brands. For the last four years within the Gap’s family, Athleta has experienced a decent growth in both traditional retail and e-commerce side. It has opened 35 new retail stores during the past 2 years. 

Cash Cow on a Strong Balance Sheet

Investors seem to also get excited about the new $1 billion share buyback program. The retailer has kept buying back its shares in the stock market in 2012. During the fourth quarter of 2012 until now, Gap has already spent nearly $540 million to buy 17 million shares in the market from the fourth quarter of fiscal 2012 to date. Sabrina Simmons, Gap’s CFO commented that the company has distributed to its shareholders nearly $1.2 billion year-to-date in the form of both dividends and share buybacks. For the last 5 years, the treasury stock has grown from more than $7.9 billion to $12.76 billion currently. Gap is actually operating with the decent financial foundation. As of October 2012, it had more than $3.16 billion in total stockholders’ equity, $1.77 billion in cash and short-term investments, and only $1.25 billion in long-term debt. Thus, it had the net cash position of $520 million. For the trailing twelve months, it generated $1.95 billion in operating cash flow and nearly $1.37 billion in free cash flow.

And Valued Cheaply

At the current trading price of $32.10 per share, Gap is worth $15.39 billion in the market. Even it has returned around 70% in 2012, it was still valued cheaply with only 6.47x EV/EBITDA. It was the cheapest valuation compared to its peers, including American Eagle Outfitters (NYSE: AEO) and TJX (NYSE: TJX). American Eagle is valued at 7.52x EBITDA multiples, whereas TJX is the most expensive, with 9.23x EV/EBITDA. American Eagle has the highest dividend yield among the three, with 2.1% yield. TJX is paying 1% dividend yield to shareholders and Gap is paying 1.6%.

Foolish Bottom Line

Intermix is considered to be a small acquisition for Gap, but it would support Gap with its brand portfolio in the luxury retail market. Like Athleta, the chief of Intermix would stay in to run Intermix’s operation as a chief creative officer in the Gap’s family. Along the new share buyback program and the current low EV multiples valuation, I think Gap will have a lot to give to investors in 2013.

hoangquocanh has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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