Gap's Future Is With the BRICs

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After suffering international setbacks from European market declines and Japan’s natural disaster in the past year, Gap (NYSE: GPS) has plans to bounce back internationally. This year, Gap plans to open new locations in the BRIC countries (Brazil, Russia, India, and China) as well as a new global brand restructuring plan to facilitate these new developments. Brazil, Russia, India, and China have 40% of the world’s population and more than 25% of global GDP. Any successful efforts to enter these markets can have a substantial future pay-off for retailers like Gap.

Growth in China

Since Gap opened stores in China in 2010, they have had a rapidly increasing presence in China, including six new locations in the past month. Gap is determined to infiltrate the second largest apparel market in the world. In China’s large cities, where many of these new locations are opening, consumers spend about 10% of their income on clothes. The young, affluent consumers in China are excited about the increased interest of high profile American retailers and are rewarding companies who make the investment. Other successful entries in to the Chinese market include Abercrombie & Fitch (NYSE: ANF) who claim that their Chinese stores are among the highest performing stores in the company.

Expanding into India and Brazil.

Jumping on India’s new opening for single-brand retailers, Gap is capitalizing on India’s $500 billion retail market. India is a smart choice for high profile retailers like Gap because the mix of increased disposable household income and cultural shifts towards accepting western fashion will place Gap Inc. at the head of the curve in this expanding market. Many young urbanites are moving away from traditional garb for what consumers call “Indo-fusion,” or a mix of western and Indian styles.

By the end of fall 2013, Gap plans to open its first stores in Brazil, starting with a franchise in Brazil’s largest city, Sao Paulo. These new locations are the beginning of a five year expansion in Brazil. A successful launch in Brazil will signal an exciting future for Gap stores in South America, a relatively untapped market. Gap is the first among its strongest American competitors to make the expansion giving Gap the advantages tied to being the first mover. However, European companies may prove troublesome for Gap's arrival. Future competition will most likely come from the Spanish Zara, part of Inditex SA, who has had a strong presence in Brazil since 1999 with 39 stores and counting. This could also be a strong indicator of demand from consumers looking to diversify their wardrobes with American fashion. Consumers in Brazil have increasing amounts of disposable income and are extremely brand conscious, often preferring foreign brands to domestic ones.

Despite losses in sales internationally in 2012, Gap’s share price gained a market-trouncing 67.33%. Compared to some of Gap's main competitors, such as Abercrombie & Fitch who also suffered from a decrease in international sales and a decrease in share price of 1.78% over the past year, or Guess? (NYSE: GES) who really suffered last year with a decrease in share price by 17.71%.

Gap still carries a price-to-earnings ratio of 16, which is pretty cheap for the clothing retail industry, where the average P/E comes in at 24. Like Gap, Abercrombie & Fitch may be undervalued with a P/E of 14.  However, Abercrombie & Fitch expanded their international brand by opening 40 new stores outside of the USA, at the expense of closing 47 stores inside the USA. Additionally, Abercrombie & Fitch has not been able to bounce back from a depressing 2012 fiscal year with about a 0% increase in share price since January 28, 2013. But even Abercrombie & Fitch must feel relieved that they are not Guess? With 37% of their business tied up in Europe, it is unlikely that Guess? will be able to reverse the 14% loss in share price from last year.

Bottom line

In comparison to Abercrombie & Fitch and Guess?, Gap seems to be starting off on the right foot in 2013. Despite incredible gains, Gap shares have plenty of room to grow. With all these new international expansion plans, Gap shareholders have a lot to look forward to, especially when their rivals are struggling to keep up. That is why I predict that Gap will outperform the market in 2013 on my CAPS page.

 


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