A Retailer Moving Up

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The Gap (NYSE: GPS) recently announced a relatively small acquisition, paying $130 million for high-end retailer Intermix. The move probably makes sense for the company, but comes with one material risk: distraction. Gap has been struggling with weak same store sales, a key performance measure, at its three main concepts for years and adding yet another brand to the portfolio won't make fixing the big problems any easier.

A good idea...
Intermix is an upscale women's retailer that focuses on an “edited collection of the season's best fashion statements.” Its 30 U.S. stores, which it calls boutiques, present current fashions “mixed” in unique ways. Some of the designers it carries include such well known names as Yves Saint Laurent, Helmut Lang, Fendi, Stella McCartney, and Jimmy Choo, among others. The offering is differentiated from The Gap's other stores, which typically offer only self branded merchandise.

Adding a company that focuses on the upscale consumer is a solid plan. This segment of the U.S. market has held up better than the middle and lower class consumer who is more likely to shop at Old Navy and the company's namesake store. Intermix also brings The Gap into relationships with designers that it could potentially use to spruce up other properties.

Expansion appeal
Perhaps the most promising aspect of the Intermix acquisition, however, is the company's small size. At just 30 stores, The Gap will have plenty of room to open new “boutiques.” This will follow on the heels of the company's relatively successful expansion of its niche Athleta concept. This active wear brand has resonated with customers looking for an alternative to high-priced fare from Lululemon Athletica (NASDAQ: LULU). (Although Athelta's clothing is far from cheap, it is often cheaper than Lululemon attire.) Expansion could make Intermix a valuable source of growth for a company that has been struggling to find its way in recent years.

Copycat brand
Although Athleta has done reasonably well, it's really just a copycat of Lululemon. The latter brand, which hails from our northern neighbor Canada, pretty much took the women's apparel market by storm. Few saw a specialty active wear/yoga store as a winner before Lulu, as its legions of fans call it, made it fashionable. Fast product turnover, high prices, clean and pleasant stores, and clothing tailored to make women look and feel good, however, proved to be a winning combination. The Gap saw this and simply brought out a similar concept that is almost, but not quite, as good. While this has been a winning move for The Gap, it isn't clear that there is a similar model to follow with Intermix.

Problems at home
The success of Athleta and The Gap's Piperlime concept, which shares some similarities to Intermix but is focused on Internet shoppers, has come at the same time that The Gap seems to be continuing to struggle with its core brands. Indeed, weak same store sales comparisons have been a notable problem for many years. This isn't surprising given that Old Navy and The Gap are geared toward the middle to low end of the market.

The bigger issue, however, may be that the brands aren't particularly differentiated from each other or competitors. Even Banana Republic sells similar products to its sister stores. Add in the multitude of other companies selling “basics,” such as Abercrombie & Fitch (NYSE: ANF) and Aeropostale (NYSE: ARO), and the three main Gap brands look even more “tired.”

Abercrombie, for example, makes a big push to seem upscale and hip. It's Hollister brand is a notable example, where the entire shopping experience from apparel to store design is managed very tightly to adhere to a specific image. The Gap's stores just don't have the same luster. Aeropostale, meanwhile, focuses on cheap but cool, which Old Navy's family focus doesn't pull off nearly as well. Aeropostale, for its part, has faced its own set of problems, including some fashion missteps and potentially overzealous discounting. A focus on the low-price end of the customer market hasn't helped either.

At the end of the day, the Intermix acquisition, if completed, probably isn't big enough to cause too much of a problem for a retail giant like The Gap. However, this purchase, even coupled with the success of Athleta and Piperlime, doesn't change the fact that The Gap needs to fix its three main concepts before it will truly regain its footing. This makes the risks of this acquisition that much more important to watch.

ReubenGBrewer has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica. The Motley Fool owns shares of Aeropostale. 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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