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Gap Strengthens its Luxury Line-up

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In an effort to expand its brand portfolio as well as further firm its position in the growing global luxury market, Gap Inc. (GPS - Analyst Report) recently acquired INTERMIX Holdco Inc. – a women-centric luxury apparel retailer in the U.S. Gap concluded the deal on the last day of 2012 by paying $130 million in cash.

INTERMIX is a multi-brand luxury fashion retailer in North America, which offers fashionable apparel for women from the industry’s most popular designers and brands that provides it a clear competitive advantage. The company offers its products through a network of 32 boutiques in North America and an online channel.

We believe that the acquisition will not only help Gap in expanding its brand offerings, but will also regain its fashion leadership status. Further, we believe that Gap’s international presence and infrastructure would help INTERMIX to emerge as a globally recognized luxury retailer in the same way as it facilitated Athleta brand acquired in 2008 to gain a significant position.  Started through a catalog business, Athleta brand – with the help of Gap’s innovative ideas – has now approximately 35 stores and an e-commerce platform.

Gap, which has gone through a phase of declining comparable-store sales and reduced profitability, is now coming back on the growth track with the help of its turnaround strategies as evident from its solid comps and sales performance in the recent months.

As part of its strategy, the company is planning to deliberately reduce its Gap North America store count to 950 by the end of fiscal 2013. Contrary to this, the company continues to aggressively expand on the international front through both company-operated and franchise stores. Further, it is aiming to generate 30% of total sales from overseas operations and online business by 2013.

Gap’s long-term strategic moves, along with its disciplined cost management measures have not only provided it with financial flexibility, but also helped reduce operating expenses. Moreover, Gap’s globally-recognized brands complement one another, enabling the company to leverage its position in the sector.

Gap, which competes with American Eagle Outfitters, Inc. (AEO - Analyst Report), currently has a Zacks #2 Rank that translates into a short-term ‘Buy’ rating. Moreover, we maintain a long-term ‘Outperform’ recommendation on the stock.

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