Bright Future for The Gap Inc. (GPS)

Analysts may argue that Banana Republic offers high end apparels; nonetheless, it does not have a similar positioning to Intermix. Currently Intermix owns 30 stores in the US, and going forward it is certain the count will go up. Currently Intermix volumes are small in relation to the stock price, however its addition to the portfolio establishes a certain brand perception and a feeling of positivity among investors. Gap once held the title of being the world’s largest apparel retailer; however, it has lost heavy ground to ZARA in the last few years. However, Gap’s strategy to restructure the overall brand perception allows each sub-brand within Gap to primarily focus on increasing its market share. This may lead to a snowball effect on its stock in the near future.

Undervalued Stock

Gap is currently trading at 86% of its 52 week high. The potential of international expansion and transcending into other segments through acquisitions makes Gap an attractive investment if you have a long-term investment horizon. There may be a 14% upside to the stock if the company posts good numbers in the first quarter of 2013. The PE ratio of GAP stands at 16.1, compared to Abercrombie & Fitch’s 37.9, however, the PEG ratio of Gap stands at 270, whereas Abercrombie & Fitch stands at roughly 160. This may suggest that Gap is relatively overvalued. Gap posted a 6.5% growth in overall revenues and a 5% growth in like for like sales.

However, it must be noted that the international expansion prospects and an effort made to generate revenues from markets such as Brazil and China may push the stock price towards a premium going forward. Gap also reported 23% growth in the direct to consumer segment. Other players have also profited hugely in this segment, and going forward it is certain that the apparel industry in the US will be driven by direct to consumer retail.

The article Bright Future for Gap originally appeared on Fool.com and is written by Sujata Dutta.

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