A Step Forward or Backward for Gap?

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Gap (NYSE: GPS  ) recently announced it is opening a brick-and-mortar store for its six-year-old online boutique apparel site, In the world of retail, though, trends are shifting in the opposite direction, so is this a smart move or a mistake?

So far in 2012, Wall Street has been pretty impressed with Gap. The company's stock price is up more than 50% since the beginning of the year due to well-received spring lines and a 6% increase in sales compared to 2011's first quarter.

In fact, the overall retail sector in 2012 has been kind to investors. Most of Gap's competitors, like American Eagle Outfitters (NYSE: AEO  ) , Limited Brands (NYSE: LTD  ) , Chico's FAS (NYSE: CHS  ) , and ANN (NYSE: ANN  ) are also beating the market, but Gap is definitely leading the way. These companies have all been helped by an unseasonably warm winter, an improving macroeconomic environment, and waning cotton prices. However, American Eagle, Chico's, and ANN have all seen inventory tick higher while Limited Brands has managed to whittle its down a bit.

GPS Chart

GPS data by YCharts

It can be easy for investors to let short-term trends like this lull them into trusting that a company can do no wrong, especially when the guys over on Wall Street are falling in love, too.

However, the good long-term investor should always be asking questions, especially if the company does something potentially crazy like bringing a digital brand to brick-and-mortar while most companies are going in the other direction, taking brick-and-mortar stores to the digital world.

That said, while Gap's recent decision to give Piperlime a physical home is worth questioning, I don't know that it's that crazy, and I'll give you three reasons:

  1.  Piperlime currently represents less than 5% of Gap's overall sales. This gives the company some flexibility to play around with the brand without worrying too much about the impact on its overall bottom line.
  2. Have I mentioned the number of brick-and-mortar stores that Piperlime will be opening? Just one, and it will be in NYC's SoHo district. SoHo probably doesn't need another trendy apparel store, but it's a pretty safe bet the store will find its target audience (someone a little bit more affluent than the average mall-goer) with a decent amount of foot traffic. And again, one store shouldn't have much of an effect either way on Gap's bottom line, or investors' pockets.
  3. The store will have more of a boutique feel than that of its sibling Gap namesake and Old Navy stores, which are very cookie-cutter with mass appeal. This is smart, since boutiques call to mind a higher level of both quality and customer service, two things which are rising in importance as brands compete for customers' loyalty.

It definitely seems as if Gap has learned from its mistakes a decade ago and is taking things slowly with Piperlime's expansion.

You'll need to do more research, though, to decide if Gap as a whole is a smart investment for your portfolio. If you're looking for a few more ideas, then click here to check out a special free report put together by some of our top analysts about the stocks only the smartest investors are buying.

Fool contributor Amanda Buchanan holds no position in any company mentioned. Click here to see her holdings. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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10/27/2016 11:06 AM
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