Fool.com: Gap - AOL Partnership: The Best of all Possible Internet Worlds (News) August 26, 1999

Gap - AOL Partnership: The Best of all Possible Internet Worlds

By Richard McCaffery (TMF Gibson)
August 26, 1999

Investors looking for powerhouse retailer Gap Inc. (NYSE: GPS) to swing closer to customers in the age of e-commerce saw a step in the right direction with the announcement of a marketing agreement with America Online (NYSE: AOL).

The San Francisco retailer announced an online partnership with Internet brand leader AOL that will make all of Gap's labels available at each of AOL's e-commerce shopping sites: Shop@AOL, Shop@AOL.com, Shop@Netscape.com, and Shop@Compuserve.

The three-year agreement puts clothing from the Gap, Old Navy, and Banana Republic on AOL's Shop@AOL marketplace, a glitzy online mall AOL rolled out in its latest form in July. AOL expects to have up to 400 merchandisers paying for virtual real estate on the site by the end of October. In addition to the Gap, other merchants on the site include J. Crew, Eddie Bauer, and Victoria Secret.

The marketing agreement comes just as clothing retailers head into their busiest season -- the 13 weeks that start when kids go back to school and end with the holidays. Sales from this period represented 37% of Gap's $9 billion in sales last year, so a strong season is critical for investors eager to see the company maintain its momentum, not to mention its justification for a high P/E. The company trades at 40 times trailing 12 month earnings.

For the quarter ended July 2, Gap posted record earnings of $0.22 per share, or $196 million, up 47% from the same period last year. Comparable store sales, a critical metric in the retail industry grew 8%.

The big deal for investors regarding the partnership is that it brings together two companies with powerful brand names, and each gets to benefit from the other's strengths. AOL gets the Gap name to showcase on an online storefront. Gap gets access to a valuable distribution channel.

Gap has had an e-commerce site since 1997. While the company doesn't break out sales or Web traffic for the site, a spokesperson said the company is pleased with results. (Others may find it a bit sleepy, though easy to navigate.) Gap plans to augment its online offerings both through the AOL deal and other means.

For example, in the fourth quarter, Gap plans to roll out a shopping Web site of its own for Banana Republic, as well as a marketing site for Old Navy. However, until the Old Navy site is fitted for e-commerce transactions, customers wanting to buy the Old Navy label online will need to visit the Shop@AOL marketplace. The agreement therefore could add nicely to Gap's fall sales.

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