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Gap's Pulling Into Port in Sunny China

By Andrew Marder - Apr 18, 2013 at 2:16PM

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For companies looking at growth, the Far East has become the (next) final frontier.

While the news that Gap (GPS 12.46%) is planning on taking its Old Navy brand to China wasn't surprising, investors might not have foreseen the strength the company has in its convictions. On a call with investors yesterday, Gap's management said, "We see [the opportunity for global growth] particularly in some countries where in our category, you're talking about double-digit growth just to keep up with the market." That means China, Indonesia, Vietnam, and Cambodia, just to name a few.

The start of the push will come from franchise Old Navy locations in China, but with Gap's impressive array of brands, it's not going to be long before others come along.

The new opportunity
Gap is looking at Old Navy to be the first big push into new Asian markets. At first, stores will be franchise locations, with up to 85 open before the end of the year, with 10 of those being outlets. One of the biggest strengths that the company boasts is its impressive underlying operations. On yesterday's call, the company bragged that the structure now in place was buried in the P&L from 2008 to 2012, and now the cost to enter new locations is minimal.

That's great news for investors, who are in a position to reap all sorts of lovely rewards if Gap manages its growth correctly. Not only does it have three strong brands to play with, it also has three lesser-known brands with huge potential. Intermix, Piperlime, and Athleta are all sitting in the company's back pocket waiting to be pulled out at an opportune time.

The global workout
International growth is especially good news for Athleta. The yogawear brand is effectively a cheaper, lesser-known version of lululemon athletica (LULU 1.22%). That company has been suffering over the past few months with shortages that stemmed from faulty product. It has also taken a cautious approach to international growth, setting up distribution points, brokering relationships with locals, and working on e-commerce before taking the plunge.

While the strategy is solid, like Pilates abs, it's also slow, like... some other workout thing. (Tai chi?) Anyways, Athleta is now in a position of strength, where Gap can use the cash it's accumulated to move the brand quickly into new markets and beat Lululemon to the punch.

In short, Gap's international move should delight investors and worry competitors. With everyone looking to Asia for new sales, it may come down to the first movers to make the most of the opportunity, and Gap looks to be breaking away from the pack. I'll be watching to see when franchise locations lead to company-run stores, which would be a potential tipping point for the brands. It should be a fun show, either way.

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Stocks Mentioned

The Gap, Inc. Stock Quote
The Gap, Inc.
$10.65 (12.46%) $1.18
Lululemon Athletica Inc. Stock Quote
Lululemon Athletica Inc.
$260.66 (1.22%) $3.15

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