When companies get near historic highs, investors have a tendency to get a little nervous. Gap (GPS +0.93%) is within points of its 10-year high, so it's understandable if you're a bit hesitant to jump on in. Luckily for us, there are plenty of reasons to consider picking up Gap, even as the stock jumps. Apart from the increase in overall sales, the rising dividend, and the strong balance sheet, Gap has a few lesser-known tricks up its sleeve.
The key to success at Gap is in the company's three smaller brands. Gap, Old Navy, and Banana Republic act as the company's old-guard leaders, setting the tone of the business. But underneath, there are three smaller brands trying new things and offering a lot of potential. Enter Athleta, Intermix, and Piperlime. Investors would do well to investigate and understand these brands in order to truly understand the potential offered by Gap.
The value in Athleta
Athleta is Gap's answer to lululemon athletica (LULU 0.28%), and it offers a similar range of yogawear at a lower price. Whereas Lululemon's pants run around $95, Athleta's come in closer to $80.
Lululemon beat everyone to the market and, as a result, it is the current top dog. The company is still hitting 10% comparable-store sales growth, and even with a shortfall earlier this year, it's set to have a fantastic 2013. Gap's advantage is that Lululemon has been slow to expand beyond the U.S. and Canada. So far, Lululemon only has stores in North America and Australia, but it has plans for new international locations this year. On its last earnings call, Gap said that Athleta would be adding 30 new stores this year to bring the total number of locations to 65, and was looking at global expansion. If it can beat Lululemon to the punch, it has a chance to make a huge impact on the bottom line.
Intermix offers up big margins
While the rest of Gap's offerings can fairly be described as being aimed at the suburban mall shopper, Intermix is decidedly higher end. The brand offers bags and clothing that compete more directly with brands like Michael Kors. Intermix is getting five new stores this year, but the company has fewer location opportunities than Gap's other brands. After all, not everyone can buy a $3,700 handbag.
Luckily, Gap doesn't need to sell the brand to everyone. While Kors has been growing comparable sales at a silly rate -- 41% last quarter -- it's also focused on selling more, slightly cheaper things. Gap can take a whole different tack with Intermix, selling high-margin fashion that it doesn't even have to design. The stores are boutiques, giving Gap a broad range of products to use to appeal to its customer base.
The best part of the Intermix brand is that it gives Gap some stability over the long run. When the markets came tumbling down, Kors was able to keep on chugging along, because the upper end of the economic scale recovered more quickly. That's stability that Gap would love to have, and that Gap investors should be excited about.
Piperlime starts to gain speed
The last of Gap's three smaller brands is Piperlime, a trendy clothing and accessory retailer. The brand acts as a boutique, offering selections from a range of designers. Until late last year, Piperlime was an online-only business, but then the company put up a store in New York City. The brand also acts as a testing ground for new ways to interact with customers by using social media marketing tools such as guest editors and bloggers to promote the store's fashions.
While Piperlime is small, it has a lot of potential when paired with the boutique business that Intermix offers. Gap can use that business to test boutique markets, and when it finds one that lacks the products that Piperlime offers, it can move in with a physical location.
Overall, the combination of the three smaller brands gives investors a whole basket of things to look forward to. The growth of Athleta, the margins at Intermix, and the up-and-coming Piperlime all offer future value to an advanced business. I think the potential lurking in these three lines helps justify the price that Gap now commands.
