Let's face it. The clothing retailer, which began life in San Francisco back in 1969, has had a pretty good run. The company helped establish a new channel of specialty retailers that now compete nationwide. Along the way, Gap has created enormous value for its shareholders. But with more than 3,000 stores now, it's less than nimble, and it's having a hard time navigating the turbulent sea of fashion. It seems that Gap has outgrown the sales channel it helped create, while smaller companies like American Eagle Outfitters
And the resulting competition and specialty retail's maturity are having a material impact on Gap's competitive position. With each month of deteriorating sales, Gap loses more and more operating leverage, making the company less profitable and less competitive. So it's at least a little soothing that the company is trying to find new ways to leverage its valuable brand name.
The latest attempt is to franchise its brand abroad, where specialty retail is still in its infancy. In its third-quarter filing with the SEC, Gap announced it had opened its first stores in Singapore and Malaysia by signing a deal to franchise The Gap and Banana Republic brands with FJ Benjamin. FJ Benjamin, based in Singapore, already markets several brand names from Guess?
Such a small increase in its store base won't offer any short-term relief for Gap, and it's too early to tell how profitable the franchise will be, but it is creating new opportunities for the company to grow out of its current doldrums. And as an investor looking at Gap, it also highlights the need to think about global industry dynamics rather than just national economies.
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Fool contributor Matthew Crews welcomes your feedback -- really! He has a financial position in American Eagle Outfitters but none of the other companies mentioned. The Gap and American Eagle are both Stock Advisor recommendations. The Gap is also an Inside Value pick, and Limited Brands is an Income Investor pick. The Motley Fool has an ironcladdisclosure policy.