Gap to Introduce Old Navy in Philippines

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Going ahead with its global expansion plan, The Gap, Inc. (GPS) recently announced the opening of its first Old Navy franchise store in Philippines in 2014. We believe that the stable Philippine economy combined with the increasing preference of the rising middle class for American goods is a positive that will benefit the company’s expansion in the nation.

In order to effectively penetrate into the $1.4 trillion global apparel retail market, Gap entered into an agreement with its existing partner Stores Specialists, Inc. to open three Old Navy stores by the end of 2014. Stores Specialists is a specialty retailing business established in 1987 and currently operates Gap’s namesake and Banana Republic franchises stores in the Philippines.

According to the agreement, the company will open two Old Navy franchise stores in Manila at the beginning of 2014. Apart from this, the company will open its third Old Navy store by the end of 2014 in the same city. Manila is not only the second largest city in the country but also the second most-visited Philippine destination with over 2 million visitors every year. Therefore, we believe that opening Old Navy stores in this city is a strategic fit for Gap’s long-term global expansion plan.

This Zacks Rank #3 (Hold) company made its first appearance in this tropical island by opening its first namesake franchise store in 2007. Since then, the company has opened 9 franchised Gap stores and 4 Banana Republic stores.

The premier international specialty retailer is aggressively going forward with its previously-announced strategy of franchising Old Navy stores globally. In Apr 2013, Gap declared its plan to open company-operated Old Navy and Banana Republic stores in China. At present, it operates stores in the Asian country under its namesake brands only.

Gap, which competes with Buckle Inc. (BKE), Abercrombie & Fitch Co. (ANF) and American Eagle Outfitters, Inc. (AEO), has been marching ahead with its long-term plans by reducing dependency on the North American specialty business, while increasing its online presence and expanding international operations. Moreover, Gap aims to generate 30% of its total sales from overseas operations and online business by 2013 versus 27% in fiscal 2012.

Gap witnessed a phase of declining comparable-store sales and reduced profitability but is now gradually returning to growth on the back of turnaround strategies as is evident from solid comps and sales performance in fiscal 2013 so far.

We believe that the company’s long-term strategic moves and its cost management measures have not only given it financial flexibility, but helped in reducing operating expenses as well. Moreover, Gap’s globally recognized brands complement one another, enabling the company to leverage its position in the sector.

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