How Luxurious Will This Deal Be for Gap?

To expand into the profitable luxury market, Gap (NYSE:GPS) has announced that it is acquiring the women’s apparel retailer Intermix Holdco for $130 million.

Intermix does not design its own clothing, rather the retailer carries clothes and accessories from renowned design houses like Yigal Azrouel, Yves Saint Laurent, Brian Atwood, and Jimmy Choo. With 32 boutique stores in North America, the chain is relatively small. However, as The Wall Street Journal reported on Wednesday, Gap’s bigger balance sheet will allow the luxury chain to expand quickly. Art Peck, the company’s president in charge of new brands, said that the retailer has plans to double the number of Intermix stores and expand overseas.

Catalysts are critical to discovering winning stocks. Check out our newest CHEAT SHEET stock picks now.

As the publication noted, this is the right time for the casual-clothing retailer to make a purchase, as the company is coming off a series of “rare fashion successes” that stimulated its sales and stock price in 2012. In December, Gap reported a 5 percent increase in same-store sales, while analysts expected it to report only a 3.5 percent rise.

Gap also used an acquisition to capitalize on increasing demand for yoga and workout clothing. In 2008, the company paid $150 million for the women’s active apparel retailer Athleta.

Now, with competition from Hennes & Mauritz AB’s (HNNMY.PK) H&M and Inditex Group’s Zara rising, it is necessary for Gap to expand its higher-end clothing offerings through another acquisition.

After missing important trends like premium denim in recent years, Gap’s Chief Executive Officer Glenn Murphy has been working to “improve Gap’s fashion sense and get new items into stores faster,” according to the Journal. Adding a line of higher-end apparel will strengthen the company’s range of mid-to-lower priced brands like Gap and Old Navy, as it expands into luxury-obsessed countries like China. Murphy has made expansion into Europe and Asia a primary goal, but Gap’s success has been limited; from February to November, international sales were down 3 percent.

The luxury chain has sales of approximately $130 million a year, a source told the publication. For reference, Gap reported $14.5 billion in sales in its most recent fiscal year, with sales from Athleta and Piperlime, an an e-commerce site the company purchased in 2006, contributing $301 million to that total.

Investing Insights: Is Target’s Stock a Buy Now?