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Will Gap's Hill City Rollout Mitigate Flagship Brand Woes?

The Gap, Inc.GPS is gearing up to launch Hill City, an athleisure brand, to tap the booming activewear category but this time for men's. The company plans to limit the initial launch of the brand to the e-commerce portals, with only regulated shelf space in some stores. The brand, expected to be launched in mid-October, will be exclusively available at hillcity.com. Some of its products will also be available at nearly 50 Athleta stores across the country. Its offerings include technical clothing, suiting a man's entire closet with versatile and trendy outfits for workouts, running errands and general dressing.

Launch of the men's activewear brand highlights the success of the company's flourishing women's chain, Athleta, which offers yoga pants, leggings and sweaters among others. In fact, Gap's Athleta remains well on track to achieve $1 billion-sales target. According to analysts, the company is probably following the footsteps of its leading yoga-brand competitor, lululemon athletica inc. LULU , which launched its first men's store in New York City in 2014. Gap will also be able to compete with the behemoth in men's activewear - NIKE NKE with this latest launch.

This apart, the company's strategic initiatives like rolling out of new brands and expanding business lines to replenish the soft sales trend at its flagship brand are encouraging. Comparable store sales (comps) fell 5% at Gap brand in second-quarter fiscal 2018, mainly due to operational headwinds across timing of inventory and assortment issues. Though management has been taking measures to revive its flagship brand, continuation of soft trends at the brand is likely to weigh on the company's overall comps growth and profitability.

So far this year, shares of this premier retailer have lost 17.5% against the industry 's 4.9% rally.

As the company is executing its plans to close underperforming Gap and Banana Republic brand stores, the launch of Hill City is likely to be a value addition to its focus brands - Old Navy and Athleta - which are performing well. Notably, the company plans to open 270 Old Navy and Athleta stores and simultaneously close 200 underperforming Gap and Banana Republic stores over the next three years.

In the United States, the activewear trend has been popular in the past couple of years and is poised to grow further. Per the NPD Group, an American research firm, activewear apparel sales rose 2% to $48 billion in 2017, contributing nearly 22% to the overall apparel industry sales. Per sources, the global activewear market is anticipated to witness a CAGR of 6.5% from 2018 to 2024.

Apparently, leading apparel makers are now focused in boosting the activewear category to reinforce strong footholds in the space. In August this year, V.F. Corporation VFC revealed plans to spinoff its Outlet business and Jeans division, including the iconic Lee and Wrangler brands, in order to focus on its outdoor and activewear businesses.

All said, we believe that the launch of Hill City along with the company's booming Athleta will generate higher sales. Also, this is expected to return the company's mature Gap brand to profitability and revive stock performance.

Presently, Gap carries a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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