Gap and Old Navy to Split, Create Two Separate Companies

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"The reality is that Old Navy's strength has essentially been funding Gap and Banana Republic", said Nomura analyst Simeon Avram Siegel.

Gap said on Thursday that Old Navy would be spun off to its shareholders, while the other entity will consist of the Gap brand, Athleta, BR, Intermix and Hill City.

The San Francisco-based company said the spin-off will enable each company to focus on flexibility and pare down costs. The two companies will trade under different ticker symbols and have separate management and leadership structures, as well as distinct financial profiles, company executives said. Art Peck, Gap's current president and CEO, will remain in charge. Old Navy has grown to reach $8 billion in annual sales and the move will allow the brand to expand on its own.

Ironically, the lack of same-store sales growth at Old Navy hurt fourth-quarter overall sales. According to The Wall Street Journal, Old Navy accounted for almost half of Gap Inc.'s total 2018 sales of $16.6 billion.

Gap reported full-year comparable sales of positive three per cent at Old Navy versus a decline of five per cent at Gap and a gain of one per cent at Banana Republic.

Gap shares were up about 25 percent in after-hours trading Thursday. The second company called New-Co will contain Gap's other brands like Banana Republic and Athleta.

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The company has not said where shops will shut or how many jobs will be affected, although all 230 closures over the next two years will be of Gap stores.

The "NewCo", what's left after Old Navy will have approximately $9 billion in annual revenue, a strong balance sheet, and a multi-store portfolio. Retailers such as Levi's, Target and fast-fashion sellers H&M and Zara lured away Gap's denim shoppers with cheaper prices and trendier styles.

Gap the latest major retailer to announce store closures in response to declining sales. Sonia Syngal, who is now President and Chief Executive Officer of Old Navy and who has led it since 2016, will continue to lead the brand as a standalone company.

But to achieve the top end of Siegel's valuation range, Old Navy will have to bounce back quickly from a mixed holiday season.

Plus, closing 230 stores signals that Gap "must have seen that there was too much waste in its business model". It expects to have more than 40 per cent of Gap's business coming from online after the restructuring.

In addition, the company plans to close 230 Gap-brand stores over the next two years, but it's now unknown how many closures will impact Canada.