Gap to separate Old Navy, close stores; shares jump

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Oxford Street Stores Stock

Gap Inc. will separate Old Navy into its own publicly-traded company and create a new, now unnamed firm to house the remaining brands in its portfolio, including Gap and Banana Republic.

The company's shares were up 17.7 percent at $29.89 in extended trading. Old Navy's momentum was evident in the breakdown of the separation, with the new, still unnamed company bringing in about $9 billion in annual revenue through its assorted brands and Old Navy, by itself, garnering approximately $8 billion. Old Navy, the one brand within the portfolio that has been thriving over the last few years, will exist as its own entity. "At the end of the day, Gap is still a struggling brand and needs to prove its relevancy to the consumer", Redding said.

Same store sales were flat for Old Navy in fourth quarter but rose by 3% over 12 months.

Gap will also close 230 stores across the country over the next two years, a decision expected to cost roughly $625 million, as well as some Banana Republic stores.

Gap plans to spend $750 million in 2019 on capital expeditures - including $100 million to build out its OH supply center and headquarters - and sell the main Old Navy office.

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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. "I'm not so sure on NewCo; that's still going to take some time", said Jennifer Redding, Wedbush Securities analyst.

Peck will hold the same position in the new company, while Old Navy CEO Sonia Syngal will stay on as head of the standalone firm.

Hugh Tallents, a partner at management consultancy cg42, said that when companies spin off certain franchises, they "either spin off the star brand or the brand that is dragging down the star". Old Navy would have been too valuable for Gap to simply sell off. Meanwhile, Gap's designers often made bad bets about what customers would like, forcing the company to discount products heavily, which had the effect of diluting the brand. Tallents said he'd expect an overhaul of Gap's marketing and customer experience strategies as part of the revamp. "How much more can the strength of Old Navy prop up the rest of the business?" said Wendy Liebmann, chief executive officer of WSL Strategic Retail.

The question for Gap will be how it rebounds and reorganizes after the split, Cohen said.

Investors will now likely pay more for Old Navy's stock-the point of the spinoff.

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