Gap is planning to spin off Old Navy, its strongest brand, into a standalone company, betting that its namesake and other specialty brands will benefit from its undivided attention.
With the spinoff, Gap would lose a brand that accounted for $8 billion in sales, or 47% of company-wide sales, in 2018. It founded Old Navy in the early 1990s as a budget alternative to the namesake brand.
A new entity will consist of Gap, Athleta, Banana Republic, Intermix, and Hill City, representing combined sales of around $9 billion.
“Following a comprehensive review by the Gap board of directors, it’s clear that Old Navy’s business model and customers have increasingly diverged from our specialty brands over time, and each company now requires a different strategy to thrive moving forward,” Gap Chairman Robert Fisher said in a news release.
CEO Art Peck called the proposed split an opportunity “to write the next chapter for specialty retail,” noting that Old Navy shares fewer customers with the other labels, has a smaller international footprint, and uses different in-store technology.
Investors reacted favorably to the move as Gap shares rose 25.6% to $25.40 in after-hours trading Thursday. Its shares had fallen about 20% over the past 12 months as the Gap brand struggled in the face of competition from fast-fashion retailers and changing trends.
The company reported Thursday that same-store sales dropped 1% during the fourth quarter compared with an increase of 5%, with sales flat at Old Navy, down 5% at Gap, and down 1% at Banana Republic.
Revenue fell to $4.62 billion from $4.78 billion a year ago, missing analysts’ estimates of $4.69 billion.
Fisher said the two new companies would have “distinct financial profiles, tailored operating priorities, and unique capital allocation strategies, both well positioned to achieve their strategic goals and create significant value for our customers, employees, and shareholders.”
But Moody’s analyst Christina Boni warned that although a spinoff of Old Navy “will enable a sharpened strategic focus on [Gap’s] business priorities, it reduces the diversification the brand provides to the overall entity.”