Gap on Thursday announced plans to split into two publicly traded companies, putting Old Navy on a stand-alone path apart from the company’s other brands.
Old Navy will become its own company, distinct from a yet-to-be-named company made up of the Gap, Athleta, Banana Republic, Intermix and Hill City. In a statement, Gap chairman Robert Fisher said that after a review of the company by its board of directors, it was clear that Old Navy’s business model and customer base had diverged from the Gap’s other specialty brands.
“Each company now requires a different strategy to thrive moving forward,” Fisher said.
The company’s stock surged more than 20 percent on the news after the markets closed Thursday.
As part of the separation, Gap shareholders will receive a pro-rata stock distribution and own equal shares of both Old Navy and the new company. The deal is set to be completed in 2020 and must receive final approval from Gap’s board of directors.
Old Navy has been the strongest brand under Gap’s vast umbrella. The companies belonging to the new company reel in $9 billion in annual revenue. On its own, Old Navy boasts roughly $8 billion. In 2018, Old Navy’s comparable sales were up three percent. Gap’s were down 5 percent. Also on Thursday, Gap announced it would close 230 stores over the next two years.
On an earnings call Thursday evening, said Teri List-Stoll, Gap’s chief financial officer, said the company had been grappling with “what’s right for Old Navy versus what’s right for the other brands,” whether with online strategies or technology tools.
“More and more often, you’re coming up with different answers,” List-Stoll said.
Gap’s president and chief executive, Art Peck, will stay at the helm of the new company. Sonia Syngal, Old Navy’s president and chief executive, will take over that franchise.
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. Instead, a clean split like this can help all companies better allocate resources and give Gap a window to double down on its main focus areas. Tallents said he’d expect an overhaul of Gap’s marketing and customer experience strategies as part of the revamp.
Plus, closing 230 stores signals that Gap “must have seen that there was too much waste in its business model.”
Mark Cohen, director of retail studies at Columbia Business School, said Old Navy became a direct competitor for Gap, rather than a companion, as stores popped up within the same malls. Now, Cohen said that the board seems to have “finally woken up to the fact that they’ve got a winner and a loser.”
The question for Gap will be how it rebounds and reorganizes after the split, Cohen said. He was more optimistic about Old Navy’s future.
“It’ll work out for Old Navy,” Cohen said, “because Gap has been an albatross around Old Navy’s neck.”