Published: Sat, March 02, 2019
Finance | By Kristine Clayton

Gap Inc splitting into two companies with HUNDREDS of stores closing

Gap Inc splitting into two companies with HUNDREDS of stores closing

Gap said late Thursday that it's creating two independent publicly traded companies - low-cost Old Navy and a yet-to-be named company, which will consist of the iconic Gap brand, Athleta, Banana Republic, Intermix, and Hill City.

Sonia Syngal, now CEO of Old Navy, will keep leading Old Navy when it becomes a standalone company. 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.

Gap Inc. will be closing 230 of their underperforming GAP stores worldwide over the next two years, many of them in the USA and some in Canada.

Old Navy has been the only bright spot for the company in the past few years, cushioning it from the weak performance of its namesake Gap and Banana Republic brands, where sales have also taken a hit from fewer additions of new designs.

According to The Wall Street Journal, Old Navy accounted for almost half of Gap Inc.'s total 2018 sales of $16.6 billion.

The retailer said the separation will be done through a spin-off that is meant to generally be tax-free to company shareholders for US federal income tax purposes.

The company's stock surged more than 20 percent on the news after the markets closed Thursday. Old Navy will be spun off into its own public company. "Doing so allows the market to properly value Old Navy for its high margins and strong cash flows", Jefferies analyst Randal Konik said.

A second company will hold on to Old Navy, which has been out-performing the other labels such as Banana Republic.

"Let's remember these are both US$8 and US$9 billion companies, so it's not like they're small", Peck said in an interview Thursday.

"As we look ahead to 2019 and beyond, we know what we need to do to win and, combined with the separation we announced today, we will be well positioned to leverage the power of our brands and the talented teams that lead them to accelerate the pace of change, improve execution and deliver profitable growth", Peck said.

Gap officials said each company requires a different strategy to thrive. It expects to finish splitting the companies in 2020. He was more optimistic about Old Navy's future. As of the end of last quarter, there were 1,242 Gap stores worldwide.

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

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