By
with contributions from David Moin, Evan Clark
 on February 28, 2019
Old Navy comps were up in October.

Gap Inc.’s stock surged 25 percent in after-hours trading following a shock announcement that it is splitting itself into two publicly traded companies.

One will be made up of Old Navy, while the other — a yet-to-be-named entity — will consist of Gap, Athleta, Banana Republic, Intermix and Hill City.

Art Peck, president and chief executive officer of Gap Inc., will run the new company, set to be created by next year, while Sonia Syngal, president and ceo of Old Navy, will remain in place. The latter has approximately $8 billion in annual revenue and the other companies’ revenues add up to around $9 billion.

While Gap has been suffering from operational issues and market share losses, Old Navy has gone from strength to strength and the reasoning behind the split is that the new company will create a clearer focus on what is necessary to deliver improved profitability in the more mature brands — Gap and Banana Republic.

“Following a comprehensive review by the Gap Inc. 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,” said Robert Fisher, Gap chairman.

“Recognizing that, we determined that pursuing a separation is the most compelling path forward for our brands — creating two separate companies with 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.”

The news did not stop there, with the company unveiling plans to shutter around 230 Gap stores over the next two years, mainly in North America and including some flagships, resulting in an estimated annualized sales loss of approximately $625 million.

Pretax costs associated with these actions are set to run between $250 million to $300 million, with the majority expected to be cash expenditures. The company estimates that these actions will result in annualized pretax savings of about $90 million.

Approximately 150 closures will take place as leases naturally expire over the next two years. For the rest, Gap is pursuing more rapid closures and the stores with the most significant losses are expected to be shut by the end of fiscal year 2019.

After the closures, Gap expects to see significant improvement in channel mix with its profitable online and outlet businesses representing approximately two-thirds of the business and specialty stores accounting for a third, down from about half.

The company detailed that it is working on multiple initiatives to “revitalize” the Gap brand by reengaging with customers and expanding its customer base, “leveraging the multigenerational, democratic appeal of the brand.”

As part of this, it recently hired Alegra O’Hare, formerly with Adidas, as senior vice president and chief marketing officer in an effort to turn around the business. The appointment was the latest in a string of high-level hires at Gap in an effort to improve results.

Last June, Gap brand named retail veteran Neil Fiske president and chief executive officer, and last November, Pam Wallack returned to Gap in the newly formed position of executive vice president and general manager for North America specialty retail and global head of specialty product. She formerly was with The Children’s Place, but earlier in her career, she was president of Gap Kids and Baby, which were expanded successfully under her leadership.

Some Banana Republic stores will also be culled, although the company did not offer specific numbers. It said that while it has a much healthier fleet, it’s taking the opportunity to close some stores that don’t have “attractive economics.”

This came as the company reported fourth-quarter net income of $276 million, or 72 cents per share, compared with $205 million, or 52 cents per share, a year earlier.

Net sales were $4.6 billion, coming in a touch below Wall Street forecasts for $4.7 billion. Comparable sales were down 1 percent, compared with a 5 percent increase last year. Within that, Old Navy was flat, Banana Republic was down 1 percent and Gap was 5 percent lower.

Peck told investors the quarter “did not live up to” what he knows the brands can deliver.

“We did not finish the year as strongly as expected. As others have pointed out in the industry, the macro environment played a role,” he said during a conference call. “But we know we could do better and we are committed to doing better in the areas of the business that we control. That said, as we look back on the year, there [are] many things to be pleased with.”

The Gap brand peaked in the Nineties with its memorable “Individuals of Style” black-and-white advertising featuring celebrities including Steve McQueen and Zsa Zsa Gabor, while Old Navy was created in 1994 by former Gap chief executive officer Mickey Drexler, who named the discount concept after a bar in Paris.

Old Navy became the first retailer to reach $1 billion in annual sales in less than four years and marked a golden period for the company, when Banana Republic and Gap were also gaining ground at higher price points and making the company into a multifaceted powerhouse.

Some of the magic wore off, though, and the company sought direction under a series of leaders who struggled to revitalize the upper tiers. By the late Nineties, Gap started losing steam and in the years ahead changed up its advertising sometimes utilizing sexier imagery and cause marketing.

Old Navy, though, with its utilitarian in-store aesthetic, low prices and national push has been the stand-out performer in recent years, particularly as full-price mall stores struggled.

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