Seth Wenig/AP/REX/Shutterstock
Gap Inc. no longer intends to separate Old Navy into a stand-alone public company.” The plan to separate was rooted in our commitment to value creation from our portfolio of iconic brands,” Robert Fisher, Gap Inc. interim president and chief executive officer, said Thursday. “While the objectives of the separation remain relevant, our board of directors has concluded that the cost and complexity of splitting into two companies, combined with softer business performance, limited our ability to create appropriate value from separation.”
News of the canceled spin-off sent Gap shares ahead more than 6 percent, or $1.14, to $19.75 in after-hours trading.”The work we’ve done to prepare for the spin shone a bright light on operational inefficiencies and areas for improvement,” continued Fisher. “We have learned a lot and intend to operate Gap Inc. in a more rigorous and transformational manner that empowers our growth brands, Old Navy and Athleta, and appropriately focuses on profitability for Banana Republic and Gap brand. Our board is focused on supporting this work and appointing new leadership with the appropriate experience necessary to lead a portfolio of retail brands and to support our transformation efforts.”
The struggling Gap Inc. is seeking a new ceo to replace Art Peck who left last November. On Thursday, the company also said that Neil Fiske, president and ceo of Gap brand, will leave the company.
Four of the company’s senior leaders have taken on additional responsibilities. Mark Breitbard, president and ceo of Banana Republic, will now lead Gap Inc.’s collection of specialty brands — Gap, Banana Republic, Athleta, Janie and Jack, Intermix and Hill City.
Sonia Syngal, president and ceo of Old Navy, continues in that role.
Teri List-Stoll, executive vice president and chief financial officer, will lead corporate operations related to finance, supply chain, technology and real estate. And Julie Gruber, executive vice president, global general counsel, corporate secretary and chief compliance officer, will lead corporate administrative functions including legal, corporate facilities and services, human resources and communications, loss prevention, sustainability, government affairs and foundation.
The decision to not take Old Navy public reflects continuing woes across most divisions. The three core brands — Old Navy, Gap and Banana Republic — dragged through the third quarter of 2019 when the $16 billion corporation saw its net income fall to $140 million, compared with $266 million a year ago. Comparable sales overall were down 4 percent in the third quarter, with Old Navy Global down 4 percent, Gap Global down 7 percent and Banana Republic Global down 3 percent.
Net sales were $4 billion, a decrease of 2 percent compared with last year.
The San Francisco-based retailer now expects total company fiscal 2019 comparable sales and net sales to both be at the higher end of its previous guidance range of down mid-single digits and down low-single digits, respectively. As a result of better-than-anticipated promotional levels over the holiday period, particularly at Old Navy, the company now expects its adjusted fiscal year 2019 earnings per share to be moderately above its previous guidance of $1.70 to $1.75.
“We are working aggressively to stabilize and improve business results,” said List-Stoll. “We are committed to sharpened strategic focus, tailored operating strategies and operational discipline and accountability that can strengthen the health and profitability of our brands.”
Last fall, even as Old Navy showed signs of sinking performance, Syngal told analysts at an investor day in New York that she would open an additional 800 Old Navy stores over an unspecified time period, pushing the total fleet up to around 2,000. The idea was to locate most of the new stores in smaller, underserved towns to help catapult Old Navy into a $10 billion revenue company. It’s unclear whether that plan is still intact.
While seeking to build up Old Navy, the corporation has been aggressively downsizing Gap. Last year, Peck laid out plans to shutter 230 Gap stores, mainly in North America, and an unspecified number of Banana Republic stores, although he indicated at the investor day that the Gap number may not be as high.
“One surprise, I would say, is the degree of the intensity that landlords have with wanting to keep a Gap store in their centers,” he said last year. “Now there are some centers we’re leaving. There are some centers we want to be in, but the economics don’t make sense. That can lead us to a conversation about how do we change the terms.”
The plan to spin off Old Navy was announced in February. The idea was to isolate Old Navy and provide investors with a clear picture of value and also give executives a chance to devote more of their time trying to revive Gap and Banana Republic.
It hasn’t been all bad at Gap Inc. The Athleta division continues to roll out stores and gain market share, and Old Navy is still considered a strong retail format, providing value for families across several categories, and its ceo is highly regarded. Current difficulties are largely traced to fashion misses and increasing competitive pressures from Target, Walmart, Zara, T.J. Maxx, Amazon and other major retailers.
According to Craig Johnson, president of Customer Growth Partners, “Gap Inc. has not addressed the vast changes in fashion retail since Mickey Drexler exited in 2002, whether the entry of foreign stores such as Zara and Aritzia, the growth of the off-pricers, or the burgeoning online players, from Amazon Fashion to The RealReal. Instead, it has long seen dismal results at its “big three” brands, while dabbling with concepts that have never fully gotten off the ground, from Forth & Towne a decade ago, to Intermix and Piperlime — and must now digest Janie & Jack without cannibalizing GapKids.
“With such a full plate of problems, it is little wonder that Bob Fisher and his board have decided that spinning out Old Navy makes little sense, especially with Old Navy’s choppy sailing over the past year,” Johnson added. “Already a dated brand, Old Navy had to accelerate its store remodel program, whether the carveout occurred or not.”