Gap to split from Old Navy to focus on restructuring of flagship brand

Gap Inc. announced on Thursday that it will be splitting into two separate publicly traded companies as it aims to turn around the fortunes of its namesake brand with the help of a revitalized marketing strategy and widespread store closures.


Old Navy has been consistently performing better than Gap Inc.'s flagship brand - Instagram: @oldnavy
 
The split, which the company expects to complete in 2020, will see the Old Navy label spin off to form a standalone company, while Gap Inc.’s remaining brands, which include Gap, Athleta, Banana Republic, Intermix and Hill City, will continue to be operated together as part of an as-yet-unnamed company.
 
“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,” explained Robert Fisher, chairman of the board at Gap Inc., in a release.
 
The split will allow Old Navy, which has been consistently more successful than the other brands in Gap, Inc.’s portfolio in recent years thanks to the broad appeal of its value-oriented offering, to focus on executing its strategic initiatives, including the expansion of its product categories and the development of its omni-channel model.
 
Sonia Syngal, president and CEO of Old Navy, will continue to lead the brand once it becomes a separate company, which will operate out of its current headquarters in San Francisco.
 
The other yet-to-be-named company resulting from the schism will be able to concentrate its efforts on righting its flagship Gap brand through a strategy built around a comprehensive fleet restructuring and brand revitalization.
 
The fleet restructuring will include the closure of some 230 Gap specialty stores in the next two years, a process that the company predicts will result in pre-tax costs of between $250 million and $300 million, as well as an annualized sales loss of around $625 million.
 
Benefits, however, are expected to include an annualized pre-tax saving of approximately $90 million, and an improved channel mix, with 40% of sales originating online, while the rest will be shared between the company’s specialty and value channels.
 
As part of its plan to revitalize the Gap brand, the company will principally be seeking to modernize its marketing model in an effort to boost engagement and loyalty among its customers, simultaneously hoping to reconnect with existing fans and expand into new markets.
 
Gap Inc.’s current president and CEO Art Peck will maintain the same position at the head of the unnamed company, which will continue to operate from its existing headquarters, also based in San Francisco.
 
Following the announcement of the split, Gap Inc.’s shares rose 18% in extended trading on Thursday, a day which also saw the company report mixed fourth-quarter and full-year 2018 financial results.
 
Net sales for the fourth quarter ended February 3, 2018 totaled $4.6 billion, down from $4.8 billion in the prior-year period, while comparable sales fell 1%. Reflecting recent trends at the company, comps at Old Navy were flat, but declined 5% at Gap and 1% at Banana Republic.
 
Net income for the period was $276 million, or $0.72 per diluted share, up from $205 million, or $0.52 per diluted share, in the equivalent period in the previous year.
 
Full-year 2018 net sales came to $16.6 billion, an improvement when compared to the $15.9 billion reported in fiscal 2017. Comparable sales for the year were flat, as a 3% rise from Old Navy and a lower 1% increase at Banana Republic were offset by a 5% decline at Gap.
 
Annual net income totaled $1.0 billion, or $2.59 per diluted share, up from $848 million, or $2.14 per diluted share in the previous year.
 
The company’s financial outlook for fiscal 2019 predicts comparable sales to be flat or increase slightly, while EPS is expected to be in the range of $2.11 to $2.26.
 
“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,” concluded Peck.
 

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