Gap Inc.’s announced that it’s spinning off the best part of its business Old Navy. It has sent the apparel retailer’s shares soaring 25 percent in premarket trading. The remaining company, which still needs a name, will consist of the namesake Gap brand, Athleta and Banana Republic, plus a couple of lesser known brands. It will have annual revenue of about $9 billion, compared to Old Navy’s $8 billion. Analysts called the split a smart one, and one the struggling parent company should have considered long ago. The Gap brand has struggled as part of a broader slump for brick and mortar retailers. In the latest quarter — the critical holiday period — Old Navy’s same-store sales were flat, while Gap and Banana Republic sales were both negative.
As part of the reorganization, the company will slash the store count of the struggling Gap brand by closing 230 locations over the next two years. These closures will erase $625 million in sales. This will lead to huge job losses among various countries, the company doesn’t know the exact number of job losses from the planned store closures but will try to minimize the number.
Both companies will be strong enough as standalone entities to manage the large supply chains and relationships that keep them running. Gap’s struggles have been brewing for some time, from declining mall traffic to operational issues. One of the most famous missteps came in 2010 when the company unveiled a new Gap logo.
There’s also been a sense that the Gap brand lost its fashion sense, falling out touch with its core customers. The three largest brands were meant to complement each other, with Old Navy pulling in families with discounts, Gap resonating with high school and college students and the Banana Republic a go-to for young professionals. The model has frayed in recent years, with the Gap brand under increasing pressure amid complaints about its clothes and messy stores. Old Navy is expected to turn into a stand-alone company by 2020 when the transaction is expected to get completed.
