Why Old Navy Goes Solo – The Motley Fool

Gap Inc. (NYSE: GPS) and Old Navy break up.

Gap, who is also the parent of Banana Republic, Athleta, and smaller brands of Intermix and Hill City, said it would spin off Old Navy as a separate public-traded company. The discount chain has been Gap's most efficient retail banner late and is by far the largest, accounting for almost half of its revenue.

The movement showed bowl from investors, who sent the Gap share up 16% on Friday. The divorce frees up the company's best resource, mainly splitting the clothing company into a growth brand and a pack of struggling inheritance marks that face comparable sales declines and hundreds of store closures.

The news also marks the clearest sign yet that Gap, the brand that is defined as American style as much as anyone in the last generation or two, desperately needs a new strategy.

Gap has fallen behind competitors as competitors like H & M Uniqlo and Zara, while some customers have moved to upscale brands like Lululemon or cheaper alternatives like Old Navy. In the same announcement, the management said it would close 230 Gap brand stores over the next two years.

Gap Chairman Robert Fisher explained the decision to share the company and said: "Following a comprehensive review of Gap Inc.'s board, it is clear that Old Navy's business model and customers have increasingly diverged from our specialty products and every business now requires another strategy to thrive in the future. "

Image Source: Getty Images.

A diamond in the rough

Gap brand and Banana Republic has faced an increasing competition in both the online stores and online stores in recent years and has done little to develop or separate. In contrast, Old Navy carved out a unique brand and clear leadership position in discount clothing, operating at a price point that gives it significantly fewer direct competitors offering the breadth and style of clothing it does.

Old Navy has more than 1100 stores, almost all of them in North America, and accounts for more than half of Gap's corporate-run properties. The discount mark was completed by the year with 3% comparable sales volume, after 6% composition growth in 2017. In Gap stores, comps fell by 5% in 2018 after a 1% decrease in the previous year.

Old Navy brought in $ 7.9 billion in revenue last year, or 47% of the company's total. Considering the faster growth, it would be the more valuable of the two companies to divide the split today.

A Question Mark for Gap

While the separation will help streamline and speed up decision making at Old Navy, it's less clear how the pace improves the Gap brand's prospects. Re-inventing a 50-year-old brand will not be easy, especially in the highly competitive and overpowered mid-market apparel sector, where a number of competitors, including H & M, have been forced to close down stores.

Management said it intended to revitalize the Gap brand and planned to close nearly 50% of its "specialty stores" in the coming years, which did not include the better performing factory and outlets. Closing stores should help free up capital to invest in remodeling the remaining stores and growing GAP's e-commerce business. This strategy seems to lend from more successful omnichannel dealers like Nordstrom . The company also plans to make market investments to raise the brand again.

A gain for investors

As the increase of the stock suggests, the split will unlock the value of shareholders, as Old Navy growth had been buried among Gap's larger woes. It will also offer investors a choice between a growth hub in Old Navy or a turnaround game in Gap and the other brands that the company calls "NewCo" for now. With Old Navy on a constantly diverging path from Gap Inc., the two companies differ in terms of both investors and business. The sharing is expected to take place by 2020.