Gap backs away from plan to spin off Old Navy brand

Bloomberg

Gap Inc, the apparel retailer that’s searching for a new chief executive officer, said it will no longer seek to establish Old Navy as a standalone company.
The plan, announced under previous CEO Art Peck, was to spin off Old Navy on the premise that its fast growth wasn’t being reflected in Gap’s stock price. However, Old Navy’s performance has deteriorated in recent quarters and Peck was removed as CEO late last year.
“The work we’ve done to prepare for the spin shone a bright light on operational inefficiencies and areas for improvement,” Robert Fisher, Gap’s interim CEO, said. “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.”
Gap said it expects full 2019 profit to be “moderately above” its previous projection of $1.70 to $1.75 a share because of “better than anticipated promotional levels over the holiday period.”
The company also announced that Neil Fiske, president and chief executive officer of Gap brand, will leave the company.
Gap has struggled in recent years to find its identity, with several fashion misses and declining sales.
“Gap has lost its identity,” said Poonam Goyal, a retail analyst at Bloomberg Intelligence. “It needs to fix operational execution, brand messaging and the entire organisation needs an uplift. Who is Gap and who are they trying to attract?”
The decision is a significant shift for Gap. A day after Peck’s departure last November, the company said its board “continues to believe in the strategic rationale for the planned separation, and the preparation for separation continues as planned.”
However, Jefferies analyst Randal Konik had questioned the spinoff in a note, asking whether it “continues to make strategic sense” considering its “recently underwhelming results.”
The cost of the separation may have been an issue. In a September presentation about the spinoff, Gap said the separation would create a one-time expense of $400 million to $450 million, and cost $300 million to $350 million in terms of capital.
Gap, founded in 1969 in San Francisco, rose to prominence as a denim emporium selling jeans from Levi Strauss & Co, another Bay Area institution. It helped pioneer the vertical integration of retail and started producing its own branded goods. By the 1990s, it had transformed into a fashion juggernaut as it jumped on the khaki-pants trend and built up robust secondary brands in Banana Republic and Old Navy.
Investors may have to wait until February 27 for more details, when Gap said it will release fourth-quarter earnings.