Ongoing problems at Gap Inc. — even at its powerhouse Old Navy and its up-and-comer Athleta – have some analysts wondering if the company should again consider a breakup.
In the first quarter, net sales at normally stalwart Old Navy fell 19%, with comps down 22%; net sales and comps at Gap both fell 11%; net sales at Athleta rose 4%, with comps down 7%. Banana Republic was an uncharacteristic standout, with net sales up 24%, comps up 27%, and lower discounts helping margins, per a Securities and Exchange Commission filing.
Macroeconomic pressures like supply chain woes and inflation are only making matters worse at the chronically embattled apparel conglomerate. Overall Gap Inc. Q1 net sales fell 13% year over year to $3.5 billion and comps fell 14%. The company swung into the red, with net loss of $162 million, down from last year’s $166 million net income.
It's far from clear that separating these banners is the answer, however. Gap went down that road just a couple of years ago, plotting and then abandoning a plan to spin off Old Navy. The notion was shelved in part due to declines at the value brand, and, troubles there are resurfacing. Brand chief Nancy Green left abruptly last month, amid merchandising snafus that included miscalculations around demand for its much touted inclusive size offer.
This time, Athleta is in focus. Despite some headwinds in the recent quarter, the activewear banner is growing fast and, on its way to next year's $2 billion target, enjoys the brightest prospects of all its siblings. Still, Gap Inc. CEO Sonia Syngal pushed back when asked to explain the rationale for keeping Athleta in the fold, though she didn't entirely rule it out, saying the company always looks to maximize shareholder value, "and monitor and consider strategic options to unlock that value at the right time."
The company may soon have to get more specific, according to a Thursday note from Credit Suisse analysts led by Michael Binetti.
"We think the chances that [Gap Inc.] has to announce that it's exploring value creation initiatives are rising significantly," Binetti said, adding, however, that the aborted Old Navy spinoff revealed a high level of difficulty. "But in the end, we don’t see an easy way to separate these businesses — and think with Old Navy struggling, separating out Athleta by itself would leave a RemainCo with a very difficult narrative in the public markets."
That echoes Syngal's comments that the company is committed to the current strategy of keeping the brands in a single portfolio. She noted important synergies across brands, saying they all leverage Gap Inc.'s platform capabilities, tech stack, e-commerce site and cross-brand credit card. But in a Thursday client note, Wells Fargo analysts led by Ike Boruchow said that this sum-of-the-parts argument is getting harder to make, in light of the comp decline at Athleta.
For now, Athleta stays.
"In this time of disruption we're very committed to our strategy and believe that Athleta's positioning in the premium space nicely balances our value side of the business and gives us a balanced portfolio," Syngal said.