Less than two years after forging a growth plan dependent on Old Navy, Gap Inc. is letting its best performing brand go it alone.
On Thursday the company announced it will split into two independent publicly traded companies: Old Navy will stand alone as an $8 billion company annually, with yet-to-be-named "NewCo" comprising Gap, Banana Republic, Athleta and other specialty apparel brands notching some $9 billion each year.
"[W]hat's really on our minds is here we have the number two apparel brand in the United States and a significant percentage of the population that doesn't have access to the brand. We think that's a real winning combination," Gap Inc. CEO Art Peck told analysts Wednesday regarding opportunity the plan for Old Navy presents, according to a transcript from Motley Fool. Peck will take the reins at NewCo and Sonia Syngal, the current president and CEO of Old Navy, will helm the new spin off.
"[F]rankly ... we became convinced with the convergence of the business models and the needs of each business, the investment requirements of the business and our ability to manage the dis-synergies and get productivity, it was the right thing to do. And I believe very strongly that when you come to that point, beyond the reasonable probability of doubt then you move — when you move quickly with urgency and with responsibility and that's where we are right now," Peck said.
The company’s performance and brick-and-mortar plans also tell the story. Gap Inc. on Wednesday reported that net sales in the fourth quarter fell to $4.6 billion from $4.8 billion in the year-ago quarter as net income rose to $276 million from $205 million. And while Old Navy had a rough holiday period, the brand continues to outperform its siblings. Comp sales at Old Navy were flat in the quarter, compared to the year-ago period’s 9% increase, while Gap global comps fell 5% after being flat a year ago and Banana Republic comps fell 1% after a 1% jump last year.
Peck also said that many areas of the country will likely see more Old Navy stores, possibly in areas where Sears, J.C. Penney and Kmart stores are shuttering. "We know that there is an opportunity in markets that are smaller than the markets that we have traditionally put stores in," he said. He later continued, "Those markets are oftentimes increasingly underserved and we've found great success with Old Navy and some of the smaller markets. The rents are oftentimes de minimis. The customers are super loyal. Many customers in those markets, because remember they — we have a significant percentage of cash consumers at Old Navy, they actually don't have access to the brand through the digital expression of the brand."
But the Gap brand is being swept from the landscape. The company Wednesday said it will shutter 230 Gap stores, mostly in the U.S., on top of 68 stores closed in 2018. "This represents closure of nearly half the fleet, and there will be additional natural expirations in closures beyond 2020," CFO Teri List-Stoll told analysts.
Some Banana Republic stores are also expected to close.
The parent killer
Old Navy was the brainchild of Mickey Drexler, who took Gap from a regional apparel brand to a global powerhouse, when Target and other retailers began selling lower-priced denim. Rather than cede that market, he positioned Old Navy to defend it. "Old Navy was a brilliant original brand created by GAP CEO Mickey Drexler as an off mall budget companion to mostly mall based GAP Stores," Columbia University Business School retail studies professor Mark Cohen told Retail Dive in an email. "But then as Old Navy grew and was brought into the mall in many locations it became a competitor to the GAP. Management lost sight of the power of its creation."
It’s not clear how well the NewCo brands will fare without Old Navy’s strength, though. The spinoff is "a watershed moment for Gap," according to Ray Hartjen, marketing director of RetailNext. "For some time, the bell cow for Gap, Inc. has been Old Navy, and after this spin off, Old Navy will be fine. In fact, Old Navy is poised to be a star in the retail sky. The brand resonates with a very broad market and it has a redeeming value proposition for its customers and shoppers."
The challenges
The move is rational, but brings with it several questions, many analysts say.
"Gap is making the hard, but right call to separate its healthiest business, Old Navy, from its declining businesses including Gap," Eddie Yoon, founder of Eddie Would Grow, a think tank and growth strategy advisory firm, told Retail Dive in an email. "Old Navy has a strong tailwind given its lower priced value equation, whereas Gap is facing the headwind that hits all brands that are the middle of the road between premium and value. You saw Nestle USA do this when it sold its US confections business, after it recognized that being the #4 player was not going to help itself. This is despite Nestle being synonymous with milk chocolate and Nestle Crunch. IBM did this when it sold its desktop and Thinkpad business. Ford is doing it by getting out of sedans."
In fact, it was a long time coming. "I believe activists would have long ago attempted to force the company to do what it has just announced (split itself into requisite parts) but for the fact that the founding Fisher family has always had a control stake in the business," Cohen said.
"It’s sorta like what took you so long? Value price points are winning and Old Navy has been delivering that for Gap for 10 years?"
![](https://d12v9rtnomnebu.cloudfront.net/diveimages/corporate_site/teampage/square_profiles/placeholder-200.png)
Brian Kelly
President, Brian Brands
Or as branding strategist Brian Kelly, president of consultancy Brian Brands, put it, "It’s sorta like what took you so long? Value price points are winning and Old Navy has been delivering that for Gap for 10 years?"
But in the divorce will be a re-allocation of resources. "While this looks like a great way to allow Old Navy to flourish it does pose the issue of how well it [will] be able to separate itself with regard to sourcing and back of the house operations while at the same time it begs the issue of what will cause the GAP and its other brands to improve and grow in their own right," Cohen said.
Peck sought to assure investors that such questions have been considered. "We have done some work on looking at what the potential dis-synergies would be," he said. "We're continuing to work on our technology stack and some opportunities that we have there. We're certainly doing the work to the back-end from a supply chain standpoint. … [T]here has been an accelerating divergence between the businesses with the path for Old Navy and the path for the other businesses and that's also true on the back-end with our vendors where there is more alignment with Old Navy and less overlap with the other brands. The other brands overlap each other, but overlap maybe less."
But the overarching question is what will become of the brands relegated to NewCo — including the once-iconic fashion basics flagship. It’s a question that may be watched by other apparel companies in an analogous position, notably J. Crew, which, also under Drexler, spawned the Madewell brand that looks to be similarly cannibalizing its parent. Gap, Banana Republic and the others now have less time and room to maneuver.
For Gap in particular, if the brand can’t rediscover a loyal customer base and reinvent its fashion proposition, it could signal the end, according to Kantar Consulting Senior Analyst, Tiffany Hogan.
"There’s no more crutches for Gap to lean on now. They have to fix their product challenges and optimize supply chain and inventory, or the burden on the other ‘NewCo’ brands will be unbearable."
![](https://d12v9rtnomnebu.cloudfront.net/diveimages/corporate_site/teampage/square_profiles/placeholder-200.png)
Ray Hartjen
Marketing Director, RetailNext
The split is great news for Old Navy; for the others, it’s just "news," according to Hartjen.
"It’s too early just yet to say if it’s good news or bad news," he said. "The other Gap brands … are left out in the cold and left to their own devices to succeed. Athleta is firmly rooted in the marketplace, but it still faces stout competition. Banana Republic has rebounded in the past year, but one year does not overcome a decade of underperformance. Then, there’s the opportunities that Gap must face on its own. They have plenty of assets to leverage, like great cross-brand omnichannel shopping experiences."
Gap’s needs could overpower the smaller brands, even promising athleisure companies Athleta and Hill City, he also said. "They’re not big enough to support Gap on their own. There’s no more crutches for Gap to lean on now. They have to fix their product challenges and optimize supply chain and inventory, or the burden on the other ‘NewCo’ brands will be unbearable."
And yet, in the end, Gap Inc. probably had little choice but to make this move. "I guess this is an example of the old adage 'when all else fails buy something, merge with someone, or, break yourself up,'" Cohen said.