On Friday morning, hours after Gap Inc. announced it is halting plans for a spinoff of its discount Old Navy banner, analysts by and large hailed the about-face.
None were shocked, as many fought the idea in several pieces of analysis last year, while Old Navy posted disappointing results quarter after quarter and the company failed to shed much light on the strategy.
"For some time, we’ve argued that the spin-off of Old Navy would be significantly destructive to equity value," Credit Suisse analyst Michael Binetti wrote in emailed comments, adding that his team was not surprised. "[W]e think the [board] realized what we've been concerned about all along: the market does not need two standalone negatively-comping specialty apparel retailers."
Wedbush analyst Jen Redding also welcomed the move. Her team had viewed the plan to break the company up as a "distraction."
The retailer is not only backing away from the split, but also from its rationale, which was that the two companies, with different customer bases and operational strategies, were each better off going it alone. Binetti said Gap Inc. now faces the task of providing the opposite rationale, which he said will be "a very difficult thesis repair job ahead."
"[Gap] spent nearly a decade driving the narrative of the value of integration of these brands," he wrote. "At the announcement of the spin, [Gap] then tried to reverse that negative to highlight the value of separating these brands. We don’t expect the market to easily re-embrace a narrative about integration."
Gap Inc. interim president and CEO Robert Fisher attempted to address that, if only in general terms, saying Thursday that the company had taken valuable lessons from the process.
"The work we’ve done to prepare for the spin shone a bright light on operational inefficiencies and areas for improvement," he 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. Our board is focused on supporting this work and appointing new leadership with the appropriate experience necessary to lead a portfolio of retail brands and to support our transformation efforts.”
"Appointing new leadership" remains a glaring uncertainty, however. A key theme in several analyst reports emerged on Friday: that a dearth of leadership at the company, both in its management ranks and perhaps on the board, will be a challenge in coming months. So far, more executives have left the scene than come aboard. In its announcement regarding the turnabout decision, the company made clear that Fisher (son of the founder) wouldn’t be staying on, so a search for a new chief executive is ongoing. Add to that the departure, also announced Thursday, of Neil Fiske, who had led the Gap brand for just a year and a half.
Other management changes have already been made and were also announced Thursday, notably added duties for key personnel. Banana Republic chief Mark Breitbard will also take on Gap Inc.'s other specialty brands, including Gap, Athleta, Janie and Jack, Intermix and Hill City, which (except for legacy labels Gap and Banana Republic) are positioned as growth brands. Old Navy chief Sonia Syngal is keeping her role, and Gap Inc. CFO Teri List-Stoll will lead corporate operations related to finance, supply chain, technology and real estate.
In light of Art Peck's departure as CEO in November, Fiske's departure Thursday and "significant talent departures from the company in recent months," Binetti characterized the setup as a "leadership vacuum." Wells Fargo analyst Ike Boruchow in a note emailed to Retail Dive, similarly called Gap Inc. "troubled ...from a leadership, execution, and strategic perspective." And B. Riley analyst Susan Anderson in emailed comments questioned the board's stance amid the company's back-and-forth on the spinoff.
"Given that there has been no change in board leadership since November, we view the renouncement as evidence that management lacks a unified view of strategic direction," she wrote, adding, "We remain on the sideline until we feel management can be more consistent with their messaging as well as see improved performance at Gap Brand and the Banana Republic."
The rudderless direction at Gap, particularly at the once iconic namesake brand, is really nothing new, however. Peck was a business consultant without particular savvy about fashion when he arrived 15 years ago to lead that brand, eventually moving up a decade later to oversee the entire company.
"They have not had a merchant," Ilse Metchek, president of the California Fashion Association, told Retail Dive in an interview after his departure two months ago. "They brought in — I'm sure they’re lovely people and one business brain after another — but no one who looks at the product. That’s really the issue here. There’s no one for the past 10 years who’d re-examined the product."