Gap, Inc. made a big announcement alongside its Q4 earnings report on Thursday afternoon: It's going to split up into two separate publicly-traded companies. Old Navy is being spun off into its own company, while Gap brand, Athleta, Banana Republic, Intermix and Hill City will comprise the other company, which has yet to be named.
"Following a comprehensive review by the Gap Inc. Board of Directors, it's clear that Old Navy's business model and customers have increasingly diverged from our specialty brands over time, and each company now requires a different strategy to thrive moving forward," said Robert Fisher, Gap Inc.'s Board Chairman. "Recognizing that, we determined that pursuing a separation is the most compelling path forward for our brands – creating two separate companies with distinct financial profiles, tailored operating priorities and unique capital allocation strategies, both well positioned to achieve their strategic goals and create significant value for our customers, employees and shareholders."
Gap, the brand, has been experiencing declining sales fairly consistently for years now. And throughout that time, lower-priced chain Old Navy has been picking up its slack. Or, perhaps more importantly, Gap was dragging down Old Navy's sales. Old Navy was making up nearly half of Gap, Inc.'s sales and was its second fastest-growing brand as of last quarter. Its performance lately has been impressive in general, not just compared to Gap, with brick-and-mortar traffic outpacing industry trends on top of accelerating online sales.
As separate companies, Old Navy has $8 billion in annual revenue while "NewCo" which is what the other company is being called temporarily, has $9 billion. Art Peck, CEO of Gap, Inc., will be CEO of NewCo; Sonia Syngal, current president and CEO of Old Navy, will remain in that role at the new, separated Old Navy.
This news coincides, probably not coincidentally, with some Gap brand news that's equally major: It will be closing 230 of its stores, which is estimated to result in a $625 million loss in annual sales. The move is part of an overall revamp of Gap's retail strategy, with 40 percent of sales expected to come from e-commerce post-restructuring. Gap will also undergo a "brand revitalization" that will somehow be different from the dozens of "revitalizations" it's undergone over the past decade. "Improving the product by recapturing the traditional Gap attributes of style, quality, fit and value is a top priority," reads the press release. We'll believe it when we see it.
Update, Thurs. Jan. 16, 2020 1:40 p.m.: Gap, Inc. announced it has entirely scrapped its plan to spin off Old Navy and take it public.
"The plan to separate was rooted in our commitment to value creation from our portfolio of iconic brands," said Robert Fisher, interim president and chief executive officer, in a statement. "While the objectives of the separation remain relevant, our board of directors has concluded that the cost and complexity of splitting into two companies, combined with softer business performance, limited our ability to create appropriate value from separation."
"The work we've done to prepare for the spin shone a bright light on operational inefficiencies and areas for improvement," continued Fisher. "We have learned a lot and intend to operate 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.”
Sonia Syngal, Old Navy's president and CEO, will remain in her position. Meanwhile, Neil Fiske, president and CEO of Gap brand, will be leaving the company.