Gap Inc: Old Navy To Become Own Company Amid Gap Store Closures

Gap Inc. (GPS) has plans to turn Old Navy into its own publicly-traded company, separating it from The Gap, Athleta, Banana Republic, Intermix, and Hill City brands, which will become its own yet-to-be-named company.

The move by Gap Inc. is part of its restructuring strategy that is intended to revitalize the brands. As part of the announcement, the company said it will be closing 230 Gap specialty stores over the course of the next two years.

Gap Inc. stated that nearly 40 percent of its sales come from online purchases, causing the company to focus on growth with its specialty, outlet, and online channels. The brand revitalization initiative will allow the company to modernize its marketing to reengage with customers while focusing on the qualities that Gap stands for – style, quality, fit, and value.

Gap Inc. also said it is assuming approximately $625 million in annual sales losses by the store closures with pre-tax costs are expected to be around $250 to $300 million. Pre-tax savings is estimated at about $90 million.

According to Gap Inc., the move two separate into two independent entities is intended to allow each company to “maximize focus and flexibility, align investments and incentives to meet its unique business needs and optimize its cost structure to deliver profitable growth.”

“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,” Robert Fisher, Gap Inc.’s Board Chairman, said.

“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.”

The new company created by Gap Inc. has approximately $9 billion in annual revenue with a solid balance sheet that has it positioned for growth and profitability going forward, the company said. Old Navy has approximately $8 billion in annual revenue and is one of the fastest growing apparel brands in the U.S., according to Gap Inc.

Making Old Navy its own business will provide it with more “flexibility, focus and control.” Going forward, Old Navy will focus on its “strategic real estate strategy, evolving its omnichannel model and expanding its product categories” to increase its market share.

The separation of the two companies will result in a pro-rata stock distribution for shareholders, giving them an interest in both Old Navy and the new company equally. Gap Inc. said it expects the transaction to be completed in 2020.

The new company will be led by Art Peck while Sonia Syngal will remain Old Navy’s president and CEO. Both companies will remain headquartered in San Francisco.

Shares of Gap Inc. stock were up 16.36 percent as of 3:13 p.m. EST on Friday.