After struggling to keep up with fashion rivals such as Zara and H&M, The Gap Inc. shares skyrocketed more than 20% in after-hours trading Thursday after the retailer said it would split into two publicly traded companies, turning Old Navy into an independent entity.
Old Navy has been the only bright spot for the company in the past few years, cushioning it from the weak performance of its namesake Gap and Banana Republic brands, where sales have also taken a hit from fewer additions of new designs.
The company has struggled with contrasting performances of its brands. Old Navy has been a bright spot as its wide range of budget apparel made it more attractive to a broader base of customers, while its specialty Gap brand struggled in the face of competition from fast-fashion retailers and changing trends.
“It’s clear that Old Navy’s business model and customers have increasingly diverged from our specialty brands over time,” Gap’s Chairman Robert Fisher said in a statement.
Separating Old Navy to a standalone company is what we have argued for over the past few years. Doing so allows the market to properly value Old Navy for its high margins and strong cash flows,” Jefferies analyst Randal Konik said.
Gap said on Thursday that Old Navy would be spun off to its shareholders, while the other entity will consist of the Gap brand, Athleta, BR, Intermix and Hill City.
Gap, Athleta, Banana Republic and the remaining brands will be part of a yet-to-be-named company. The separation of Old Navy into a publicly listed company, which Gap said will be tax free to investors, is likely to be completed by 2020.
Peck will hold the same position in the new company, while Old Navy CEO Sonia Syngal will stay on as head of the standalone firm.
Old Navy has annual sales of about $8 billion, while the other brands have a combined revenue of $9 billion.
At least four brokerages raised their price target on the stock, with Telsey making the most bullish move by raising its price by $6 to $40, well above the median of $30.
Gap is closing underperforming stores worldwide
The company also said it would close hundreds of underperforming Gap stores in the next two years and would increase investments in its online business as they try to adapt to a more modern retail environment.
It already shut its massive flagship store on Fifth Avenue in New York earlier this year.
While analysts were encouraged by Thursday’s announcement, some said concerns around the company’s money-losing Gap brand would remain.
“While we are encouraged by the decision, we would note the company’s brands continue to face intense competitive pressure, particularly in the U.S.,” Guggenheim analyst Robert Drbul said.
Gap’s shares lost a fifth of their value in the past 12 months, while the broader S&P 500 Apparel Retail index rose 13%. The stock was last up 21% before the opening bell on Friday.
