Gap Inc. said Thursday it will split into two independent publicly traded companies - one comprised of its Old Navy brand, and the second a yet-to-be-named company that includes its other brands like Banana Republic and Athleta.
"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", Gap Inc Board Chairman Robert Fisher said in a statement.
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 stock surged on the news in after-hours trading on Wall Street.
After the separation, Art Peck, now the president and CEO of Gap Inc., will hold the same position with "NewCo", and Sonia Syngal, current president and CEO of Old Navy, will continue to lead the brand as a standalone company. Sonia Syngal, Old Navy's president and chief executive, will take over that franchise. The transaction is expected to be completed in 2020.
For years, Peck tried to apply the practices that led Old Navy to such success to other brands, but to no avail. NewCo will have about $9 billion in annual sales.More news: India says 'happy' Pakistan is releasing downed pilot
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Old Navy is the No. 2 clothing brand in the US, according to Gap, as it has carved out a niche targeting shoppers with discount deals that compete against off-price clothing stores like T.J.Maxx.
"Although the proposed spin at Old Navy will enable a sharpened strategic focus on its business priorities, it reduces the diversification the brand provides to the overall entity", said Moody's analyst Christina Boni.
Old Navy runs more than 1,100 stores in North America (its largest market) and Asia.
There's also been a sense that the Gap brand lost its fashion sense, falling out touch with its core customers.
But some analysts questioned why promising brands such as Athleta and Hill City were included in NewCo with the struggling Gap brand. "It's nearly as if they used Old Navy as a smokescreen to hide the absolute urgency to do some fundamental things with the other businesses". "And if that's the case", said Siegel, "it makes sense to let Old Navy shine as a stand alone".