This summer will mark the 50th anniversary of Don Fisher opening the first Gap(GPS) store in San Francisco. That initial store opened just days after Woodstock and a month after Neil Armstrong took his small step and, it initially sold only Levi’s jeans and records. Fisher’s concept was that his store would always have every size in stock and he guaranteed that through his exclusive deal with San Francisco-based Levi’s(which has recently filed to go public itself). Over the ensuing half century, Gap has grown and changed quite a bit. Today Gap has well over 3000 store locations in 43 countries across six brands, and it sells a lot more than just Levi’s- $16.6 billion in revenue in 2018.
In recent years, however, Gap’s Old Navy brand has been the star of the show, accounting for nearly half of the company’s revenue and much of its growth. Gap’s announcement yesterday that it will be spinning off its Old Navy business as an independent public company thus comes as no surprise. The remaining brands(Gap, Athleta, Banana Republic, Intermix and Hill City) will get a new corporate name(right now, the company is referring to the stub business as NewCo). We’re sure this new name will reflect the company’s broad ambition and values, delightful sense of humor, and a hint of vanilla. It will assuredly “[leverage] the multigenerational, democratic appeal of the brand.” The spinoff is expected to be tax free to shareholders and to take place in 2020. Investors like the plan, with Gap stock up 25% to above $32 after hours following the announcement.
Old Navy is the faster growing business, though its comparable sales increased just 3% in 2018. With approximately $8 billion in revenue, it is the slightly smaller business.
As one of the fastest growing apparel brands in the U.S. with approximately $8 billion in annual revenue, Old Navy will be able to capitalize on its scale, broad customer awareness and unique positioning to extend its category leadership and deliver profitable growth as an independent company. Through this separation, Old Navy will have the flexibility, focus and control needed to increase customer access by further applying its strategic real estate strategy, evolving its omni-channel model and expanding its product categories to continue to successfully resonate with value-focused customers. Old Navy will be well positioned to invest in capabilities and initiatives that will continue to grow its market share.
Gap is struggling, with a 5% decline in comparable sales in 2018. Other brands within NewCo, such as Banana Republic, have had better performance. While NewCo had nearly $9 billion in 2018 revenue, the company has announced that 230 Gap stores will be closed over the next two years, resulting in a $625 million decline in revenue. This will cost $250-$300 million and result in $90 million in annual savings. 40% of revenue will be from online sales after the completion of these closures. This shift online will be a key element of NewCo’s continued longevity.
NewCo, with approximately $9 billion in annual revenue and a strong balance sheet, will have a unique and differentiated portfolio, with significant opportunity to create value. The company will be well positioned to drive sustainable growth and improve profitability by leveraging its loyal and complementary customer base and an appropriately scaled operating platform with advantaged digital capabilities to deliver distinct products and experiences. With enhanced strategic and operational focus, it can deliver improved results at Gap, Banana Republic and Intermix, while capitalizing on the momentum of B-Corp certified Athleta and newly-launched Hill City. The program announced today to restructure the Gap brand specialty fleet is an important part of the plan to enhance the profitability of that channel. As a stand-alone company, NewCo also will be better positioned to continue to evolve its leadership role in sustainability and social responsibility.
The company emphasized that after the transaction both companies “are expected to be appropriately capitalized with sufficient cash to support planned operating and investment plans.” Both companies will retain current leadership. Art Peck, CEO of Gap will be CEO of NewCo and Sonia Syngal, CEO of Old Navy, will continue in her role post-spinoff.
Gap has a storied history as a more premium brand than the value-focused Old Navy. Hopefully there is a place for both in the consumer mind and in investor’s portfolios for years to come.
Disclosure: The author holds no position in any stock mentioned