Gap’s most successful brand will no longer be a Gap brand

Splitting up.
Splitting up.
Image: Reuters/Brendan McDermid
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Gap Inc. announced today (Feb. 28) that it will split into two companies. One will consist of its Old Navy brand, which has been the steady bright spot at the otherwise struggling retailer. The other company, whose name has not yet been determined, will be, well, everything else.

The move acknowledges that Old Navy is on a very different trajectory than most of the other brands under Gap Inc., which include Gap, Banana Republic, Athleta, Intermix, and Hill City. While Old Navy’s sales have consistently grown, and long since eclipsed those of Gap Inc.’s namesake, Gap and Banana Republic have been a drag on the company.

In a statement, Robert Fisher, Gap Inc.’s board chairman, said that after a review by the 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.” He emphasized that creating two independent, publicly traded companies—each with its own finances and priorities—will leave both better suited to pursuing its goals and keeping shareholders happy.

The move could, however, leave the new company separate from Old Navy at a disadvantage. Although the spin-off “will enable a sharpened strategic focus on its business priorities, it reduces the diversification the brand provides to the overall entity,” said Christina Bona, vice president of financial services firm Moody’s, in a statement.

The company additionally announced a plan to close 230 Gap stores over the next two years. It expects a loss in sales of about $625 million stemming from these closures, not to mention pre-tax costs of between $250 million and $300 million, “the majority of which are expected to be cash expenditures for lease-related costs,” it said. But it believes it will be left with a sturdier foundation to build from, as well as a healthier mix of sales among its regular stores, outlet locations, and e-commerce. After the restructuring, it said nearly 40% of sales will come from its online channels, and the rest will be split “fairly evenly between the specialty and value channels.”

The news caps off another mixed year for Gap Inc., which saw its sales grow just 1% in fiscal 2018. As for the Gap brand, in the US, its largest market, sales declined about 2.4% for the year. Old Navy’s sales, by contrast, grew about 8.6%.