Why Gap Stock Surged Today – The Motley Fool

What happened

Gap Inc. (NYSE: GPS), the parent company of its namesake chain, Banana Republic, Athleta, Old Navy, Intermix and Hill City, announced last night that the company would split in two, with Old Navy becoming a standalone company and the rest of the chains remaining their own business.

Investors welcomed the decision, which should unleash the hidden value of Old Navy, which has grown much faster than its sister chains and now accounts for nearly half of the company's $ 16.6 billion in revenue. The company also beat earnings estimates in its fourth quarter report, released at the same time, and the stock was up 18.8% at 11:06 am EST.

So what

Gap stated that this decision reflected the fact that Old Navy was significantly different from its core business in recent years and that the discount brand had developed a distinct customer base from its core business. Robert Fisher, president of Gap, said: "After a thorough review by the board of directors of Gap Inc., it is clear that the business model and the Old Navy customers are differentiating more and more. of our specialized brands over time, and that every company now needs a different strategy to succeed. " towards the front. "

The company also said the move would help streamline decision-making at Old Navy and give it greater autonomy in capital allocation, expansion and other key operational decisions.

Gap also announced plans to close 230 Gap brand "specialty" stores over the next two years as part of a strategy to revitalize its brand and focus more on the factory and retail stores. top performing stores, as well as the development of its e-commerce business. The announcement of the closing of the stores was widely expected, Gap having announced the closure of stores after the closure of 56 stores last year. The decision also shows that the company is dealing with its oversaturated store base at a time of declining shopping center traffic.

In the earnings report, Gap reported that comparable sales of the Gap brand had decreased by 5% and 1% across the company. Overall income declined 3.2% to $ 4.62 billion and earnings per share rose from $ 0.61 adjusted a year ago to $ 0.72 due to 39, a lower tax rate resulting from the law on tax reform, exceeding $ 0.68.

Now what

The separation from Old Navy appears to be an obvious victory for investors, as it gives them the choice between a constantly growing retail business in Old Navy and a trade consisting mainly of traditional brands (like Gap and Banana Republic) that need Rectification the magic. Given this, it is not surprising to see the stock soar today.

Jeremy Bowman has no position in any of the mentioned actions. The Motley Fool has no position in any of the actions mentioned. Motley Fool has a disclosure policy.