Why Old Navy Going Solo – The Motley Fool

Gap Inc. (NYSE: GPS) and Old Navy separate.

Gap, which is also the parent company of Banana Republic, Athleta, and smaller brands, Intermix and Hill City, has announced its intention to move from Old Navy to a separate publicly traded company. The discount retail chain is Gap's most successful retail banner and is by far the largest, accounting for nearly half of the company's revenue.

This decision sparked investors' encouragement, which boosted Gap's shares by 16% on Friday. Divorce releases the company's best asset, essentially dividing the apparel business into a growing brand and a suite of struggling traditional brands, faced with a comparable sales decline and hundreds of closures of shops.

This new brand is also the clearest sign that Gap, the brand that defines the American style as much as any other in the last two or three generations, desperately needs a new strategy.

Gap has fallen behind its fast fashion competitors H & M, Uniqlo and Zara, while some customers have turned to high-end brands such as Lululemon or cheaper options like Old Navy. In the same announcement, management announced the closure of 230 Gap brand stores over the next two years.

Gap President Robert Fisher explained the decision to split the company by stating, "After a thorough review of Gap Inc.'s board of directors, it is clear that Old Navy's business model and customers have Increasingly differentiated from our specialty brands over time.Now requires a different strategy to thrive and move forward. "

A diamond in the rough

The Gap brand and Banana Republic have faced a rising tide of competition on online and in-store channels in recent years and have done little to evolve or differentiate. On the other hand, Old Navy has created a unique brand and a clear leadership position in the discount apparel sector, at a price that gives it significantly fewer direct competitors offering a range of clothes as large as stylish.

Old Navy has more than 1,100 stores, almost all located in North America, and accounts for more than half of the real estate managed by the Gap Company. The discount brand has just finished the year with a similar 3% sales growth, after a 6% growth in sales in 2017. In Gap stores, sales have fell 5% in 2018, after a decline of 1% the previous year.

Old Navy achieved a $ 7.9 billion business last year, or 47% of the total. Given its faster growth, it would be the most valuable of the two companies if the split was to occur today.

A question mark for Gap

While the separation should help streamline and speed up Old Navy's decision-making process, it is less clear how this improves the prospects for the Gap brand. Reinventing a 50-year-old brand will not be easy, especially in the highly competitive and oversaturated middle-market garment industry, where several competitors, including H & M, have been forced to close their stores.

Management has announced its intention to revitalize the Gap brand and close nearly 50% of its "specialty" stores in the coming years, not counting the top performing companies. The store closures are expected to free up funds to invest in the redevelopment of the remaining stores and the growth of Gap's e-commerce business. This strategy seems to borrow from more powerful omnichannel retailers such as Nordstrom. The company also plans to make marketing investments to enhance the brand.

A victory for investors

As the stock rally shows, the split will create shareholder value as Old Navy's growth has been buried among Gap's greatest woes. It will also offer investors a choice between a growth stock in Old Navy or a turnaround of Gap and its other brands, which the company calls "NewCo" at the moment. With the Old Navy on a trajectory more and more divergent from Gap Inc., separating the two companies makes sense for both investors and the company. The split should take place in 2020.