Gap and Old Navy split to ‘maximise focus and flexibility’

Gap Inc. will be splitting Old Navy from its business to create two independent publicly traded companies. Old Navy will become a standalone brand while brands such as Gap, Athleta, Banana Republic, Intermix and Hill City will go under a new yet-to-be-named company (NewCo).

Gap said that this spin-off will enable each company to maximise focus and flexibility, align investments and incentives to meet its unique business needs and optimise its cost structure to deliver profitable growth.

NewCo will be positioned to drive sustainable growth and improve profitability by leveraging its customer base and an appropriately scaled operating platform with advantaged digital capabilities to deliver products and experiences. With enhanced strategic and operational focus, NewCo aims to deliver improved results at Gap, Banana Republic and Intermix, while capitalising on the momentum of the Athleta and newly-launched Hill City brands. As a standalone company, NewCo also looks to be better positioned to continue to evolve its leadership role in sustainability and social responsibility. The five brands under the umbrella bring in a total of approximately US$9 billion in annual revenue.

In the meantime, with approximately US$8 billion in annual revenue, Old Navy will be able to capitalise 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 aims to have the flexibility, focus and control needed to increase customer access by further applying its strategic real estate strategy. It also looks to evolve its omni-channel model and expand its product categories to continue to resonate with value-focused customers. Old Navy will also be well positioned to invest in capabilities and initiatives that will continue to grow its market share.

Current president and chief executive officer, Art Peck, will hold the same position with NewCo after the separation. Over the last several years, Peck has led significant improvements at Gap and reinvigorated growth across several specialty brands by strengthening the supply chain and pivoting to leverage technology and capitalise on new customer trends.

Following the separation, Sonia Syngal, current president and chief executive officer of Old Navy, will continue to lead the brand as a standalone company. Syngal, who has led Old Navy since 2016, has led Old Navy’s transformation and driving product-to-market innovations, as well as deep experience in supply chain and manufacturing in both retail apparel and other industries.

Meanwhile as part of its restructuring, Gap will be closing around 230 Gap specialty stores, mainly in the US over the next two years. As a result of these store closures, the company estimates an annualised sales loss of approximately US$625 million.

The remaining specialty stores aim to serve as a more appropriate foundation for future growth of the brand across the specialty, outlet and online channels. The company said that there will be a healthier channel mix after the restructuring, with nearly 40% of sales coming from online, and the remainder split fairly evenly between the specialty and value channels.

In a bid to revitalise the brand, Gap aims to re-engage with customers and expand its loyal customer base, leveraging the multi-generational, democratic appeal of the brand. It added that it aims to improve the brand by recapturing the traditional Gap attributes of style, quality, fit and value. The company also looks to modernise its marketing model to build engagement and loyalty.

Robert Fisher, Gap Inc.’s board chairman said that following a review by the Gap board of directors, it was clear that Old Navy’s business model and customers have increasingly diverged from its specialty brands over time, and each company now requires a different strategy to thrive moving forward.

“Recognising that, we determined that pursuing a separation is the most compelling path forward for our brands – creating two separate companies with distinct financial profiles, tailored operating priorities and unique capital allocation strategies, both well positioned to achieve their strategic goals and create significant value for our customers, employees and shareholders,” he added.

President Peck said that the spin-off will enable the company to embed those capabilities within two standalone companies, each with a strategic focus and tailored operating structure.

“We have made significant progress executing on our balanced growth strategy and investing in the capabilities to position our brands for growth: expanding the omni-channel customer experience, building our digital capabilities and improving operational efficiencies across the company. As a result, both companies will be well positioned to capitalise on their respective opportunities and act decisively in an evolving retail environment,” he added.

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