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Nov 8, 2019

Old Navy spinoff hangs in the balance as Gap's board readies to meet

Old Navy spinoff uncertainty as Gap axes CEO


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Gap Inc.’s firing of Chief Executive Officer Art Peck left investors with loads of questions about the struggling apparel retailer, but the biggest is what happens to the spinoff of its Old Navy brand?

It’s a move the company pitched as a way to unlock value for investors, and Peck was a key part of the plan. And now Old Navy, once the undisputed shining star of the clothing giant, is declining along with the rest of the firm. Answers to the spinoff’s fate may come next week when Gap’s board meets, according to Susan Anderson, an analyst at B Riley FBR Inc., who spoke to the company Thursday.

“It definitely sounds like it’s up in the air,” Anderson said. “I wouldn’t be surprised if they keep the company together now. Anyone following this thing knew it was a huge mess separating the two.”

Gap gave investors little confidence that a separation would still happen. In its press release announcing Peck’s termination, the company only mentioned the costs of a “planned” spinoff in its earning guidance. It said its focus will be looking for strong candidates to fill the CEO seat and shoring up all its brands, which include the Gap and Banana Republic banners. The company also declined to answer any follow-up questions.

When Gap announced the Old Navy spinoff in February, the stock surged with some analysts saying it was long overdue. But nine months later, Old Navy is struggling on multiple fronts. The chain admitted to flubbing women’s fashion this year and competition from discounters, like Target and T.J. Maxx, is only increasing. Add the cost of the separation, which could hit US$1 billion, and it makes sense for it to be called off, according to David Swartz, an analyst for Morningstar Investment Service.

“You gotta think this is going to be a hard sell” to investors, Swartz said. “Maybe Old Navy has peaked? If it was clearly doing better than Gap and Banana, that makes a lot more sense.”

Robert Fisher, the company’s current non-executive chairman and son of Gap co-founders Don and Doris, will step in as president and CEO on an interim basis. There are two other members of the Fisher family, who collectively are the largest shareholders with 43 per cent of the voting power, on the board. The Fishers signed off on spinning out Old Navy before as a way for investors to realize the true value of a brand that has been dragged down by the struggles of Gap’s other struggling properties.

Planned Expansion

As an independent company, Old Navy said it’s planning to aggressively expand to about 2,000 locations, with a focus on smaller markets, according to a presentation in September.

Many U.S. apparel-focused retailers continue to struggle with purchases migrating online and consumers turning to used goods. Plus, Old Navy is already a very mature business with about US$8 billion in sales and more than 1,000 stores in the U.S., where it does the overwhelming majority of its business. Several years ago, management envisioned pushing the brand overseas, but those efforts flopped, including exiting Japan. Old Navy does see potential in China, however.

“That’s not an exciting story, to say the least,” Swartz said. “They can say its cheap, and they may believe that, but no one is saying ‘I wish Old Navy was a separate company so I could put my whole fund into it.’”