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Gap Inc. Nixes Old Navy Split—Here’s Why

Cross one potential IPO off the list for 2020.

Gap Inc. no longer intends to separate Old Navy into a standalone public company, the apparel giant said Thursday.

“The plan to separate was rooted in our commitment to value creation from our portfolio of iconic brands,” Robert Fisher, Gap Inc. interim president and CEO, said. “While the objectives of the separation remain relevant, our board of directors has concluded that the cost and complexity of splitting into two companies, combined with softer business performance, limited our ability to create appropriate value from separation.”

The work that was done to prepare for the spin off shined “a bright light on operational inefficiencies and areas for improvement,” Fisher said.

“We have learned a lot and intend to operate Gap Inc. in a more rigorous and transformational manner that empowers our growth brands, Old Navy and Athleta, and appropriately focuses on profitability for Banana Republic and Gap brand,” he said. “Our board is focused on supporting this work and appointing new leadership with the appropriate experience necessary to lead a portfolio of retail brands and to support our transformation efforts.”

“Gap Inc.’s plan to terminate its spin of Old Navy reflects the challenges presented by the cost and complexity of splitting the business in the face of weaker operating results,” Moody’s vice president Christina Boni said. “The significant dis-synergies related to the transaction, as well as most of its separation costs, will be avoided.”

Not only can operating a larger and more diversified platform be instrumental to helping Gap, Inc. manage risk, she added, but keeping the brands together enables the company to leverage “investments in technology and logistics.”

The company’s board of directors intends to appoint a new CEO to oversee the full portfolio of brands and corporate strategy. In the interim, the company had previously said four of the company’s senior leaders have been elevated and have taken on additional responsibilities, reporting to Fisher.

Mark Breitbard, president and CEO, Banana Republic, will now lead Gap Inc.’s collection of specialty brands, including Gap, Banana Republic, Athleta, Janie and Jack, Intermix and Hill City. Sonia Syngal, president and CEO of Old Navy, will continue to lead the Old Navy business.

Teri List-Stoll, executive vice president and chief financial officer, will lead corporate operations related to finance, supply chain, technology and real estate, and Julie Gruber, executive vice president, global general counsel, corporate secretary and chief compliance officer, will lead corporate administrative functions, including legal, corporate facilities and services, human resources and communications, loss prevention, sustainability, government affairs and foundation.

In addition, the company announced that Neil Fiske, president and CEO of Gap brand, will leave the company.

The company now expects total company fiscal 2019 comparable sales and net sales to both reach the higher end of its previous guidance range of down mid-single digits and down low-single digits, respectively. As a result of better than anticipated promotional levels over the holiday period, particularly at Old Navy, the company now expects its adjusted fiscal year 2019 earnings per share to be moderately above its previous guidance of $1.70 to $1.75.

“We are working aggressively to stabilize and improve business results,” List-Stoll said. “We are committed to sharpened strategic focus, tailored operating strategies and operational discipline and accountability that can strengthen the health and profitability of our brands.”

Last year, Gap Inc. had announced that it was planning to spin off Old Navy–considered its best-performing division–into a separate entity in 2020. In the denim space, it nearly coincided with announced initial public offerings for then-private Levi Strauss & Co., and the Wrangler and Lee unit of VF Corp. into Kontoor Brands, which did go forward.

Net sales in the third quarter ended Nov. 2 decreased 2 percent to $4 billion. Comparable sales were down 4 percent versus flat last year. Old Navy Global comp sales declined 4 percent versus a gain of 4 percent last year, Gap Global comp sales fell 7 percent compared to a 7 percent decline a year earlier, and Banana Republic Global comp sales were off 3 percent versus a 2 increase last year.

Net income in the period dropped 47.4 percent to $140 million from $266 million in the year-ago quarter.

The results were quickly followed in November by the company parting ways with former Gap Inc. CEO Art Peck, who was replaced by Fisher, the son of Gap co-founders Donald and Doris Fisher, who has been involved with the company for 35 years and has also served on the board since 1990.

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