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Gap Inc. to Split in Two, With Old Navy Standing Alone

Gap Inc. said Thursday it plans to create two independent publicly traded companies–Old Navy, focused on family apparel, and a yet-to-be-named “NewCo” that will consist of the Gap brand, Athleta, Banana Republic, Intermix and Hill City.

The spin-off will enable each company to maximize focus and flexibility, align investments and incentives to meet their particular business needs, and optimize cost structures for greater profitability, Gap Inc. said ahead of reporting its fourth quarter and full year sales and earnings.

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

Art Peck, president and CEO of Gap Inc., said, “We have made significant progress executing on our balanced growth strategy and investing in the capabilities to position our brands for growth.”

This includes expanding the omnichannel customer experience, building digital capabilities and improving operational efficiencies, Peck noted.

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“Today’s spin-off announcement enables us to embed those capabilities within two stand-alone companies, each with a sharpened strategic focus and tailored operating structure,” he added. “As a result, both companies will be well positioned to capitalize on their respective opportunities and act decisively in an evolving retail environment.”

The new entity, which includes Gap, Athleta, Banana Republic, Intermix and Hill City, with roughly $9 billion in annual revenue and a strong balance sheet, will have a differentiated portfolio, with significant opportunity to create value, the company stressed. It will be well positioned to drive sustainable growth and improve profitability by leveraging its loyal and complementary customer base and an appropriately scaled operating platform with digital capabilities to deliver distinct products and experiences.

With an enhanced strategic and operational focus, the company feels it can deliver improved results at Gap, Banana Republic and Intermix, while capitalizing on the momentum of B-Corp.-certified Athleta and newly launched Hill City.

“As a stand-alone company, NewCo also will be better positioned to continue to evolve its leadership role in sustainability and social responsibility,” the company said.

As one of the fastest growing apparel brands in the U.S. with about $8 billion in annual revenue, Old Navy will be poised to capitalize on its scale, broad customer awareness and positioning “to extend its category leadership and deliver profitable growth as an independent company,” Gap said. “Through this separation, Old Navy will have the flexibility, focus and control needed to increase customer access by further applying its strategic real estate strategy, evolving its omnichannel model and expanding its product categories to continue to successfully resonate with value-focused customers.”

Both companies will have experienced leadership teams. Peck will hold the same position with NewCo after the separation. Following the separation, Sonia Syngal, current president and CEO of Old Navy, will continue to lead the brand as a standalone company. Syngal has led Old Navy since 2016.

The company said the spinoff is intended to generally be tax-free to its shareholders. Upon separation, Gap Inc. shareholders are expected to receive a pro-rata stock distribution and as a result own shares in both NewCo and Old Navy in equal proportion. The transaction is currently targeted to be completed in 2020, and is subject to certain conditions, including final approval by Gap Inc.’s board, receipt of a tax opinion from counsel and the filing and effectiveness of a registration statement with the U.S. Securities and Exchange Commission.

NewCo will be based in Gap Inc.’s current headquarters and Old Navy will remain at its current headquarters, both in San Francisco. Morgan Stanley & Co. is serving as financial advisor and Wachtell, Lipton, Rosen & Katz is serving as legal advisor to Gap Inc.

Meanwhile, Gap Inc. reported net sales for the fourth quarter ended Feb. 2 dipped 3.3 percent to $4.62 billion. Fourth quarter gross profit fell 6 percent to $1.65 billion, while net income for the period rose 16.6 percent to $276 million.

For the full year, net sales were up 4.6 percent to $16.58 billion. Net income in the period grew 18.3 percent to $1 billion, while gross profit was up 4 percent to $6.32 billion.