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Gap Inc. Unveils UK Joint Venture

Gap Inc. has a new franchise partner across the pond.

Beginning in 2022, Next Plc will operate Gap’s online business in the U.K. and Republic of Ireland through a joint venture. The partnership affords Gap the “benefit of their extensive omni platform and their e-commerce expertise as the U.K.’s number one online clothing retailer,” Mark Breitbard, head of Gap Brand Global, and Adrienne Gernand, head of franchise and strategic alliances, said in a statement on Friday.

The deal spans, Gap product on the Next website, and Gap-branded shop-in-shops at Next flagship locations. Breitbard said the venture will offer “extensive click-and-collect options for online customers” but won’t add freestanding Gap stores on British high streets.

The arrangement makes good on Gap Inc.’s asset-light European strategy, with Breitbard describing franchise partnerships as a “strong and cost-effective way to amplify the brand.”

Last month, Gap Inc. delivered its highest second-quarter net sales in more than a decade, with Old Navy and Athleta the biggest contributor its sales gains. Digital sales climbed 65 percent versus the comparable 2019 quarter, accounting for one-third of the San Francisco company’s business.

Gap Inc. recently closed 19 U.K. and Ireland stores when their leases expired. And by the end of September, it will have closed all 81 of its company-operated Gap and Gap Outlet stores in that same territory.

Breitbard didn’t include any information on how the ownership percentage would be split for the franchise partnership. However, Next will likely take a 51 percent stake in the venture, with Gap owning 49 percent, similar to Next’s past deals, like its tie-up with L Brands after Victoria’s Secret’s UK arm went bankrupt.

According to Breitbard, Gap is exploring a partnership that would allow Hermione People and Brands to own and operate Gap stores in France and build its franchise operations there.

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“Pending regulatory approval, we plan to transfer 21 French stores and the majority of Gap France employees to Hermione People and Brands in October 2021,” Breitbard said.

What’s more, the company is in “exclusive negotiations with a partner to take over company-operated Gap stores” in Italy, he added.

Breitbard credited European colleagues brand-building efforts for giving Gap a solid foundation through which “we can now amplify our reach through strategic partnerships that will make us even stronger and able to continue to deliver incredible products and experiences to our customers in Europe and around the world.”

The news comes after Gap Inc. announced debt refinancing plans earlier this week.

The company queued up an early retirement of all tranches of its $2.25 billion debt.

Gap on Monday said it would sunset $500 million of its 8.375 percent senior secured notes due 2023, $750 million of its 8.625 percent senior secured notes due 2025 and $1.0 billion of its 8.875 percent senior secured notes due 2027.

So what’s the benefit?

At the same time Gap pays down the debt, the specialty retailer will raise $1.5 billion in new senior secured notes at a lower rate. Wells Fargo retail analyst Ike Boruchow estimates that the new rate could be between 4 percent to 4.5 percent versus the average interest rate of 8.681 percent for the tranches being retired.

Consequently, the refinancing could generate an estimated $125 million in annual interest savings for Fiscal Year 2022. That’s the difference between the current estimated annual average interest rate burden of $195 million for the notes that will be retired and the new estimated annual interest burden of $65 million for the new notes, Boruchow said, noting new momentum in the heritage company.

The interest savings potential could possibly add 25 cents in upside to Fiscal Year 2022 earnings per share.

As corporate leadership plans to grow Old Navy and Athleta, management will also shrink the store network for Gap and Banana Republic. The company expects to reduce its North American fleet by 35 percent by 2023, and shift their doors to 80 percent off-mall locations.