Gap Finally Gets It — Spin-Off of Old Navy Heading Your Way

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It’s finally happening, and so what if the news feels a decade late. Gap Inc. (NYSE: GPS) announced along with its earnings that the company is breaking up its corporate structure and will split into two separately traded public companies. The company is effectively spinning out its Old Navy stores as a category-leader in family apparel. The remaining Gap stores will kept inside a yet-to-be-named company which will include the Gap brands, Athleta, Banana Republic, Intermix and Hill City.

Just a guess for what the “NewCo” name will be — umm, Gap Holdings maybe? Gap intends that the Old Navy spin-off is intended to be a tax-free event to existing Gap shareholders.

Thursday’s press release indicated that the spin-off will allow each company to maximize focus and flexibility, to align investments and incentives to meet its unique business needs, and to optimize its cost structure to deliver profitable growth.

Robert Fisher, Gap’s Chairman of the Board, said:

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. 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.

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The two stand-alone companies will each have a sharpened strategic focus with tailored operating structures aimed at to capitalizing their respective opportunities. Both companies will also have their own experienced leadership teams to lead the companies on separate and defined paths.

The Old Navy company will have approximately $8 billion in annual revenue and will aim to deliver profitable growth as an independent company. Sonia Syngal, who is currently President and Chief Executive Officer of Old Navy and who has led it since 2016, will continue to lead the brand as a standalone company. The release further noted:

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 omni-channel model and expanding its product categories to continue to successfully resonate with value-focused customers. Old Navy will be well positioned to invest in capabilities and initiatives that will continue to grow its market share.

The “NewCo,” what’s left after Old Navy will have approximately $9 billion in annual revenue, a strong balance sheet, and a multi-store portfolio. It’s target is also said to be sustainable growth and improved profitability with improved results at Gap, Banana Republic and Intermix — also while capitalizing on the momentum of B-Corp certified Athleta and the newly-launched Hill City. Gap Inc.’s current President and Chief Executive Officer, Art Peck, will hold the same position with NewCo after the separation.

Upon the separation, Gap Inc. shareholders are currently expected to receive a pro-rata stock distribution in NewCo and Old Navy in equal proportion. The deal is currently targeting a completion sometime in 2020. Final board approval is required, as are receipt of a tax opinion from counsel and the filing and effectiveness of an S.C.C. registration statement.

It’s rather obvious the unlocking value story here is a positive one, although now some will wonder if all the good news is already being price in. Gap shares closed up 4-cents at $25.40 on Thursday, but the shares were last seen up 26% at $32.04 in the after-hours trading session. Gap’s 52-week range is $24.25 to $34.71 and its consensus analyst price target was last seen at $28.71.

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