Retail

Gap's Surprise: 'We Are Keeping Old Navy ... Oh, and We Are Raising Earnings Guidance!'

There are many cycles that run through the business world. Over the past 20 years Wall Street has seen its waves of telling companies “buy other companies for scale and protection” and they have also turned into “break the company up to unlock value.” Gap Inc. (NYSE: GPS) was in the process of looking to carve out its Old Navy business into a new company that was outside of the Gap, Banana Republic and Athleta brands. That effort is now history.

The Gap announced on Thursday that it is no longer seeking to separate its Old Navy brand stores into a standalone public company. The company also announced that its board now intends to appoint a new CEO to oversee the full portfolio of brands and corporate strategy. Four senior leaders in divisions have already been elevated and have taken on additional responsibilities as they report to Fisher, but Thursday’s announcement showed that Neil Fiske, who is the president and CEO of Gap brand, will leave the company.

Some moves come as a surprise, but this move to stick together would seem to give the combined operating structure and ability to use scale for materials and other services makes sense to keep together. In a surprising note, Gap raised its guidance with this announcement as well.

The press release indicated that Gap now expects to report total company comparable sales and net sales for calendar 2019 to both come in at the higher end of its previous guidance range. The company had forecast for its sales to be down mid-single digits to down low-single digits. Gap cited better-than-expected promotional levels over the holiday period, but this showed that the better results were particularly seen at its Old Navy stores.

Gap is now forecasting adjusted annual earnings (2019) per share to be moderately above its previous guidance of $1.70 to $1.75 per share. The Refinitiv consensus estimate was calling for earnings of $1.74 per share, but that would still be lower than the $2.59 per share reported the prior year.

Gap shares surged higher in the after-hours trading session. Its shares closed up almost 4% at $18.61 on and the shares were last seen up 7.5% at $20.00 after having traded as high as $21.00 after the news broke. Gap’s 52-week range is $15.11 to $31.39, and analysts had taken the consensus analyst target price down to $16.16 due to weak ongoing sentiment.

Robert Fisher, Gap’s interim president and chief executive officer, said:

The plan to separate was rooted in our commitment to value creation from our portfolio of iconic brands. 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 we’ve done to prepare for the spin shone a bright light on operational inefficiencies and areas for improvement. 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. 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.