Reuters
- Gap shares extended their gains Friday morning after the retailer said it would spin-off its Old Navy brand off into a standalone public company.
- Analysts cheered the decision, contending the split makes sense for Gap.
- The retailer plans to shutter 230 Gap stores over the next two years amid falling sales growth.
- The Old Navy spin-off could pave the way for other retailers to make similar moves, analyst Dana Telsey told Markets Insider on Friday.
- Watch Gap trade live.
"Santa Didn't Bring the Sales but Brought Old Navy Spin Instead."
That's what Kate Fitzsimons, an analyst at RBC Capital Markets, wrote in a note out late Thursday following Gap's announcement that it would make Old Navy a separate, publicly traded company.
Fitzsimons' note was emblematic of Wall Street's tone: this was a positive development as the company has seen strong sales at Old Navy, but significant weakness in the namesake Gap brand.
Now, other retailers could follow suit, according to Dana Telsey, chief executive officer and chief research officer of Telsey Advisory Group, a New York-based brokerage firm focused on the consumer space.
"Overall, the
She pointed to VF Corp.'s decision last summer to spin-off its Lee and Wrangler denim brands into a separate public company. The announcement came as some of its other brands, like Vans and The North Face, were generating more sales than VF Corp.'s denim businesses.
The idea is that other retailers, particularly apparel manufacturers, could increasingly look to restructure amid changing consumer tastes and a broader shift to e-commerce. Traditional retailers are "cleaning up the physical base, and enhancing their omnichannel presence," Telsey said.
She said investors could see a similar spin-off in Abercrombie & Fitch's Hollister apparel brand, and American Eagle Outfitters' Aerie lingerie business. Abercrombie, for its part, is scheduled to report quarterly earnings on Wednesday.
Randal Konik, an analyst at Jefferies, has been arguing for an Old Navy separation for years. Konik said in a note out Friday he thinks the spin-off allows investors to consider Old Navy at the valuation it commands.
Last summer, he wrote a note addressed to Gap's board of directors entitled, "Dear B.O.D. of GPS... Please Change Name of Company to Old Navy."
Gap also announced Thursday that it planned to shutter 230 of its namesake stores over the next two years. The retailer reported sales at its namesake stores fell 7% during the holiday quarter.
Following the split, the old company will oversee its Gap, Athleta, Banana Republic, Intermix, and Hill City brands. Its CEO, Arthur Peck, will stay on as CEO of the yet-to-be-named retailer. Meanwhile, Sonia Syngal, the CEO of Old Navy, will lead the separate Old Navy company.
Peck, on a call with analysts on Thursday, was asked by Oliver Chen, an analyst at Cowen, about the timing of the brand separation.
Peck said ultimately it was decided that the "convergence of the business models and the needs of each business, the investment requirements of the business, and our ability to manage the dis-synergies and get productivity, it was the right thing to do."
Gap shares were down 13% this year, including Friday's 18% gain.
Read more Gap and Old Navy news from Markets Insider and Business Insider:
- Old Navy splits off from Gap
- Gap is going bananas after announcing it's spinning off Old Navy
- More than 300 store closures are announced in a single day as the retail apocalypse rips through JCPenney, Gap, and Victoria's Secret
- We visited Old Navy and saw why it became Gap's biggest asset before it was announced it was spinning off as its own company
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