The Gap, along with Banana Republic and smaller brands Athleta, Intermix, and Hill City, will be grouped under a new company headed by Gap Inc. The market liked the news, sending shares soaring in Friday trading.
In addition, the company plans to close 230 Gap-brand stores over the next two years, but it's now unknown how many closures will impact Canada.
Old Navy had a strong two-year stretch of sales as it got back to basics in offering affordable, yet stylish clothing.
Gap Chief Executive Art Peck, who will lead NewCo, said the revamp was made with an eye towards positioning the businesses for the future nearly exactly 50 years after founders Doris and Don Fisher launched the company with a single store on Ocean Avenue in San Francisco that also sold record albums.
Getting out from under the sinking ship that is Gap (GPS) is good news for Old Navy.
Old Navy will be spun off into its own public company. Denim will remain the core and "the essence" of the Gap brand, Gap executives said on a call with investors. For instance, shoppers could potentially lose the unified checkout experience online across the Gap brands and the ability to use Gap gift cards at Old Navy (or vice-versa).
Konik said separating Old Navy, which is the primary driver of profit for Gap, would also make the budget brand as attractive as off-price retailers such as TJX Co Inc and Ross Stores.
"Old Navy continues to outpace Gap Brand and Banana Republic and is one the fastest-growing major apparel brands with comparable stores of 3% in 2018 growing to over $7.8bn in 2018".
Analysts said the move was a long time coming.
FILE PHOTO: Customers arrive to shop at an Old Navy store in the Brooklyn borough of New York June 15, 2015.
"As we look ahead to 2019 and beyond, we know what we need to do to win and, combined with the separation we announced today, we will be well positioned to leverage the power of our brands and the talented teams that lead them to accelerate the pace of change, improve execution and deliver profitable growth", Peck said. Instead, a clean split like this can help all companies better allocate resources and give Gap a window to double down on its main focus areas. Now, Cohen said that the board seems to have "finally woken up to the fact that they've got a victor and a loser".
"It'll work out for Old Navy", Cohen said, "because Gap has been an albatross around Old Navy's neck".