The Reasons for the Separation of Gap and Old Navy

GAP Breaks Up! 1. (Introductory) How many of you shop at the Gap? Why or why not? 2. (Introductory) How many of you shop at Old Navy? Why do I see more hands up? Is price the only reason? 3. (Advanced) Why does a chain like Gap even own Old Navy in the first place? Since the two brands actually compete, where are the synergies of owning both brands? 4. (Advanced) Why are the two brands being separated? If it made sense to own them both in the past, why does it make less sense now? GAP Breaks Up! SAN FRANCISCO, United States — Gap Inc., the second largest apparel company in the US, said Thursday it will spin out Old Navy to create two publicly traded companies. The split almost divides the company roughly in half: Old Navy generated $7.9 billion in revenues in 2018, while the remaining brands — Gap, Banana Republic, Athleta, Intermix and Hill City — combined for $8.7 billion. Analysts said that the move was a long overdue. Gap became ubiquitous in malls worldwide in the 1990s, with its globally recognised brand known for denim and American basic casual wear. But Old Navy, which launched in 1994, steadily cannibalised Gap’s customer base, selling products of similar quality at a lower price. Old Navy outpaced Gap in revenue in 2006 with $6.8 billion in annual sales and the company has grown increasingly reliant on the brand to drive growth. The Gap brand has shrunk from $7.2 billion in 2004 to $5.3 billion in 2017, when Gap Inc.presented a strategy to shareholders that pinned its future on Old Navy and Athleta. It said it expected those brands to reach $10 billion and $1 billion in annual sales in the next several years. “It makes sense simply because Old Navy was always running the business,” said Jane Hali, chief executive of research firm Jane Hali & Associates. “They were forced to do more with Old Navy because the rest of the company struggled, and now that they’ve split, there are two separate financial profiles so they can put more into each new [entity].” The company’s shares soared 25 percent in after-hours trading following the separation announcement, after closing at $25.40. Old Navy will be spun out into a new entity via a transaction that it said will be tax-free to Gap's shareholders. The rest of the brands underneath the former Gap Inc. umbrella will become a yet-to-be-named company. Gap Inc. president and chief executive Art Peck will continue to lead those companies, while Old Navy president and chief executive Sonia Syngal will continue to lead Old Navy in this new independent capacity. Gap said on Wednesday that its reasons for separating the company include sharpening its strategic focus and allowing the two entities to “capitalise on unique business models, growth plans and customer bases.” Peck told analysts in a call that over time, customers for Old Navy have diverged from the rest of its specialty brands. “That divergence to me is now clear. And we think the best way for each company to grow and meet the evolving needs of our customers is to allow them to pursue tailored strategies separately,” he said. The separation would also create more value for Old Navy investors, according to B. Riley analyst Susan Anderson. “When you look at the sum of the parts, maybe you’re not getting the full value of a [potential Old Navy] stock when Gap is hiding under its performance,” she said. Gap launched Old Navy under then-chief executive Mickey Drexler as a low-price, offthe-mall alternative to Gap, with stores designed to feel like warehouses. The brand was a near-instant hit, reaching $1 billion in sales four years later, and, unlike Gap, kept growing as fast fashion chains H&M and Zara poached customers from Gap, which lost and never regained its aesthetic vision in the 2000s. Gap Inc. also posted its fourth-quarter earnings Thursday, posting sales decrease of 7 percent compared to the same period last year. Overall, its comparable sales fell one percent while Old Navy saw a 5 percent increase. As part of the reorganisation, 230 Gap stores will close over the next two years, which will erase $625 million in sales. Though analysts cheered the split’s impact on Old Navy, many were skeptical it would solve the Gap brand’s mounting problems. “Quarter after quarter Art Peck apologises for the fact that they didn’t… get the product assortment right,” Hali said. “But when is this actually going to change?” Hali pointed to the respective Gap Inc. companies’ omni-channel capabilities, noting that only Old Navy has a buy-online, pick-up-in-store feature — something that Gap could have adopted while Old Navy was still a part of the main company. “What concerns me is that they blame Old Navy’s customer for diverging from the other brands but really what every customer wants is a good product,” she added. Will Divesting Old Navy Help The Gap? Source:Wikimedia Khadeeja Safdar reports in the Wall Street Journal today that Gap Inc. is splitting into two publicly traded companies. Old Navy, the company's low-priced apparel chain, will become an independent firm, while another company will operate the other brands including Gap, Banana Republic, and Athleta. The article notes that Old Navy has been the highest-performing brand in the portfolio for some time, and that it has surpassed the company's namesake brand in total revenue. Gap Inc.'s stock rose 25% when the news broke. Safdar reports on the comments offered by CEO Art Peck when announcing the breakup: “The other brands overlap each other but overlap Old Navy less,” Mr. Peck said on a conference call with analysts Thursday. He said separating the two would allow both to make quicker decisions and focus their investments. Mr. Peck has long said the brands have advantages over their competitors because of the parent company’s combined size. I have doubts about whether this move alone will help the core Gap brand address its long-running troubles. Gap's struggles extend far beyond the issues experienced by many brick-and-mortar chains as consumers flock to e-commerce options. Gap has been "stuck in the middle" strategically for years. What do I mean by that? Well, Old Navy has clearly occupied a low cost position in the casual apparel market. Banana Republic has established a more differentiated, premium-priced position with higher quality and more professional clothing. What's the Gap brand position in the market? For years, they have floating somewhere between a low cost and differentiated position, unclear about who they are or want to be. I've been writing about this strategic problem and discussing it with students for at least ten years. See this past blog post, for instance. Today's Wall Street Journal article describes one aspect of this problem: Some analysts have said that Old Navy’s rise has expedited the Gap brand’s demise. “When your prices are lower and it’s essentially the same merchandise, you’re going to cannibalize the sales at the higher-end brands,” said Sucharita Kodali, a retail analyst at Forrester. “There’s no differentiation.” Will splitting off the Old Navy brand fix this strategic issue at the Gap brand? I don't see a clear reason why it will, unless other substantial changes are made. Simply splitting the company in two does not address the "stuck in the middle" problem. The Gap is not just stuck in the middle of Old Navy and Banana Republic; they are stuck in the middle of a host of other strong, well-positioned low cost and differentiated apparel brands. Posted by Michael Roberto Gap Shares Tumble as Flagship Brand Shows No Sign of Recovery The Gap brand posted its worst same store sales miss in three quarters. Source: Shutterstock SAN FRANCISCO, United States — Shares of Gap Inc fell 8 pct in premarket trading on Friday, a day after the company's namesake brand posted another bigger-than-expected drop in comparable sales, raising concerns around the unit's turnaround plan. Gap typically offers big discounts to entice shoppers to buy last season's designs, but the company cut back on promotions as it prioritised profit margins over sales in the latest reported quarter, leading to disappointing results at its main brand. The Gap brand is expected to weigh on the company's gross margins in the current quarter as it works through its inventory issues, B. Riley FBR analyst Susan Anderson said. Anderson, who cut her price target on the company's stock by $2 to $33, said she would remain on the sidelines until the brand showed consistent positive comparable sales. Sales at Gap branded stores open for more than a year fell 5 percent in the fiscal second quarter, more than the 2.55 percent decline forecast by analysts, according to Thomson Reuters I/B/E/S. Other analysts saw positives in strong performance at company's other key brands - Old Navy and Athleta. In a note titled "Dear B.O.D. of GPS... Please Change Name of Company to Old Navy," Jefferies analyst Randal Konik said the company's better-than-expected profit and reaffirmed guidance show that the Gap brand does not matter as long as Old Navy remains solid and Athleta continues to grow. The Gap brand posted its worst same store sales miss in three quarters. Analysts expect sales to fall in the current quarter as well, with an average estimate of a drop of 2.6 percent. "We think Gap will continue to lose share to fast-fashion and off-price peers," Morningstar analyst Jaime Katz said, adding that the company had no clear execution on a plan to stave off losses in key segments.