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Gap (GPS) to Retain Iconic Name Post Old Navy Spin-off

Zacks Equity Research

The Gap Inc. GPS stated that it will retain the iconic name for the new public company, presently referred to as NewCo, post Old Navy spin-off.

The new Gap Inc. will house brands, namely Gap, Banana Republic, Athleta, Hill City, Intermix, and Janie and Jack. Meanwhile, Old Navy, which is among the fast-growing apparel brands, is likely to operate under the existing name as a standalone company.

The transaction, which is expected to close in 2020, is subjected to some conditions that also include final approval from Gap’s board of directors. Earlier, management had stated that after the spin-off, Gap’s shareholders will receive a pro-rata stock distribution and as a result is expected to own shares in both the resultant companies equally.

Further, industry experts believe that the spin-off will enable the two stand-alone companies to better capitalize growth opportunities. Previously, management had also stated that the new Gap Inc. is expected to generate roughly $9 billion revenues annually, whereas Old Navy is likely to generate about $8 billion revenues.

Going forward, this Zacks Rank #3 (Hold) company remains encouraged about the prospects of the new Gap Inc., thus deliver higher sales and profitability.

We note that Gap’s powerhouse brand, Old Navy, which is focused on creating affordable high-quality fashion for the whole family, remains a significant long-term growth opportunity. Although comparable sales (comps) at Old Navy fell 5% in second-quarter fiscal 2019, the company remains confident about the brand’s growth in the back half.

Additionally, Gap has been experiencing significant progress in its smaller brands. Gap’s digitally native men's active brand, Hill City, is consistently developing and remains a great growth opportunity for the company. Furthermore, Gap continues to benefit from the Janie and Jack clothing brand, backed by roughly 140 U.S. locations and a profitable online channel.



Price Performance

In a year, shares of Gap have lost 47.4%, narrower than the industry’s 50.9% decline. The decline in stock price is attributed to persistent softness across the company’s namesake brand for quite some time now.

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