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Gap (GPS) Up on Revocation of Old Navy Spin-Off, Raises View

Zacks Equity Research

The Gap, Inc. GPS has cancelled its plan to spin-off Old Navy into a standalone public company. The spin-off was proposed to create value from the company’s portfolio of iconic brand.

However, the board of directors stated that the cost and complexities of splitting into two companies as well as soft business performance make the spin-off unfeasible. It ascertains that aforementioned concerns will hinder the creation of appropriate value from separation.

Following the revocation, the company plans to focus on transformational efforts to further bolster its growth brands, Old Navy and Athleta. Meanwhile, it expects to focus on boosting profitability of the Banana Republic and gap brands. The company intends to support these efforts through appointment of new leadership team for its retail portfolio.

Furthermore, the company raised its guidance for fiscal 2019. It now anticipates comparable sales and net sales to be at the higher-end of its previous guided ranges. Earlier, it predicted comparable sales to be down mid-single digits and net sales to be down low-single digits.

Moreover, based on the enhanced promotions during the holiday period, particularly for the Old Navy brand, the company now envisions adjusted earnings per share for fiscal 2019 to be moderately higher than its prior view of $1.70-$1.75.

Markedly, shares of this San Francisco, CA-based company rose 6% during the after-market trading session on Jan 16. In the past three months, shares of this Zacks Rank #3 (Hold) company have gained 10.2% outperforming the industry’s growth of 7.4%.

Notably, management is on track to revitalize the Gap brand by streamlining its specialty fleet and enhancing the marketing model to drive customer engagement. The company is focused on driving profitability through improved product assortment and inventory composition as well as reduced promotional activity.

Though it has a long way to go before restoring the brand to profitability, results in the third quarter of fiscal 2019 were relatively better. The company witnessed positive margins and traffic trends for the Gap brand in the fiscal third quarter, owing to its efforts to drive profitability through improved product assortment and inventory composition as well as reduced promotions.

Key Picks

The Buckle, Inc. BKE delivered positive earnings surprise of 12.8% in the last reported quarter. Currently, it sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Zumiez Inc. ZUMZ has a long-term earnings growth rate of 12% and a Zacks Rank #1.

Boot Barn Holdings BOOT has a long-term earnings growth rate of 17% and a Zacks Rank #2 (Buy).

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Click to get this free report Zumiez Inc. (ZUMZ) : Free Stock Analysis Report The Gap, Inc. (GPS) : Free Stock Analysis Report Buckle, Inc. (The) (BKE) : Free Stock Analysis Report Boot Barn Holdings, Inc. (BOOT) : Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research