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Gap is splitting into two companies in a bid to finally make shareholders happy

Brian Sozzi

It’s about time.

After years of operational miscues — and the rise of even more competition in the apparel space — that have sent shoppers elsewhere, Gap’s board of directors has woken up to reality. That is to maximize value for shareholders, operating a mix of different brands with varying business models is no longer the correct decision.

The long overdue course of action has finally been taken: a breakup of Gap Inc. (GPS)

Splitting the Gap up

About 600 shoppers are lined up at a Little Rock, Ark., Old Navy store Friday, Nov. 27, 2009. The nation's retailers are ushering in the traditional start of the holiday shopping season with expanded hours and deep discounts  (AP Photo/Danny Johnston)
About 600 shoppers are lined up at a Little Rock, Ark. (AP Photo/Danny Johnston)

Gap revealed Thursday afternoon the company would look to split up into two public companies by sometime in 2020. Old Navy will be spun off into its own public company, putting it in competition for investor love with better run value clothing retailers such as TJX Companies and Ross Stores.

“Following a comprehensive review by the Gap Inc. Board of Directors, it’s clear that Old Navy’s business model and customers have increasingly diverged from our specialty brands over time, and each company now requires a different strategy to thrive moving forward,” said Gap Chairman Robert Fisher (son of Gap co-founders Don and Doris Fisher). “Recognizing that, we determined that pursuing a separation is the most compelling path forward for our brands — creating two separate companies with distinct financial profiles, tailored operating priorities and unique capital allocation strategies, both well positioned to achieve their strategic goals and create significant value for our customers, employees and shareholders.”

Indeed Old Navy executives will have a good story to pitch to prospective investors on a roadshow. Old Navy has had a strong two-year stretch of sales as it has gotten back to basics in offering affordable, yet stylish clothing. Same-store sales have increased for three straight years. The chain posted a 3% same-store sales increase in 2018 — the best among Gap’s big brands.

Old Navy runs more than 1,100 stores in North America (its largest market) and Asia. The brand hauled in $7.8 billion in sales last year, up from $7.3 billion in 2017.

The new public Old Navy will be led by current brand CEO Sonia Syngal.

Gap and Banana Republic brands are sleepy relics

Meanwhile, the remaining businesses named ‘NewCo’ — Gap, Intermix, Athleta, Banana Republic — will live as its own separate entity. According to a slide deck from Gap, these brands raked in $8.7 billion in sales last year. The crown jewel of the portfolio is athletic wear brand Athleta, and it wouldn’t be surprising if a top retailer (like VF Corp.) swoops in and scoops it before the spin-off.

It will be difficult to drum up excitement for NewCo. Outside of Athleta, the Gap and Banana Republic brands are sleepy relics of the late 1990s with sizable physical store networks. Both brands have struggled for years to drive consistent traffic and keep costs under control.

To that end, Peck said the Gap brand will look to shutter 230 stores over the next two years. He is slated to be CEO of NewCo.

Peck was likely on borrowed time as CEO, so the brash move makes sense from that standpoint. Gap shares have lost 30% since Peck took over in Oct. 2014. Shares spiked 24% in after-hours trading on the breakup news.

But, the split also makes sense from a shareholder value perspective. The real question is why it took so long.

Brian Sozzi is an editor-at-large at Yahoo Finance. Follow him on Twitter @BrianSozzi

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