Gap Inc.’s (GAP) decision to split into two companies has been given the thumbs up by investors.
On Thursday evening, the retailer announced that its successful Old Navy Brand will become a separate publicly listed company, breaking away from the rest of the business, made up of Gap, Banana Republic and other brands, including Athleta and Hill City. Investors cheered the move, sending the shares up 24% in extended trading.
In a press release, Gap revealed its decision to create two independent publicly traded companies was motivated by differing business models and customer bases. “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,” Robert Fisher, the company’s chairman, said.
“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,” he added.
Old Navy and the rest of Gap have experienced mixed fortunes over the past few years. Old Navy’s budget apparel has proved to be popular with a broad base of customers. In contrast, many of Gap’s other brands have struggled to deal with rising competition and evolving retail trends.
Management believes these diverging prospects can be better handled by separating them, freeing up Old Navy executives to focus on maximizing its growth potential, while enabling those in charge of the newly formed, yet-to-be-named company, currently called NewCo, to better explore ways to execute a turnaround and energize sales.
Efforts are already underway to make that happen. Management revealed that it will close a further 230 Gap specialty stores over the next two years. Chief financial officer Teri Stoll said stores that were in the “wrong locations” or were not a "strategic fit” will be targeted, according to CNN.
Shutting down more underperforming stores is expected to generate between $250 million and $300 million. Management plans to use some of that capital on marketing strategies and developing new products.
Some analysts questioned the logic of only freeing Old Navy, noting that Gap’s other promising brands such as Athleta and Hill City might be held back by continuing to be partnered with the company’s laggards.
"This could have been an opportunity for a fresh start for Gap," said Bob Phibbs, CEO of consultancy Retail Doctor, according to CNN. "It's simply putting the NewCo brands through the ringer for another cycle of rinse and repeat."
Judging by the sharp rise in the share price, investors aren’t that bothered about the unanswered questions surrounding the slower-growing company, choosing instead to focus on the value that the deal could unlock.
Corporate spinoffs have historically been popular with investors. Spinoff stocks tend to outperform the rest of the market by an average of 30% in their first three years of trading.