Gap to close 230 stores over the next two years

Old Navy will be spun off from parent Gap Inc

A second company will hold on to Old Navy, which has been out-performing the other labels such as Banana Republic. The majority of the affected stores are expected to shutter by the fourth quarter.

"It makes sense to us that Old Navy spins off, with the edge in our view going to Old Navy, driven by Old Navy's strong brand equity, newly increased focus, as well as increased management incentives", said Wedbush analyst Jen Redding.

Gap's president and chief executive, Art Peck, will stay at the helm of the new company.

It will have annual revenue of about US$9 billion, compared to Old Navy's US$8 billion, the company said.

Gap shares were up about 25 percent in after-hours trading Thursday. "At the end of the day, Gap is still a struggling brand and needs to prove its relevancy to the consumer", Redding said. They also plan to close 230 Gap locations over the next two years.

Old Navy has been the only bright spot for the company in the past few years, cushioning it from the weak performance of its namesake Gap and Banana Republic brands, where sales have also taken a hit from fewer additions of new designs. Outside of Athleta, the Gap and Banana Republic brands are sleepy relics of the late 1990s with sizable physical store networks. Net sales for the 2018 fourth quarter - the key period for retailers via the holiday season - decreased by 7 percent relative to a year ago.

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Christina Boni, vice president at Moody's, the rating agency, said: "Old Navy is Gap Inc.'s leading brand comprising 47% of sales in 2018 with margins that lead its portfolio".

"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", Gap's board chairman Robert Fisher said in a statement.

Most of those stores will be in North America, Peck told analysts Thursday.

"As we look ahead to 2019 and beyond, we know what we need to do to win and, combined with the separation we announced today, we will be well positioned to leverage the power of our brands and the talented teams that lead them to accelerate the pace of change, improve execution and deliver profitable growth", Peck said.

Gap's shares lost a fifth of their value in the past 12 months, while the broader S&P 500 Apparel Retail index rose 13 percent.

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