Gap Inc.’s move to spin off Old Navy is expected to accelerate growth opportunities for Athleta, the already fast-growing women’s activewear chain.
The plan calls for the creation of two independent publicly traded companies — low-priced juggernaut Old Navy and a yet-to-be named company, NewCo, which will consist of the iconic Gap brand, Banana Republic and Athleta as well as the smaller fashion chain, Intermix.
The San Francisco-based company said the spin-off will enable each company to focus on flexibility and pare down costs. Gap officials noted that the business models between the high-volume Old Navy and “specialty brands” businesses had diverged over time.
“Our customers’ preferences and shopping habits continue to evolve, which is challenging the traditional retail model,” said CEO Art Peck on the call with analysts. “We have responded to this with our balanced growth strategy, which has positioned us well with investments in our global supply chain, our digital capabilities and an enhanced and evolving omni-channel customer experience, while at the same time improving operational efficiencies across the company.
“But over time, Old Navy’s value creation levers, business model and customers have increasingly diverged from our specialty brands. That divergence to me is now clear. And we think the best way for each company to grow and meet the evolving needs of our customers is to allow them to pursue tailored strategies separately. The separation presents us with a unique and catalyzing moment to simplify what we are doing and how we’re doing it. With more focused companies, decision-making can be accelerated. And I’m confident that we will be able to move quickly and with agility to serve our customers.”
At NewCo, the focus will be on improving profitability at the Gap brand, Banana Republic and Intermix while further driving growth momentum of Athleta and Athleta’s men’s brand, Hill City.
Said Peck, “NewCo will have approximately $9 billion in annual revenue, a strong balance sheet and a significant opportunity to innovate, explore new ways to serve the customer and quite frankly what’s on my mind is to write the next chapter for specialty retail. I also believe NewCo will be positioned to take a global leadership role in sustainability. It’s the ethos of this company and the ethos of these brands.”
Of the $8.7 billion in revenues achieved by NewCo in 2018, the combination of Athleta and Intermix accounted for 13 percent of sales, or $1.13 billion in sales. Athleta closed the year with 161 stores and Intermix has 36. The Gap brand accounted for 59 percent, or $5.1 billion or NewCo’s sales, and Banana Republic made up 26 percent, or $2.4 billion.
During the call, Gap Inc. announced it was closing would be shuttering 230 Gap brand stores over the next two years after warning of closings, including some flagships, last year. A year ago, the Gap brand had 725 stores worldwide. After the closures, which also include the 68 stores it shuttered this year, the chain will be down to roughly 427 stores. It expects to have more than 40 percent of Gap’s business coming from online after the restructuring.
Banana Republic, which closed the year with 601 locations, has performed better with positive comps achieved in 2018 but will also see some closings in 2019. Said Peck, “We are going to close some stores inside Banana Republic. Overall Banana has a much healthier fleet. But we are going to take this opportunity to close some stores that we don’t think in the same way have attractive economics that are right for the brand.”
That leaves Athleta, with 161 stores at year end, as the only NewCo chain in expansion mode.
Peck described 2018 as “another market share gaining year” for Athleta with 13 stores opened during the year. A highlight was girls, a category launched in 2016 and delivering a comp over 60 percent for 2018. Athleta also launched the men’s performance lifestyle business Hill City brand to mark its first offering for males.
Peck said Athleta was able to grow its active customer by 20 percent, exceeding goals. Another highlight was receiving B Corp’s certification, “which is really resonating with customers and employees,” according to Peck.
For the fourth quarter, Athleta was impacted by some softer traffic in December, similar to the experience of Gap Inc.’s other chains. But sales less traffic, which Gap Inc. uses as a key indicator of product acceptance, remained positive and held to year-to-date trends, according to Peck.
Teri List-Stoll, EVP and CFO, said, “Athleta delivered another good quarter on top of last year’s remarkable trends, resulting in a two-year comp of nearly 30 percent positive. While Athleta’s performance remained strong, we also have a little room to do better there.”
Gap Inc. did not provide Athleta’s comps for the quarter or year.
Peck remained upbeat on Athleta’s growth. He said, “We continue to see tremendous market share opportunity and runway for growth in 2019 and beyond by leveraging the brand’s differentiated positioning and purpose driven mission, our unique range of product offering and growing our capabilities and performance fabric innovation.”
Peck will hold the same title with NewCo going forward. Sonia Syngal, president and CEO of Old Navy, will continue to lead the retailer in its new standalone status.
The stand-alone Old Navy business, with about 1,150 stores, will likewise have about $8 billion in annual revenue. The split will help it focus on capitalizing on its scale, broad consumer awareness and unique value positioning to drive growth. Said Peck, “We have one of the fastest-growing apparel retailers in the United States with a winning business model and an impressive runway for future growth, including capitalizing on opportunities like opening new stores and expanding its new product categories.”
Image courtesy Athleta
