Speculation that Gap, Inc. could explore a spinoff of its Athleta brand has returned. Some reports indicate activist investors could push Gap to explore a spinoff to capitalize on Lululemon’s trading value.

Lululemon, with $6.3 billion in sales in 2021, has a market valuation of $53 billion. With $16.7 billion in sales in 2021, Gap has a market valuation of $5.5 billion. Athleta’s sales last year were $1.14 billion.

Speculation about an Athleta spinoff first arrived in July 2021 after the Wall Street Journal reported that Fabletics was looking to hire banks for an initial public offering that would value the Kate Hudson-founded Fabletics women’s activewear company at $5 billion.

Based on Fabletics’ sought-after valuation, Dealreporter estimated that Athleta might be worth $9.4 billion. Athleta closed in 2021 with 227 stores, about triple the approximately 75 stores Fabletics operates.

The renewed speculation in 2022 arrived in an April 7 Activist Insight article around activist involvement in Gap shares, especially around a potential Athleta spinoff.

Following up on the Activist Insight report, Wells Fargo analyst Ike Boruchow wrote that Athleta could be worth more than the entire Gap, Inc. enterprise value.

Applying a “fairly conservative” 15 times multiple on EBITDA yields a $5 billion valuation for Athleta. Boruchow wrote in the April 13 note, “While Athleta is meaningfully smaller than LULU, they both play in the healthy and growing athleisure category, which makes us believe 15.0x for Athleta is reasonable given that it sits at the low-end of LULU’s ten-year range (LULU hasn’t dipped below 11x since March 2009, has averaged 28x over the past three years, and currently trades at 23-to-24x, to put things in perspective).”

Boruchow saw Gap stock’s uptick on news of a potential Athleta spinoff as a sign that the market is receptive to an Athleta spinoff than the negative reception Gap received to its announcement in 2019 of a planned spinoff of Old Navy, which was canceled in January 2020. Boruchow said conditions are better for an Athleta spinoff comparatively. 

Old Navy was coming off a soft year with comps down 2 percent in 2019 as the chain’s spinoff was begin proposed while Athleta continues to thrive. Athleta’s FY21 sales were up 48 percent compared to pre-pandemic FY19, with comparable sales up 39 percent on the same basis.

The analyst also said separating Athleta from Gap, Inc. would be significantly less expensive and complicated than separating Old Navy. Boruchow said, “In our view, an Athleta separation would be more achievable as the brand is very healthy, was an acquired asset and its supply chain has less overlap with the knit-heavy GPS portfolio.”

Gap Inc. acquired Athleta in 2008 for $150 million when it was only a women’s online and catalog business.

Finally, Boruchow said Gap might be open to exploring a spinoff given the stock’s underperformance over the last twelve months and comments by Gap’s CEO Sonia Syngal on its fourth-quarter analyst call that Gap was open to “looking at options around value creation” with Athleta.

Wells Fargo holds an “Overweight” rating on Gap at a $20.00 price target despite Gap’s recent struggles due to the potential to unlock hidden value at the company, particularly around Athleta. On Monday, Gap’s shares closed at $14.28.

On its fourth-quarter conference call on March 3, Syngal said Athleta was on schedule to reach $2 billion in sales by 2023, “led by its digital dominance, including growth in the wellness space, now six months into the launch of AthletaWell.”

In July 2021, AthletaWell, a digital platform, was launched and marketed to women with an empowerment message to build brand loyalty and engagement. Syngal also called out the benefit of Athleta’s brand ambassador program, including signing two Olympians, sprinter Allyson Felix in 2019 and gymnast Simone Biles last year. In February, Athleta announced a partnership with Grammy-award-winning singer/songwriter Alicia Keys.

Like others in the active space, Athleta has received a boost from consumers who gravitated toward fitness activities during the pandemic. For the full year, Athleta grew its customer file in double-digits. Athleta opened 30 stores in 2021 and plans to open 30-to-40 in 2022.

Athleta also opened its first two locations in Canada last year, marking its international expansion.

This year, Gap’s shares have been under pressure as the stock has faced several downgrades. Supply chain issues related to last year’s pandemic-related Vietnam factory closures have impacted the company more than others in the apparel space. Old Navy, Gap’s largest chain, has been affected by the supply chain hurdles, and analysts are concerned about the impact of inflation and the anniversary boost from 2021’s federal stimulus spending.

On April 1, Adrienne Yih at Barclays downgraded Gap to “Underweight” from “Equal-Weight” after reducing it from “Overweight” on February 3. The downgrade was based on the negative sales to inventory spread and increasing weeks of supply safety stock, increasing promotional activity seen at Gap and Old Navy, a lack of significant brand loyalty at Gap and Old Navy given their value-oriented pricing, and an increasing need for advertising spend to reinvigorate the long-struggling Gap chain. Yih added, “We point out that we believe there could be activist interest to split the brands and monetize the value of Athleta in particular, which could be a risk to our UW rating.”

Barclay’s price target on Gap was cut from $17 to $13.

On Monday of this week, Gap scored a rare upgrade to “Equal-Weight” from “Underweight” from Morgan Stanley. The firm’s price target is $14.

Morgan Stanley analyst Kimberly Greenberger said Gap’s shares are more appropriately valued after Morgan Stanley first downgraded the stock on January 18. Gap’s shares are down 20 percent since the start of the year and trading near five-year pre-pandemic lows.

“Our bearish thesis still stands but appears priced in,” Greenberger said in a note.

Greenberger wrote, “Our fundamental concerns remain falling store traffic, e-commerce disintermediation, declining brand health, apparel price deflation, and falling margins. A portion of Gap’s portfolio is less competitive: Gap and the Banana Republic.”

Photo courtesy Athleta