The 24 percent rise in Gap’s shares and the commendations given by several Wall Street experts indicate that Gap Inc’s decision to separate from sister company Old Navy was a good one.
There was a time when Gap was the brand to follow. The company’s logo was often emblazoned on all manner of clothing, from cargo pants to hoodies. Unfortunately, Gap seems to have fallen out of step with the times, as the company struggles to keep up with fashion houses H&M and Zara.
The only thing that reportedly kept Gap afloat was Old Navy. The brand acted as a buffer that cushioned the weak sales of Gap and Banana Republic. The slump was said to be due partly to the few new designs being added to the brand.
Randal Konik of Jefferies said that they have been arguing for the Old Navy brand to be separated from Gap Inc. and become a standalone company. The analyst further added that the break would let the market properly appreciate Old Navy for its robust cash flow and high margins.
Konik added that letting Old Navy break away from Gap will make the company as relevant as retailers like Ross Stores and TJX Co Inc.
The surge in Gap’s stock shares generated around $2 billion towards the company’s plans for market capitalization. It also went down in the company’s history as the best day it had in a decade.
Gap reported late last week that the Old Navy brand would be spun off to stakeholders. Meanwhile, the company’s other entity is composed of the original Gap brand as well as Athleta, BR, Hill City, and Intermix.
About four brokerage firms upped their market price on Gap’s stock. Telsey even risked increasing the rate to $40. This move was above the $30 median.
Gap Inc. will reportedly shut down underperforming Gap retail stores within the next two years while placing more focus on its online business. The company appears determined to adjust to today’s online retail atmosphere.
The company has already taken a step forward in its plans by closing its big Fifth Avenue flagship store early this year.
During last week’s post-earnings call with market analysts, CEO Art Peck stated Gap would be focusing on the fit, design, and quality of the clothing that consumers need today. He added that the company would be paying particular attention to denim in hopes of giving the brand a boost.
The Gap will also be investing primarily in fleece for the upcoming seasons.
Peck also talked about the split from Old Navy, stating that the decision ultimately came down to the “business logic at the end of the day.” He assured investors that the move wasn’t made on a whim and to “have confidence that we definitely boil the ocean in looking at all the combinations and permutations.”
Despite the assurances given, several analysts admitted that they still had concerns about Gap’s downward trend.
Robert Drbul, a Guggenheim analyst, said that while they were encouraged by Gap’s decision, they “would note the company’s brands continue to face intense competitive pressure, particularly in the U.S.”
Gap has already lost about a fifth of its value in the past year. This is despite the broader S&P 500 Apparel Retail Index rising 13 percent.