Gap Inc. (GPS - Get Report) shares opened at a six-month high Friday after the clothing retailer said it would close more than half of its Gap-branded stores and spin off its Old Navy division into a standalone business by 2020.
Old Navy will be run by current brand CEO Sonia Syngal, while the Gap portion of the business will continue to be lead by Art Peck and will include Athleta, Banana Republic and Hill City brands and a projected $9 billion in annual revenues. Gap, however, said it would close around 230 specialty stores over the next two years, a move that would result in annualized sales losses of $625 million and a pre-tax charge of as much as $300 million.
"In Old Navy, we have one of the fastest growing apparel retailers in the United States with the winning business model and an impressive runway for future growth, including capitalizing on opportunities like opening new stores and expanding into new product categories," Peck told investors on a conference call late Thursday. "The stand-alone company will have approximately $8 billion in annual revenue, and we'll be able to capitalize on this scale, broad consumer awareness and unique positioning to drive growth."
Gap shares were marked 19.8% higher at the opening bell Friday and changing hands at $30.42 each, the highest since August 23 and a move that takes the stock's three-month gain to around 14.6%.
The spin-off move followed weaker-than-expected holiday quarter sales for Gap, which fell 1% over the three months ending on February 3, even as earnings topped the Street forecast by 4 cents a share at 72 cents as net sales slipped 3.24% to $4.623 billion and missed the consensus estimate of $4.7 billion.
"Margins should remain pressured next year, particularly in 1Q19, as an unseasonably cold February has already caused softness and some higher promotions across spring seasonal categories (especially at Old Navy) and as the Gap brand works through its restructuring," said KeyBanc Capital Markets analyst Edward Yruma.
Gap is looking for full-year 2019 earnings in the region of $2.40 to $2.55 per share, compared to a Refinitiv forecast of $2.55, and expects "comparable sales for fiscal year 2019 to be flat to up slightly."
"Old Navy (comparable sales) have been positive for 11 consecutive quarters and we think that as an independent company Old Navy will be able to better leverage its scale to extend its category leadership under a proven management team," Yruma said.