Gap Slides After U-Turn on Old Navy Separation; Deutsche Cuts Price Target

Gap management scrapped plans to spin-off  Old Navy late Thursday, and nudged its 2019 profit and sales forecast higher, as the struggling retailer looks to consolidate its three main brands.
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Gap Inc.  (GPS) - Get Report shares traded lower Friday after it reversed a decision to spin-off Old Navy and forecast moderately firmer full-year profits and analysts at Deutsche Bank cut their price target on the struggling retailer. 

The move to keep Old Navy within the Gap reporting structure comes just two months after the group confirmed the ""strategic rationale for the planned separation" following the announced departure of former CEO Art Peck on November 8.

Gap now says the spin-off could be too costly and complex, and prefers to focus on near-term sales increases at all three of the groups brands -- Gap, Old Navy and Banana Republic -- while continuing the search for a permanent CEO. 

Shares were pressured in early Friday trading, however, after analysts at Deutsche Bank cut their price target on the stock by $3 to $15 per share.

“The plan to separate was rooted in our commitment to value creation from our portfolio of iconic brands,” said interim CEO Robert Fisher. “While the objectives of the separation remain relevant, our board of directors has concluded that the cost and complexity of splitting into two companies, combined with softer business performance, limited our ability to create appropriate value from separation.” 

Gap shares were marked 1% lower in early trading Friday to change hands at $18.42 each. 

It also said 2019 earnings would come in "moderately above" its November forecast of between $1.70 to $1.75 per share, adding that comparable store sales will come in at the "high end" of its previous estimate of mid-single digit gains.

Last February, Peck unveiled plans to split off its better-performing Old Navy brand, telling investors it, as well as the closure of around 230 specialty stores over the next two years, would result in annualized sales losses of $625 million and a pre-tax charge of as much as $300 million.

While Old Navy has struggled recently (we believe losing share to Target, which continues to post solid apparel numbers), the brand remains strong in the value segment," said KeyBanc Capital Markets analyst Edward Yruma, who carries a sector-weight rating on the stock. 

"We think Gap’s focus on profitability at Gap and Banana Republic likely portends more store closures," he added. "We believe the combined entity and its large scale provide the best structure for GPS’s collection of brands to navigate the current retail environment."