OLD NAVY'S SPINOFF BY GAP

At the beginning of the year, Investingport noted in one of its news articles that traditional retailers were having difficulty growing revenue through physical locations and have had to cull underperforming stores. In support of this statement, Seeking Alpha stated that for shareholders to be energized and help their share prices, some have floated the idea of spinning off high-growth segments.

In February 2019, Gap, one of the largest operators of mall stores in the United States announced that it planned to spinoff Old Navy into a separate public company, separating the family-friendly apparel chain and its classic, more expensive brands. It was further disclosed that the separate company will contain Banana Republic, Athleta, Intermix and Hill City brand. In the 2018 fiscal year, Old Navy brought in about $8 billion revenue and while the brands that were expected to be components of the company brought a combined amount of $9 billion.

Currently, Investment firm, Jefferies are skeptical about Gap's (NYSE: GPS) plan to spinoff Old Navy. Gap was down by 1.5% after trading hours as a result of Jefferies cutting the stock from Buy to Hold, as well as pointing out that the Old Navy spinoff might not make strategic sense. In a statement, Jefferies said, "
The company also still needs a permanent CEO, prompting a cautious approach. It has cut its price target to $17 from $24, implying a 7% downside from today's close."

An analyst with Seeking Alpha said, "The idea of an Old Navy spin-off sounded rather odd when I first heard about it. Companies usually spinoff operations into separate entities when certain operations (1) are in different lines of business than the parent company or (2) have a much different growth trajectory than the rest of the company. I am not sure Old Navy fits either of these descriptions."

Gap has reportedly struggled to grow its revenue amid its declining stocks. Gap reported total revenue of $4.0 billion, which was down year-over-year by 2%. The decline was mainly driven by Gap Global, whose revenue fell by double digits.

Revenue of $1.9 billion was reported by Old Navy, demonstrating a flat growth.  The revenue gotten by Old Navy was 49% of the total revenue, making it Gap's largest segment.

An aggressive promotional environment and headwinds to the top wreaked havoc on margins. The gross margin of Gap fell by 70 basis points compared to the previous year, while gross profit declined by 4% year-over-year. Operating expenses grew as well. Old Navy failed to generate top-line growth in the last quarter. Comparable sales for the Old Navy, Gap and Banana Republic brands were down by 4%, 7%, and 3%, respectively; making it difficult to recommend a stock when the company cannot generate consistent revenue growth. 

The figures above have generated several questions and the most important is: "What does Old Navy have to offer that investors cannot get by buying GPS?"

Seeking Alpha analyst answers this question saying, "In my opinion, the Old Navy brand is betwixt and between. I consider it more fashion-forward than clothes from Target (TGT), Walmart (WMT) or J.C. Penney (JCP), yet not as fashionable as Urban Outfitters (URBN) or Abercrombie & Fitch's (ANF) Hollister brand. Old Navy also appeals to cost-conscious buyers, yet it may not be as cheap as merchandise sold through off-price retailers like Burlington (NYSE: BURL) or TJ Maxx (TJX). By competing solely on price, Old Navy could lose some of its fashion sense. However, the off-price retailers are delivering solid same-store sales growth at the expense of other retailers."

Statistical data showed that Gap performed better in the U.S. than other international markets. Revenue from the U.S. was $3.3 billion, flat year-over-year. Revenue from Canada, Europe, and Asia all declined. The total non-U.S. revenue was $734 million, down 10% year-over-year.

Even though the U.S. may have been affected by the trade war with China, Asia is believed to be feeling the headwinds from the war. Gap's Asian was the third-largest segment, generating 6% of the total revenue. 

Factors that could have influenced Old Navy's performance

  • Old Navy could have benefitted from its non-exposure to international markets, as over half of Gap's total U.S. revenue came from Old Navy and 26% from Gap global. From Old Navy's revenue break down, 91% was from the U.S. and 8% from Canada.

  • Again, Old Navy's performance compared to Gap Global and Banana Republic could be as a result of it receiving over 90% of its revenue in the U.S. 

  • The relative performance of the brands could be due to timing. At certain times, Europe or Asia could outperform the U.S. Geographically, Gap appears to have a solid portfolio of businesses, and spinning off Old Navy would hive off over half the company's U.S. revenue, the region that may be performing better than other markets.


The spinning-off could be brutal as investors think it is coming at an odd time, as the management needs to better position the bran. Currently, GPS is down by over 25% year-over-year and will likely fall further amid declining same-store sales.


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