November 13, 2019

Gap’s Old Navy spinoff plans in doubt with CEO Art Peck out

Gap’s Old Navy spinoff plans in doubt with CEO Art Peck out

Traffic passes by an Old Navy and GAP stores in Times Square, March 1, 2019 in New York City.

Drew Angerer | Getty Images

Gap Inc.‘s plans to spin off its once-star Old Navy brand are being called into question with CEO Art Peck ousted.

The San Francisco-based apparel retailer announced Thursday evening Peck would step down from his role, effectively immediately, having been CEO since 2015. Peck has been replaced temporarily by the son of Gap’s founders.

With Peck’s abrupt departure, analysts are doubting a looming split of Old Navy and Gap will go through, especially with the Old Navy brand in such poor shape.

Gap shares were falling more than 9% in premarket trading Friday. The stock, as of Thursday’s market close, has tumbled nearly 30% this year. Gap is valued at roughly $6.9 billion.

The company announced in February it planned to split Gap Inc. into two publicly traded companies — one with only the Old Navy brand. And another with the namesake Gap brand, Banana Republic and athletic performance brands Athleta and Hill City was set to be led by Peck. The transaction had been scheduled to be completed next year.

The Old Navy brand had up until recently been the star of Gap’s portfolio, bringing in about $8 billion in annual sales by itself. It has been successful at offering basic apparel like white tees, jeans and logo hoodies at reasonable prices, rivaling the likes of T.J. Maxx and Ross Stores.

Today’s shoppers have countless options for finding reasonably priced apparel online and at fast-fashion players like H&M, which recently reported a return to sales growth. Shopping at second-hand merchants and clothing rental options are also cutting into apparel sales.

On Thursday, Gap said company-wide same-store sales fell 4% in the third quarter, with a disappointing 4% drop at Old Navy.

“We have to think this new development will make the original timeline of the planned Old Navy separation extremely difficult,” Evercore ISI analyst Omar Saad said in a note to clients.

“An already skeptical market is going to have a hard time embracing [a] fundamentally challenged Gap/Banana Republic combination without a leader and clearly articulated turnaround plan,” he added.

“What about the spin?!” RBC Capital Markets analyst Kate Fitzsimons said. “With the CEO departure, while there is no update on the Old Navy spin planned for 2020, we think the board may be re-evaluating their options.”

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