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Gap Changes Course, Will Not Spin Off Old Navy Into Separate Company

Gap Changes Course, Will Not Spin Off Old Navy Into Separate Company

Gap Inc. has decided it doesn't want to part ways with its cash cow after all.

After announcing that it would be spinning off Old Navy into a separate, public company in March, Gap issued a statement on Thursday to walk back that decision, Retail Dive reports. The plan's cancellation will likely come as a relief to investors and analysts who had been skeptical all along.

"[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 interim President and CEO Robert Fisher said in a statement provided with Thursday's press release.

As part of that release, Gap announced that it was adjusting its projection for fiscal year 2019 slightly upward, with smaller declines in comparable-store sales and net sales than anticipated, due primarily to Old Navy having a better-than-expected holiday season.

The soft performance to which Fisher was referring had much more to do with Gap in recent quarters than with Old Navy, which has resonated with shoppers in a way that Gap hasn't for years. Gap's dicey prospects without Old Navy to bolster its numbers, combined with a shared supply chain that would be difficult and expensive to reconfigure, were the chief inhibitors for creating value from a split, Retail Dive reports.

"People associate Gap with the 1990s, when they were in their heyday, and they had huge growth rates then," Morningstar Research Services retail equity analyst David Swartz told Bisnow in December. "Younger people now are not interested in Gap because their parents wore it 20 years ago. If a brand becomes dated, no one wants to go there anymore, and that’s a constant concern in fashion."

Aside from Old Navy, Gap owns another brand that fits well with today's trends in "athleisure" retailer Athleta, one of Lululemon's top competitors. Gap considers Banana Republic to be in need of support like its eponymous brand, Fisher said in his statement.

When CEO Art Peck, who led the original decision to separate Old Navy, abruptly left the company in November, many observers thought the spinoff plan would leave with him, Retail Dive reports. But after Fisher was named as Peck's interim replacement, no announcement came, leading analysts like Swartz to call Gap's situation "up in the air."

"[Gap] is in a very difficult period right now," Swartz said, noting its ongoing plan to close 230 stores. “They had already closed their worst-performing stores, and now there are other worst-performing stores.”