Gap scraps plans to spin off Old Navy

Gap has abandoned plans to break itself up and announced another senior executive departure, in another sign of how retailers are struggling with their strategic responses to upheaval in the industry.

The New York-listed company, valued at almost $7bn, had laid down plans almost a year ago to separate its Old Navy division from the rest of the group, which includes Banana Republic as well as its namesake brand.

However, the retailer said on Thursday that the “cost and complexity” of the proposed separation meant it was no longer worth pursuing. It also said weaker operating results spurred the change of course.

The rethink comes just over two months after Art Peck, chief executive, who had championed the split, stepped down. The group has yet to appoint a permanent replacement. On Thursday, the company also said that Neil Fiske, head of the Gap brand, was leaving.

The announcements, along with the disclosure that earnings this year would be better than previously expected, sent the company’s shares up as much as 7 per cent in after-hours trading.

The idea behind the split was to unlock value at Old Navy, whose value-oriented offering has allowed it to cope better than its stablemates with the pressures in retail. Mr Peck had argued that Old Navy had a different business model to — and its customers had little in common with — the group’s more expensive brands.

Investors initially welcomed the plan, pushing the stock up 16 per cent in a single day after it was announced.

However, Old Navy’s results have since deteriorated along with those of the wider group. Figures released soon after Mr Peck’s announced departure in November showed the division’s third-quarter like-for-like sales fell 4 per cent compared with the same period a year ago.

Wall Street’s enthusiasm about the plan faded, with a succession of analysts questioning the value it would create for shareholders. Since the day-one jump when the company set out the plan, Gap shares had fallen 37 per cent.

Robert Fisher, Gap chairman, a member of the company’s founding family who has also been serving as interim chief executive, said on Thursday that the original objectives of the plan “remain relevant”. The preparation work had “shone a bright light on operational inefficiencies” at the group, he said.

Directors, he added, were focused on appointing new leadership “with the appropriate experience necessary to lead a portfolio of retail brands and to support our transformation efforts”.

Gap said it now expected its full-year earnings ending in February, adjusted for exceptional items, to be “moderately above” its guidance of between $1.70 and $1.75 a share.

The upgrade on Thursday, which followed a reduction in earnings forecasts in November, was thanks to less aggressive promotions over the holiday period than the company had expected, particularly at Old Navy.