Old Navy reveals ambitious post-spin-off expansion plans; Gap to focus on denim

By

Robin Driver

Published
Sep 13, 2019

Gap, Inc. has given an update on the upcoming split of its businesses into two separate companies, revealing plans to almost double Old Navy’s brick-and-mortar store count, while the Gap brand will refocus around denim.

 
First announced in February of this year, the separation will see the Old Navy brand spin off as a standalone company. Gap, Inc.’s remaining banners, including Gap, Athleta, Banana Republic, Intermix and Hill City, will continue to be operated together as part of one company, which, as reported last month, will retain the Gap, Inc. name.
 
It is hoped that the split will allow Old Navy, a consistent bright spot at Gap, Inc., to focus on executing its growth-oriented strategic initiatives, while the other company resulting from the separation will be able to channel its resources into revitalizing struggling brands, such as its flagship Gap label and Banana Republic.

During a “Meet the Management” investor event on Thursday, it was announced that, following its split from its parent company, Old Navy intends to open 860 new locations in North America.
 
The brand, which proposes a more affordable offering than the namesake Gap label and finished fiscal 2018 with a network of 1,140 stores, further clarified that it will focus its expansion efforts on outlet stores in smaller markets and off-mall locations.
 
Thanks to its increased brick-and-mortar footprint, Old Navy, which reported net sales of around $8 billion in 2018, stated that it expects to achieve annual sales of more than $10 billion in the long term.
 
As for the Gap brand, it was revealed that store closures at the banner may ultimately be fewer than the 230 previously announced, as a number of landlords have since proved eager to keep the stores in their centers.
 
Gap also told investors that the revitalization of its flagship brand will be based around a renewed focus on jeanswear.  
 
“We are going to gain share in denim, plain and simple. It is how we have gotten the flywheel turning before in our other brands. It is what I did when I was running the brand in 2012,” explained Gap, Inc. CEO Art Peck, who will continue to lead the company after the spin-off of Old Navy. “We said we’re going to gain share in denim and that is going to be the fuel that powers the turnaround.”
 
The strategy echoes with the reasoning behind VF’s spin-off of its denim labels as Kontoor Brands earlier this year, a move partly motivated by the desire to better position the business to take advantage of denim’s comeback as the athleisure trend begins to retreat.
 
That said, Peck also has high hopes for the Athleta active apparel brand, which he believes can reach $2 billion in sales moving forward.
 
In terms of Gap, Inc.’s new organizational strategy, Peck highlighted plans to slim down the company’s management structure in order to speed up decision making, as well as a refreshed senior compensation plan, based around performance and accountability.
 
Gap intends to complete the spin-off process in 2020. As a result of the separation, between 2019 and 2021 the company expects to incur between $400 million and $450 million in one-time separation expenses, as well as capital-related costs in the range of $300 million to $350 million.