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Gap Inc.’s decision to call off the Old Navy spinoff resolves one issue for the troubled retailer, but there are many more to deal with, according to analysts.
Gap GPS, -1.92% announced late last week that it was canceling its plans to separate Old Navy from the rest of the company, saying the “cost and complexity” of the process meant the split wouldn’t “create the appropriate value.”
Read: Gap stock jumps on news it will not spin off Old Navy
Jefferies analysts recently downgraded Gap shares on concerns about whether the spinoff was the best move. Wells Fargo analysts also said a cancelation would be a good move.
With the transition nixed, analysts have a more positive view though they agree the company still has plenty of troubles.
“While this decision is surprising given management’s prior conviction behind it, we applaud the revised strategy and continue to believe it makes significantly more sense to keep Old Navy intact (even more so given recent Old Navy performance),” MKM Partners’ Managing Director Roxanne Meyer wrote in a note.
Gap’s Interim Chief Executive Robert Fisher gave three reasons for why the separation would not happen during its most recent earnings call.
“As we’ve discussed previously, we believe the dis-synergies from the separation (particularly in sales, but also in the supply chain would have been significantly greater than expected,” MKM said.
MKM rates Gap stock as neutral with a $19 price target.
See: Target’s holiday weakness in electronics drags down Best Buy’s stock
When the spinoff was first announced, Art Peck was Gap’s chief executive and Old Navy was a growth engine.
Now, Old Navy is in the midst of a turnaround after same-store sales declines, and Peck has left the company.
Gap also announced last week that the Gap brand president, Neil Fiske is stepping down; Banana Republic Chief Executive Mark Breitbard will lead specialty brands, which includes the namesake, Banana Republic and Athleta; and Chief Financial Officer Teri List-Stoll will now lead corporate operations, including those related to real estate and supply chain.
The company is searching for a new CEO.
The spinoff could have cost as much as $800 million, according to Wells Fargo.
“After speaking with management, one detail they remain upbeat on is the fact that the organization was forced to become more efficient through this process in pursuit of dis-synergy offsets, which they believe they can continue even without the spin,” Wells Fargo analysts led by Ike Boruchow wrote.
Wells Fargo notes that there were signs of an Old Navy turnaround over the holidays, but Gap has languished for five years as issues with quality, fit and brand vision eroded customer loyalty.
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Now Gap is getting more aggressive about store closures, with plans for about one-third of North American stores to shutter over the next couple of years, according to Wells Fargo. And the company’s smaller brands like Athleta and the newly-launched Hill City showing promise.
Wells Fargo rates Gap shares equal weight with an $18 price target.
“Top-line weakness at core Gap and Banana Republic continue to put pressure on profits and losses, while the deteriorating top-line and margin performance at Old Navy demonstrate uncertainty on the go-forward model trajectory,” JPMorgan analysts say.
JPMorgan rates Gap shares as underweight with an $18 price target.
Gap stock was down 2.6% in Tuesday trading and is down 30.6% over the last year.
Gap is scheduled to announce fourth-quarter earnings on Feb. 27.
The SPDR S&P Retail ETF XRT, -0.40% has gained 1.7% over the last 12 months and the benchmark S&P 500 index SPX, -0.03% is up 24.6% for the period.
