by Stephen Garner

Gap Inc. has announced plans to create two independent publicly traded companies: Old Navy, a category-leader in family apparel, and a yet-to-be-named company (temporarily dubbed NewCo), which will consist of the Gap brand, Athleta, Banana Republic, Intermix and Hill City.

Gap Inc. believes that this spin-off will enable each company to maximize focus and flexibility, align investments and incentives to meet its unique business needs and optimize its cost structure to deliver profitable growth.

“Following a comprehensive review by the Gap Inc. Board of Directors, it’s clear that Old Navy’s business model and customers have increasingly diverged from our specialty brands over time, and each company now requires a different strategy to thrive moving forward,” said Robert Fisher, Gap Inc.’s Board Chairman. “Recognizing that, we determined that pursuing a separation is the most compelling path forward for our brands – creating two separate companies with distinct financial profiles, tailored operating priorities and unique capital allocation strategies, both well positioned to achieve their strategic goals and create significant value for our customers, employees and shareholders.”

“We have made significant progress executing on our balanced growth strategy and investing in the capabilities to position our brands for growth: expanding the omni-channel customer experience, building our digital capabilities and improving operational efficiencies across the company,” added Art Peck, president and CEO of Gap Inc. “Today’s spin-off announcement enables us to embed those capabilities within two stand-alone companies, each with a sharpened strategic focus and tailored operating structure. As a result, both companies will be well positioned to capitalize on their respective opportunities and act decisively in an evolving retail environment.”

NewCo, with approximately $9 billion in annual revenue and a strong balance sheet, will have a unique and differentiated portfolio, with significant opportunity to create value. With enhanced strategic and operational focus, it can deliver improved results at Gap, Banana Republic, and Intermix, while capitalizing on the momentum of B-Corp certified Athleta and newly-launched Hill City. The program announced today to restructure the Gap brand specialty fleet is an important part of the plan to enhance the profitability of that channel. As a stand-alone company, NewCo also will be better positioned to continue to evolve its leadership role in sustainability and social responsibility.

As one of the fastest growing apparel brands in the U.S. with approximately $8 billion in annual revenue, Old Navy will be able to capitalize on its scale, broad customer awareness and unique positioning to extend its category leadership and deliver profitable growth as an independent company. Through this separation, Old Navy will have the flexibility, focus, and control needed to increase customer access by further applying its strategic real estate strategy, evolving its omni-channel model and expanding its product categories to continue to successfully resonate with value-focused customers.

Gap Inc.’s current president and chief executive officer, Art Peck, will hold the same position with NewCo after the separation. With more than a decade of retail leadership experience, Peck is well positioned to lead NewCo going forward. Over the last several years, he has led significant improvements at Gap Inc. and reinvigorated growth across several specialty brands by strengthening the supply chain and pivoting quickly to leverage technology and capitalize on new customer trends.

Following the separation, Sonia Syngal, current president and chief executive officer of Old Navy, will continue to lead the brand as a standalone company. Syngal — who has led Old Navy since 2016 — has a proven track record of leading Old Navy’s transformation and driving product-to-market innovations, as well as deep experience in supply chain and manufacturing in both retail apparel and other industries.

NewCo will be based in Gap Inc.’s current headquarters and Old Navy will remain at its current headquarters, both located in San Francisco.

The company also announced on Thursday that it plans to restructure its specialty fleet, including the closure of about 230 Gap stores over the next two years. Gap estimates an annualized sales loss of approximately $625 million as a result of these store closures.

The retailer hopes that the remaining specialty fleet will serve as a more appropriate foundation for future growth of the brand across the specialty, outlet and online channels. There will be a healthier channel mix after the restructuring, with nearly 40 percent of sales coming from online, and the remainder split fairly evenly between the specialty and value channels.

While stores are an important part of the customer journey, the company is actively working on multiple initiatives to revitalize the Gap brand by re-engaging with customers and expanding its loyal customer base, leveraging the multigenerational, democratic appeal of the brand. Improving the product by recapturing the traditional Gap attributes of style, quality, fit and value is a top priority. The company intends to modernize its marketing model to efficiently build engagement and loyalty.