By Uday Sampath Kumar
(Reuters) - Gap Inc (NYSE:GPS) will separate its better-performing Old Navy brand and shutter about 230 stores of its struggling namesake apparel business, in one of its biggest restructuring efforts to energize sales, sending shares surging 25 percent on Thursday.
The company has struggled with contrasting performances of its brands. Old Navy has been a bright spot as its wide range of budget apparel made it more attractive to a broader base of customers, while its specialty Gap brand struggled in the face of competition from fast-fashion retailers and changing trends.
"It's clear that Old Navy's business model and customers have increasingly diverged from our specialty brands over time," Gap's Chairman Robert Fisher said in a statement.
The 230 Gap specialty stores the company planned to close over the next two years, along with the 68 already shut, represents nearly half of its stores, the company said.
The company also said it would boost spending on marketing and developing new products for the Gap brand, but Chief Executive Officer Art Peck stopped short of saying that the brand was in a turnaround.
"I've called the turn before. And I've eaten my words. I'm not calling a turn again. What I'm looking forward is period-over-period improvement, and I'm quite confident and comfortable with what I'm seeing."
Gap, Athleta, Banana Republic and the remaining brands will be part of a yet-to-be-named company. The separation of Old Navy into a publicly listed company, which Gap said will be tax free to investors, is likely to be completed by 2020.
Peck will hold the same position in the new company, while Old Navy CEO Sonia Syngal will stay on as head of the standalone firm.
Old Navy has annual sales of about $8 billion, while the other brands have a combined revenue of $9 billion.
"Although the proposed spin at Old Navy will enable a sharpened strategic focus on its business priorities, it reduces the diversification the brand provides to the overall entity," said Moody's analyst Christina Boni.
The company's shares were up 24.8 percent at $31.70 in extended trading.
POOR HOLIDAY PERFORMANCE
Separately, Gap reported a surprise drop in overall same-store sales for the holiday quarter, down 1 percent compared with analysts' average estimate of a 0.3 percent rise, according to IBES data from Refinitiv.
Ironically, lack of same-store sales growth at Old Navy hurt fourth-quarter overall sales. The company blamed an absence of new products and macro-economic issues for a drop in traffic to the Old Navy stores during the crucial December shopping season.
Gap also warned that it expects the first half of 2019 to be more challenging than last year, due to a cold start to the year that weighed on all its businesses, particularly Old Navy.