Gap shareholders will receive a pro-rata stock distribution and will own shares in both NewCo and Old Navy in equal proportion. The transaction is targeted to be completed in 2020.
The rationale for the spin-off is that it will enable each company to have better focus and flexibility. Old Navy's business model and customers have increasingly diverged from Gap's specialty brands over time, and each company now requires a different strategy moving forward. Old Navy has approximately $8 bln in annual revenue while NewCo has annual revs around $9 bln.
Old Navy has been Gap's best performer. Just look at the 2018 comps: Old Navy Global +3% despite lapping a tough +6% comp in 2017. Compare that to Gap Global: -5% vs a -1% comp in 2017. Banana Republic Global has done a bit better than Gap: +1% comps after lapping -2% comps in 2017. Old Navy is among the better performing apparel retailers out there.
One thing Old Navy has done that we like is that it has gone all-in on its Plus collection. The women's plus size market is north of $20 bln. It has been offered online for years, and now Old Navy has brought the collection to its stores. While The Gap is seen as staid and boring, Old Navy does a better job at being on-trend and cheaper.
Gap has been focusing on stabilization in recent years and seems to always be in turnaround mode over the past decade as it has struggled to get its assortment right. Athleta is doing well and Banana Republic has been respectable, so this NewCo will have some growth, but we would have liked to see Gap on its own and let these other brands trade free of Gap.
Based on the stock reaction, investors are clearly happy that Gap is taking this step. Now, Old Navy can garner a higher multiple and not be weighed down by the Gap brand. Having its own stock also allows Old Navy to raise capital easier and attract talent. The other good news, while somewhat minor, is that Gap will likely not be the name of the new company. We always felt like the other brands got overshadowed by the struggling nameplate Gap brand.