Gap Inc will separate its better-performing Old Navy brand and shutter about 230 stores under its struggling namesake apparel business, in one of its biggest restructuring efforts to energise sales. The announcement sent Gap's shares surging 25 per cent on Thursday.
The company has struggled with its brands' contrasting performances. Old Navy has been a bright spot, with a wide range of budget apparel which made it more attractive to a broader base of customers.
Meanwhile, the speciality Gap brand floundered 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.
The 230 Gap speciality stores which the company had planned to close over the next two years, along with the 68 already shut, represents nearly half of its stores, it said.
It added that it would boost spending on marketing and developing new products for the Gap brand, but chief executive 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 new company that has yet to be named.
The separation of Old Navy into a publicly listed business, which Gap said will be tax-free for investors, is likely to be completed by 2020.
Mr Peck will hold the same position in the new company, while Old Navy chief executive Sonia Syngal will stay on as head of the standalone firm.
Old Navy has annual sales of about US$8 billion (S$10.8 billion), while the other brands have a combined revenue of US$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 per cent at US$31.70 in extended trading.
Gap reported a surprise drop in overall same-store sales for the holiday quarter, down 1 per cent compared with analysts' average estimate of a 0.3 per cent 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 store traffic during the crucial December shopping season.
Gap expects the first half of the year to be more challenging than last year, due to a cold start that weighed on all its businesses, particularly Old Navy.