Gap Inc (GPS.N) on Thursday scrapped its plan to spin-off Old Navy and said it would instead work to stem dropping sales, while fewer discounts during the holiday season helped full-year earnings, sending its shares up about 4%.
The move came as a surprise as just two months ago the company had stuck to its plan to separate despite several analysts calling for the strategy to be canned due to weak sales and the abrupt exit of Chief Executive Officer Art Peck.
Peck unveiled the plan in February last year when Old Navy was a bright spot for the company, which was struggling with out-of-fashion apparel at its Gap brand.
However, sales for Old Navy have slowed in recent quarters, raising doubts about the brand’s value as a separate entity.
“Old Navy’s business has not been good. With the CEO out of the way, this is the right move,” said Jane Hali, at research firm Jane Hali & Associates.
“Instead of thinking of spinning off companies, they should get back to the basics of giving customers what they’re asking for.”
The company on Thursday also said that Mark Breitbard, head of Banana Republic, will lead the Gap brand on interim basis after the departure of Chief Executive Officer Neil Fiske.
“The work we’ve done to prepare for the spin shone a bright light on operational inefficiencies and areas for improvement,” Gap interim CEO Robert Fisher said.
The company is searching for a permanent CEO, whose primary task, according to Craig Johnson, president at retail consultancy Customer Growth Partners, will be to fix the big three brands – Gap, Old Navy and Banana Republic.
“Launching an independent Navy when none of the big brands is ready for prime time would be a bridge too far,” he said.
Gap said same-store sales for 2019 would be at the higher end of its prior outlook, but would still drop from a year earlier as brick and mortar retailers lose holiday shoppers to online competition.
It forecast adjusted 2019 earnings to be moderately above its prior outlook of $1.70 to $1.75 per share.
Gap shares were up at $19.44 in extended trading.