Gap commits to Old Navy split; CEO exit won’t impact holiday shopping season

(Reuters) – Gap Inc (GPS.N) said on Friday it was sticking with plans to spin off its Old Navy brand into a separate company, as Wall Street analysts questioned its commitment to the project following the surprise exit of Chief Executive Officer Art Peck.

Gap shares fell 5.5% on Friday after Thursday’s shock announcement, which came along with another weak batch of forecasts for quarterly sales and full-year earnings.

The abrupt change in leadership comes just before the year’s main holiday shopping season, with merchandise already ordered and stores stocking up ahead of the unofficial kickoff over the late November U.S. Thanksgiving weekend. But analysts said the change in leadership would not impact the company either way.

Peck, who held the top job since 2015, planned to split the better-performing Old Navy brand from Gap and Banana Republic, and Gap in an email to Reuters said, “The board continues to believe in the strategic rationale for the planned separation, and the preparation for separation continues as planned.”

It added that there would be a regularly scheduled meeting of its board next week and that any additional details on the company’s attitude to the spin off would be provided in an earnings call on November 21.

Several Wall Street brokerages said the deal should be canned.

“It makes little sense to spin Old Navy until, at least, its sales have stabilized,” David Swartz, an analyst with brokerage Morningstar, said in a note to clients, adding that Old Navy represented most of Gap’s enterprise value as a company.

Robert Fisher, the son of Gap’s founders, has taken over as interim chief executive officer of the retailer. Fisher, who also serves as the company’s chairman, is Gap’s largest shareholder with a 12.5% stake, according to Refinitiv data.

For an interactive graphic, click here: tmsnrt.rs/32t4cN3

The Gap brand, once a trend setter with its casual logo emblazoned hoodies and Khaki cargos, has struggled to keep pace with fast-fashion rivals such as Inditex’s (ITX.MC) Zara and H&M (HMb.ST) and has experienced several years of falling sales.

While the retailer has invested heavily in some of its most iconic categories like denim, its product assortments are still viewed by many as lacking newness and Gap needs to market more effectively to younger consumers as competition stiffens, analysts said.

Peck’s successor will not be able to make needed change in time to holiday sales this season, several industry experts said.

FILE PHOTO: Art Peck, CEO of Gap, speaks during the Clinton Global Initiative’s annual meeting in New York, September 28, 2015. REUTERS/Brendan McDermid

“It’s already too late, all the plans are set, everything’s etched in stone, nothing’s changing,” said Jerry Storch, chief executive officer of consultancy Storch Advisors.

“If you brought in the most spectacular person imaginable and they had all the answers, they still couldn’t change anything until probably as late as next fall.”

Reporting by Nivedita Balu in Bengaluru and Melissa Fares in New York; editing by Patrick Graham, Bernard Orr and Diane Craft

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