Supply chain stakes — and questions — increase as Gap, Old Navy split
- Gap Inc. is spinning out Old Navy as a separate, publicly traded entity, in recognition that the Old Navy business has grown so different from the company's other brands — Gap brand, Athleta, Banana Republic, Intermix and Hill City — it was time to stand it on its own. The new Gap Inc. without Old Navy will be rebranded as NewCo until a new name is announced.
- Executives on Gap Inc.'s fourth-quarter earnings call said that the brands' sourcing has become nearly as different as their target customer, contributing to the rationale for a split. But questions around fulfillment and network integration or disintegration remain.
- "There has been an accelerating divergence between the businesses with the path for Old Navy and the path for the other businesses. And that's also true on the back end with our vendors where there is more alignment with Old Navy and less overlap with the other brands. The other brands overlap each other, but overlap Old Navy less," said CEO Art Peck.
"A lot of questions we can't answer right now," Peck said on the call. "We are quite confident that we have done the work to get us to this point in forming the fact that we believe this is a very significant and important step and it does unlock significant value creation potential."
It's a rare thing that any company would sign up for less buying power in the marketplace, but as some analysts on the call questioned, that's just what Gap and Old Navy are doing.
When they split, Old Navy and Newco will be close in revenue — Old Navy at roughly $8 billion and NewCo at roughly $9 billion. And though that may indicate that each group will be cutting its buying power in half, executives downplayed the overlap in suppliers between the two new entities.
"The benefit of scale and size is a real benefit ... these are still going to be, frankly, substantially larger than the average apparel company or companies," Peck said.
Indeed, both will likely stay in the top ten U.S. apparel companies ranked by revenue. "And so we feel a number of places are far enough down the scale curve that we can actually hold onto that and continue to move forward," Peck said. "We have done some work on looking at what the potential dis-synergies would be."
Beyond procurement, the companies may have more to unravel on the fulfillment side, since all of the Gap brands have operated online with a single cart and somewhat integrated fulfillment for years.
In terms of omnichannel strategy, the path forward for Old Navy may be clearer since the growth trajectory of that brand has been more direct. Peck mentioned Old Navy CEO Sonia Syngal will be opening new stores this year. Syngal is remaining in her position after coming into the CEO role after two and a half years at EVP if global supply chain for Gap.
On the NewCo side where stores are closing (230 expected this year) and inventory will need to be tightly managed, there were several mentions on the earnings call of maximizing efficiency through technology and digitizing the supply chain.
"It has become increasingly clear that our balanced growth strategy, while successful in building necessary capabilities in areas like supply chain and digital capability that are important to a scaled operating platform, no longer effectively supports the diverging needs of Old Navy versus our traditional specialty brands," said CFO Teri List-Stoll. "Now is the right time for us to take the next step on our journey to both ensure the competitiveness of our brands and to deliver shareholder value."
As this news ripples through the retail space, there is one thing that Gap Inc. executives were 100% right about: right now there are a lot more questions than answers.
- Seeking Alpha The Gap, Inc. (GPS) CEO Art Peck on Q4 2018 Results
- Retail Dive Old Navy goes it alone in wake of Gap breakup
- Retail Dive Gap to spin off Old Navy into separate public company
Follow Emma Cosgrove on Twitter