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Old Navy spin-off in doubt after Gap's Peck departs: analysts

Reuters | Fri, November 8, 2019 10:46 EST

(Reuters) - Shares of Gap Inc fell nearly 10% on Friday, as the surprise departure of Chief Executive Officer Art Peck and persistent declining sales, threw the apparel retailer's planned spin-off of its Old Navy brand into question.

Peck, who joined the company in 2005 and has held the top job since 2015, planned to split Old Navy into a separate public company as he strove to revitalize Gap with the addition of Athleta athleisure wear, provide more online offerings and close unprofitable stores.

Old Navy's spin-off was predicated on its out performance of Gap's other brands, but Peck's departure, after recent poor sales in a flooded market, had Wall Street wondering whether the split could be delayed or abandoned altogether.

"We think the Old Navy spin should be scrapped ... it makes little sense to spin Old Navy until, at least, its sales have stabilized," Morningstar analyst David Swartz said.

Swartz noted that Old Navy has carried Gap for years and likely represents most of its enterprise value.

"We see little future for a Gap without Old Navy ... it is difficult to see how Gap can attract a top-flight CEO to fix the company if it is going to be stripped of Old Navy, its best asset," Swartz said.

The Gap brand, once a trend setter with its casual logo emblazoned hoodies and Khaki cargos, has recently struggled to keep pace with fast-fashion rivals such as Zara and H&M.

On Thursday, the company estimated a 4% drop in third-quarter same-store sales, with declines across all its key brands including Old Navy.

J.P.Morgan analyst Matthew Boss wrote that Chief Financial Officer Teri List-Stoll, on a follow up, said it was a board decision for Peck to step down, adding the timing coincides with the 2020 planning process.

Gap shares have more than halved in value in Peck's four years in charge.

"We have to think this new development will make the original timeline of the planned Old Navy separation extremely difficult," Evercore SI analyst Westcott Rochett said, calling Peck's departure "definitely shocking."

(Reporting by Nivedita Balu in Bengaluru; editing by Patrick Graham, Bernard Orr)

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