Gap Cancels Plan to Spin Old Navy
We view the termination of the spin as favorable to shareholders and think shares of the no-moat firm are undervalued.
Citing complexity and cost, no-moat Gap (GPS) reversed course and announced that it was no longer planning to spin Old Navy. We had anticipated this decision for months, as Old Navy’s results deteriorated in 2019 and Art Peck, the architect of the spin, was fired as CEO in November. We had previously argued that the separation of Old Navy (which we believe generates about 80% of Gap’s operating income) from the rest of Gap provided little strategic sense and would destroy value through expected direct costs, capital expenditures, and gross dissynergies of as much as $1 billion. Thus, we view the termination of the spin as favorable to shareholders.
Gap also announced that its holiday sales were not as bad as expected (although still not good), leading the firm to raise its 2019 EPS guidance to “moderately above” its previous range of $1.70-$1.75. The firm now expects 2019 comparable and net sales to be “at the higher end” of its previous outlook of down mid-single digits and low-single digits, respectively. Gap provided few details apart from better-than-anticipated results at Old Navy. As we had forecast 2019 EPS of $1.71 and total company and comparable and sales declines of 4% and 2.6%, respectively, we now expect that Gap will modestly exceed our prior fourth-quarter EPS forecast of $0.36 when it reports earnings on Feb. 27.
The cancelation of the Old Navy spin does not change our view that Gap lacks a sustainable competitive advantage. However, we think the decision will allow Gap’s management to refocus on the stronger parts of its business, Old Navy and Athleta. We do not expect that the latest news, which caused shares to move up about 4% in post-market trading, will have any significant impact on our fair value estimate of $25.50 per share. We view shares as undervalued.
|Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.|
Morningstar.com does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.