After scrapping Old Navy spin-off, Gap (GPS) badly needs a workable strategy

The last decade was a difficult period for clothing chain Gap, Inc. (NYSE: GPS), when the retail sector witnessed a paradigm shift in people’s shopping behavior and the way companies do business. The company’s stock closed the last trading session at the lowest level in more than twenty years, after being battered by the widespread selloff spurred by the Covid-19 epidemic.

More than a year after announcing the plan to spin off its best-performing brand Old Navy, the company recently surprised everyone by backtracking on the idea, citing high costs and the complexity involved in the process. Yet, the company remains committed to creating value for shareholders through various initiatives, which was the main objective of the now-scrapped spin-off.

Mixed Sentiment

However, there is skepticism over the transformation plan, considering Gap’s lackluster quarterly performance in 2019, mainly due to faltering sales amid stiff competition. The bearish outlook on future performance is indicative of the underlying weakness.

That makes Gap a risky investment, with the stock not showing any sign of returning to the growth path. Analysts are cautious in their recommendations, and the majority has given the stock hold rating while predicting a decent recovery in the long term.

New CEO

Currently, all eyes are on Sonia Syngal who will be taking up the role of chief executive officer later this month, after successfully leading the Old Navy brand for several years. Syngal’s appointment assumes significance considering the circumstances that led to the unceremonious exit of former CEO Art Perk last year, following the company’s dismal third-quarter performance.

Q4 Relief

Shareholders were relieved when the company last week reported better-than-expected revenues and earnings – excluding special items – for the fourth quarter. Comparable store sales dropped modestly, but beat the estimates. The management attributed the positive outcome to solid performance by the Old Navy brand.

Store Closure

However, the shrinking store presence casts doubts over the sustainability of Gap’s business model, considering the company’s mediocre e-commerce platform. Continuing the process that started several months ago, the management recently announced more store closures.

After staying flat in the early weeks of the year, Gap’s stock pulled back mid-February and slipped to a multi-year low. It has been on a losing spree for more than two years, and dropped about 60% in the past twelve months.