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Gap Stock Surges as Investors Welcome Old Navy Spin-Off

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Stock surges on spin-off news

Gap (GPS) stock was up 18% as of 1:10 PM ET today on the company’s decision to split into two separate entities. Old Navy is to become a standalone company while the other company will comprise the namesake Gap brand alongside the Athleta, Banana Republic, Intermix, and Hill City brands. The transaction is expected to complete in 2020.

Gap made this announcement after the financial markets closed yesterday. The decision appealed to investors and analysts as Old Navy’s better performance was offset by weakness in the Gap and Banana Republic brands. The lower-priced Old Navy brand has struck the right chord with customers looking for value.

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Several analysts raised their price targets for Gap stock following the announcement. RBC increased its price target to $31 from $30. Cowen and Company raised its price estimate to $32 from $29, and Telsey Advisory Group to $40 from $34. J.P. Morgan upped its price target to $28 from $22 while Instinet increased its price target to $32 from $29.

As part of its restructuring plans, Gap intends to revitalize its namesake brand and close 230 specialty stores over the next two years. It closed 68 specialty stores in fiscal 2018. The company is to continue enhancing its digital channels.

Fourth-quarter and fiscal 2018 performance

Gap reported its results for fiscal 2018’s fourth quarter—which ended on February 2, 2019—on February 28. Gap’s fiscal fourth-quarter net sales declined 3.2% to $4.62 billion and missed analysts’ expectation of $4.69 billion. Same-store sales declined 1% due to a 5% fall in same-store sales for the Gap brand and a 1% fall in the same-store sales of the Banana Republic brand. Same-store sales at Old Navy were flat in the quarter due to weak traffic. Gap’s fourth-quarter adjusted EPS grew 18% to $0.72, exceeding analysts’ estimate of $0.68.

Gap’s sales grew 4.6% to $16.6 billion in fiscal 2018 while adjusted EPS rose 21.6% to $2.59. Same-store sales were flat in fiscal 2018 as a 3% rise in Old Navy and 1% growth in Banana Republic were offset by a 5% fall in the Gap brand.

Gap expects its fiscal 2019 EPS in the $2.11–$2.26 range on a reported basis and in the $2.40–$2.55 range on an adjusted basis. The company anticipates fiscal 2019 same-store sales to be flat or up marginally.

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