The Gap-Old Navy Breakup
Economies of scale provide a significant advantage in the retail industry. This is the reason why all retail companies try to become bigger. However, to the surprise of many American retail giant GAP Inc has decided to reduce its size. GAP is home to many famous brands like GAP, Banana Republic, Old Navy, Athleta, Intermix, and Hill City. As per the details released to the public, the Old Navy brand will be spun off into a separate company. A new name has not been decided for this company as of now. It will be called Newco till a new name is decided. On the other hand, all the other brands continue to remain with GAP. The size of both new companies will be more or less similar. This means that GAP has simply broken the company into two parts.
There are many analysts who believe that it may be a good idea to do so. However, there are many others who do not believe this is the case. In this article, we will have a closer look at the GAP- Old Navy breakup and try to figure out whether this break up makes any economic sense.
Why did GAP and Old Navy Break Up?
GAP has been struggling as a company. The results have been ordinary, and investors are starting to lose confidence. The Old Navy brand stands out as a clear performer in the GAP universe. This is because the market has moved towards low-cost discount retailers. As a result, brands like Old Navy are prospering. On the other hand, more expensive brands like the Banana Republic and GAP are seeing their sales decline.
Hence, GAPs overall sales and profits are seeing a negative trend. On the other hand, Old Navys sales and profits have been seeing a positive trend. Up until now, Old Navy was just making up for all the losses that GAP is making. However, in the future, this is likely to change. Since Old Navy has now split up into a separate brand, all the excess cash flow and profits that it generates will be plowed back to fund its own growth.
It needs to be understood that Old Navy has been a remarkable growth story until now. The brand was initially created as a cheaper version of GAP during the 1990s. Ever since then, the brand has been growing each year aggressively. The brand now generates a massive $8 billion in sales worldwide! Investors are likely to queue up to invest their money in Old Navy since they believe that it is a winning business model.
How the Breakup will Help?
Firstly, the GAP- Old Navy breakup will help the company prioritize its resources. For instance, since Old Navy is a discount brand, its in store sales are greater than its online sales. This is the reason why Old Navy is the only brand within the GAP umbrella, which plans to increase its store base. GAP, Banana Republic and all the other brands actually plane to reduce their store base drastically. This is because the majority of their sales are taking place online.
The strategy needs of the Old Navy brand are very different from the rest of the company. This brand needs to follow the strategy of aggressive growth. In order to achieve this growth, it needs more capital. However, the cost of capital is very high, given that laggards like GAP are also part of the same brand portfolio. By spinning off Old Navy into a separate brand, GAP has made it possible for them to achieve more funding at a better cost.
On the other hand, the strategy of other brands like GAP and the Banana Republic is likely to be more defensive. They are more likely to cut down costs and eliminate overheads to deliver bottom-line growth to investors even if the top line doesnt change much. Rationalizing costs is the need of the hour for all other brands in the GAP portfolio except Old Navy.
Issues with the GAP-Old Navy Breakup
The GAP-Old Navy breakup is likely to post many issues as well. Firstly, up until now, both these brands have been jointly rewarding loyalty. Now, since these brands will split up into different companies, it will be difficult to divide the loyalty points so that the consumers can redeem them.
Also, both the companies had significant economies of scale when it came to making purchases. It will be interesting to see whether the suppliers renegotiate their purchase agreements with the company. If they do not, maybe both these companies can stick together as sister concerns while making purchases. This is because all GAP brands are trying to reduce their costs. A cost overrun is one of the last things they need, given the fact that the very survival of the brand is in question.
The reality is that even though GAP is a legendary brand, it will still face several issues in the future. If the company is not able to get its act together and reinvent itself, it could be the beginning of the end for GAP Inc. It will be interesting to see how the future plays out for this company.
|❮❮ Previous||Next ❯❯|
Authorship/Referencing - About the Author(s)
The article is Written By Prachi Juneja and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.
- Corporate Finance - Introduction
- Nominal and Real Value of Money
- Fundamental Rules of Corporate Finance
- Present and Future Value of Money
- Net Present Value Calculations
- Compounding Intervals and Interest Rate
- What Are Negative Interest Rates ?
- The Consequences of Negative Interest Rates
- Opportunity Cost of Capital
- Valuing Cash Flows in Different Periods
- What is Perpetuity ?
- Growing Perpetuity
- What is Annuity ?
- Ordinary Annuity vs. Annuity Due
- Types of Annuity Calculations
- What is Bond Valuation ?
- Bond Market Conventions
- How Interest Rates Affect Bonds ?
- Stock Valuation Models
- Discounted Cash Flow Approach
- Assumptions During Stock Valuation
- What is Cost of Equity ?
- What is Payback Period ?
- What is Internal Rate of Return (IRR) ?
- Problems With Using IRR
- Capital Rationing & Profitability Index
- Types of Capital Rationing
- Capital Controls: Meaning, Types, Benefits and Downside
- Estimating Project Cash Flows: Part 1
- Estimating Project Cash Flows: Part 2
- Estimating Project Cash Flows: Part 3
- Capital Budgeting and Inflation
- Capital Budgeting and Depreciation
- Equivalent Annual Costs
- Investing and Financing Decisions
- Getting Creative with Capital Budgeting
- The Fallacy of Creative Destruction
- Companys Risk vs. Project Risk
- How Governments around the World are Bankrupting Future Generations for Present Consumption
- Role of Credit Rating Agencies in Determining Attractiveness of Companies and Countries
- Federal Reserve Announcement to Taper Quantitative Easing
- How Do Funds Transfer Systems Work
- The Importance of KYC (Know Your Customer) Norms and Procedures in Banking
- Difference between Corporate, Retail, Investment Banking, and Private Banking
- Impact of Geography on Banking and its Functions
- Functions of a Central Bank in Modern Economies
- Lease Rental Discounting
- Lending Against Intangible Assets
- Real Reasons behind FDI in Retail in India
- Microfinance: A Cure for Poverty
- Microfinance: Indebting the Poorest in the World
- Behind the Scenes of an Initial Public Offer (IPO)
- Pros and Cons of Going Public
- Snapchat IPO: Is this the New Tech Bubble ?
- Benefits of Delaying Profitability
- Why Do Corporations Get Away With Tax Avoidance ?
- After Effects of the Nirav Modi Scam
- The Panaya Acquisition
- The Flipkart and Wal-Mart Alliance
- The Worlds Largest IPO
- Initial Coin Offerings: A Primer
- The Aftermath of the Qualcomm Deal
- What are Demergers: Its Pros and Cons
- Benefits of a Holding Company
- The Economics of Lawsuits
- Protectionist Sentiment over Flipkart Takeover
- The Impact of Tariffs on the Energy Sector
- Venture Debt A Primer
- Interest Rates and Automobile Sales
- How Should Companies Communicate With Wall Street?
- How an Interest Rate Hike Will Affect the Government of USA
- Is Tesla Close to Bankruptcy?
- Myths Surrounding Toys R Us Bankruptcy
- The Economics of 'Soda Taxes'
- Why Elon Musk's Tesla Should Go Private and Why It Won't?
- Why the Xiaomi IPO Failed?
- How A Whatsapp Message Nearly Took Down A Company
- The Case for Index Funds
- The Sears Bankruptcy
- The Socialization of Losses
- The Sudden Downfall of IL&FS
- Why Healthy Corporate-Regulator Tussle is Good for Free Market Capitalist Economies
- What Happens When Businesses Go Bankrupt? Insolvency, Aftermath, and Recovery
- Alibabas Singles Day
- Ubers New Businesses
- Goldman Sachs and the 1MDB Scandal
- The Amazon Divorce
- Are Index Funds Not A Good Investment In India?
- Can Brick And Mortar Stores Compete With Amazon?
- Why is the Fed Still Raising Interest Rates?
- Problems Related to Facebook, WhatsApp, and Instagram Mega Merger
- The Whatsapp-Facebook-Instagram Merger
- What Is The DHFL Scam?
- Financial Troubles In the Fracking Industry
- Flipkart Circumvents Indias FDI Norms
- Subprime Automobile Loans in America
- The Jaguar Land Rover Debacle
- The Kraft - Heinz Fallout
- Why Uber Should Be Regulated?
- Is Regulation of the Tech Sector Long Overdue with the Tech Giants being Too Big
- The Fall of An Ambani Scion
- Litigation Funding: A Primer
- The Finance behind the Plastic Problem
- The MasterCard Visa Duopoly
- Is the Lyft IPO Overpriced?
- The Alliance between Car Companies and Ride Hailing Apps
- The Amazon Divorce Deal
- The Lawsuit Between Spotify and Apple Corporation
- The Story Behind the L&T- Mindtree Takeover Bid
- Do IPOs Affect Competitive Firms?
- Can Cost Cutting Turn Out To Be Expensive?
- The Economic Impact of Facebook Outage
- The Apple-Qualcomm Legal Battle
- Cross Border Credit Reporting
- The Sudden Deluge of Unicorn IPOs
- The Wow Airline Debacle
- The WeWork Business Model
- Problem with Private Securities Offerings
- The Amazon FedEx Breakup
- The Decline of the Big Corporation
- The Gap-Old Navy Breakup
- Apples Acquisition of Intels Modem Business
- Mergers and Acquisitions: A New Perspective
- The CBS-Viacom Merger
- Why are Sprint Wireless and T-Mobile Funding their own Competition?
- Why are Corporations Hoarding Trillions in Cash?