A year ago, when Gap announced plans to spin off Old Navy, the brand had reported nearly two straight years of revenue growth. Old Navy had brought in $8 billion in revenue in 2018, while the rest of Gap’s portfolio — which includes Gap, Banana Republic, Athleta, Intermix, Hill City and Janie and Jack — brought in $9 billion in sales total over the same time period. The idea was the spin off would give Old Navy room to grow.
Then things changed. In the three quarters since Gap announced plans for a spin off, Old Navy has reported comparable sales declines ranging from 1% to 5% year-over-year, blaming product misses in its women’s apparel assortment and a failure to invest enough in other well-performing product categories like denim.
So, it hardly came as a surprise when Gap last week that it would no longer be spinning off Old Navy. Interim Gap Inc. CEO Robert Fisher said in a statement that preparing for the spin off highlighted more operational areas that need improving.
Analysts say that historically, Old Navy’s done well at jumping quickly on fashion trends, building a clothing assortment that offers a lot of variety in color and style, and pricing it well enough to not have to rely on a ton of promotions in order to get rid of all its inventory at the end of the season. But in recent months, Old Navy has had to rely more on promotions to clear inventory, and Gap executives have said in earnings calls that they missed on some key fashion trends in their women’s assortment.
Executives have said in earnings calls that they feel confident that they’ve righted the ship at Old Navy, citing the fact that it had better-than-anticipated promotional levels at Old Navy over the holidays. But it can take months to fix product misfires at a retailer — something that Old Navy might not have been able to fix in time for the spin off.
“They were the star of Gap,” said Gabriella Santaniello, founder of retail consulting firm A Line Partners. “There was no way [Gap Inc.] can say they are going to spin off Old Navy, and have a year of underperformance.”
Under the leadership of current CEO Sonia Syngal, Old Navy has prioritized revamping its merchandising and supply chain operations to ensure that it is able to turn around new product quickly. Fortune reported that at Old Navy, Syngal began the practice of “buying huge amounts of fabric ahead of time and only later deciding what to make with it, the better to jump on an unexpected trend.”
That means Old Navy customers have come to expect that they can find a lot of variety in stores. But over the summer and fall, that changed, analysts sale. Santaniello said she felt that over the fall, Old Navy carried too many varieties of skinny jeans and not enough wide legged denim, and didn’t have a wide enough variety of colors in their women’s assortment.
“Typically when Old Navy is going to go into a style, they carry a style in one silhouette and multiple colors and they have a really large offering for the customer,” Santaniello said.
Gap Inc. executive vice president and chief financial officer Teri-List Stoll acknowledged this on the company’s third quarter earnings call, saying that with Old Navy, “some of the silhouettes and the prints and patterns…we just kind of missed.” One of Old Navy’s core group of customers is moms, so List-Stoll said a miss in its women’s assortment also made it harder to get those customers to buy more in men’s, kid’s and babies.
As a result, Stoll said that Old Navy “became too heavily dependent on messaging around discounting,” during the third quarter, and tried to course correct with more brand marketing around the holidays, including a tie-in with a Netflix movie. Over the fall and holidays, List-Stoll said that the company would invest more in denim, fleece and activewear. And in July, Gap announced that Athleta president Nancy Green would move over to Old Navy to serve as its chief creative officer.
The sales slump at Old Navy also made it harder for Gap Inc. to justify some of the costlier investments that needed to be made in order to completely spin off Old Navy. All of Gap Inc.’s brands sell through the same e-commerce platform, and customers can place a single order including products from multiple brands. So Old Navy would have had to build its own e-commerce platform in the lead up to the spin off.
Jessica Ramirez, a retail research analyst at Jane Hali and Associates, said that one big challenge Old Navy will face as it corrects is product assortment, is increased competition from other value and off-priced apparel retailers, in particular from Target. The big-box chain has added more private label categories over the past year in both women’s and kid’s apparel, most recently with the launch of activewear brand All in Motion.
“The Target private label brand has very on trend pieces, and the price is right,” said Ramirez. “Old Navy is a fun brand, and I hope they can continue to milk that.”