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The move – announced as part of its fourth-quarter earnings on Thursday – will better position the San Francisco-based company to “leverage the power of our brands,” CEO Art Peck said.
Peck will serve as CEO of the new Gap entity, while current Old Navy CEO Sonia Syngal will lead the spun-off firm. The stock surged was poised to open over 20 percent higher on Wall Street on Thursday.
Gap will also close 230 stores across the country over the next two years, a decision expected to cost roughly $625 million, as well as some Banana Republic stores. Among the brick-and-mortar locations that will be shuttered are some of its flagship properties, company executives said.
“The remaining specialty fleet will serve as a more appropriate foundation for future growth of the brand across the specialty, outlet and online channels,” Gap wrote in its earnings report.
Peck told investors the closures reflect a "pretty radical remix" to how consumers purchase products from the company.
"The remixing of the channel exposure is something that every retailer that has been dominent in the higher end of the specialty apparel segment is going to need to do," he said on the firm's earnings call.
But while Gap touted the store closures as a way to increase productivity and ultimately improve earnings, some industry experts were skeptical.
"It is hard to ignore that the last decade has seen a string of déjà vu’ing hoped-for savings from store closures across retail that simply failed to lift [profits]," Instinet analyst Simeon Siegel wrote in a note.
Gap plans to spend $750 million in 2019 on capital expeditures -- including $100 million to build out its Ohio supply center and headquarters -- and sell the main Old Navy office.
Gap reported profits of 72 cents per share in the fourth quarter, higher than analysts expected. Same-store sales decreased 1 percent, while overall sales fell 7 percent to $4.6 billion -- slightly less than Wall Street predicted.
The company expects adjusted profits in 2019 to hit as high as $2.55 per share, but sales to come in flat year-over-year.