The spin-off the Old Navy brand is expected to be complete in the first half of 2020

The spin-off the Old Navy brand is expected to be complete in the first half of 2020

US specialty apparel retailer Gap Inc has suggested separating its sourcing and tech/IT systems could be one of the largest sticking points in the planned spin-off of its Old Navy brand.

In a roundtable discussion with investors last week, Gap Inc's management provided an update on the February announcement it was spinning off the Old Navy brand and creating two, independently operated, public companies. 

At the time of the initial announcement, it said 230 Gap stores would close and the Gap, Athleta, Banana Republic, Intermix and Hill City labels would operate under a yet-to-be named business (Newco). It added the spin-off would allow each company to maximise focus and flexibility, align investments and incentives to meet its "unique business needs" and optimise its cost structure to deliver profitable growth.

At the roundtable update on 18 April, Gap Inc's management said it intends to move quickly in separating the two companies and is aiming for completion in the first half of 2020.

According to an analyst note from B Riley, Gap Inc believes the largest "dis-synergies" of the split are likely to be in tech/IT and sourcing.

"Gap Inc achieved high levels of integration in certain tech areas, such as the website, which allowed shopping across all of its brands," notes Susan Anderson, an analyst at B Riley. "We believe IT separation will be one of the largest sticking points as Gap Inc splits into two new entities that must be immediately operational following the split.

"Management highlighted sourcing as a potential cause of dis-synergies; however, due to the different category strengths of Old Navy and Newco, there isn't 100% overlap between new companies' sourcing. Management indicated that Old Navy has the largest overlap with Gap Outlet, which diminishes as one moves up the fashion/cost spectrum of Gap Inc's brands."

Additionally, Gap Inc has revealed it will be revamping Newco's business model. While the focus for the standalone Old Navy business is to optimise the productivity of that existing business, operations at Newco are to be "completely overhauled" in order to bring all of the brands on to a single operating model. 

"This means streamlining operations across the platform, including sourcing, real estate and tech, but also within the corporate structure. Currently, each of the brands operates with essentially their own corporate structure, which management expects to consolidate and realise significant corporate SG&A savings as a result," adds Anderson.