As an independent company, Old Navy said it’s planning to aggressively expand to about 2,000 locations, with a focus on smaller markets.

(Bloomberg)—Gap Inc., No. 28 in the Internet Retailer 2019 Top 1000, said it’s moving forward with a planned spinoff of its Old Navy chain after the firing of CEO Art Peck caused investors to take a critical look at the proposed deal.

“The board continues to believe in the strategic rationale for the planned separation, and the preparation for separation continues as planned,” Gap said Friday in an emailed statement. The company said any “additional perspective” would be provided in its Nov. 21 earnings call.

The spinoff is a move the company, and Peck in particular, had pitched as a way to unlock value for investors. But now that Old Navy, which was once the undisputed shining star of the clothing giant, is declining along with the rest of the firm, it has caused analysts to question whether it’s still worthwhile. The board is scheduled to meet next week.

“You gotta think this is going to be a hard sell” to investors, said David Swartz, an analyst for Morningstar Investment Service. “Maybe Old Navy has peaked? If it was clearly doing better than Gap and Banana, that makes a lot more sense.”

When Gap announced the Old Navy spinoff in February, the stock surged with some analysts saying it was long overdue. But nine months later, Old Navy is struggling on multiple fronts. The chain admitted to flubbing women’s fashion this year and competition from discounters, like Target and T.J. Maxx, is only increasing. Add the cost of the separation, which could hit $1 billion, and it makes sense for it to be called off, according to Swartz.

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The company initially caused investors to question whether a separation would still happen. In its press release announcing Peck’s termination, the company only mentioned the costs of a “planned” spinoff in its earning guidance. It said its focus will be looking for strong candidates to fill the CEO seat and shoring up all its brands, which include the Gap and Banana Republic banners.

Robert Fisher, the company’s current non-executive chairman and son of Gap co-founders Don and Doris, will step in as president and CEO on an interim basis. There are two other members of the Fisher family, who collectively are the largest shareholders with 43% of the voting power, on the board. The Fishers signed off on spinning out Old Navy before as a way for investors to realize the true value of a brand that has been dragged down by the struggles of Gap’s other struggling properties.

Planned expansion

As an independent company, Old Navy said it’s planning to aggressively expand to about 2,000 locations, with a focus on smaller markets, according to a presentation in September.

Many U.S. apparel-focused retailers continue to struggle with purchases migrating online and consumers turning to used goods. Plus, Old Navy is already a very mature business with about $8 billion in sales and more than 1,000 stores in the U.S., where it does the overwhelming majority of its business. Several years ago, management envisioned pushing the brand overseas, but those efforts flopped, including exiting Japan. Old Navy does see potential in China, however.

“That’s not an exciting story, to say the least,” Swartz said. “They can say it’s cheap, and they may believe that, but no one is saying ‘I wish Old Navy was a separate company so I could put my whole fund into it.’”

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