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After a dreadful run of financial performance, time has run out for Gap (GPS) to execute a successful split of its retail empire, one top Wall Street analyst says.
"I think it's now too late to execute the split," Barclays retail analyst Adrienne Yih said on Yahoo Finance Live (video above). "Remember the split was going to be Old Navy."
To Yih's point, Old Navy is looking like a badly wounded asset heading into the key summer and back-to-school selling seasons — making any potential spin-off next to impossible.
The retailer updated its first quarter sales guidance late Thursday, estimating that growth would see low- to mid-teen percentage declines from its prior outlook of a mid- to high-single-digit drop. (Oddly, the company didn't update its full-year adjusted profit guidance of $1.85-$2.05 per share.)
The warning occurred amid a brutal quarter for Old Navy, a three-month period so bad that CEO and long-time company executive Nancy Green was sent packing this week. The company is actively searching for a new replacement to rejuvenate the chain that has long carried the financial weight for Gap's overall business.
As a result, Gap's stock crashed about 20% to $11.60 in afternoon trading on Friday.
Back in February 2019, the company said it would look to split up into two public companies. Old Navy was to be spun off into its own public company, putting it in competition for investor love with better run value clothing retailers such as TJX Companies and Ross Stores.
Meanwhile, the remaining businesses — Gap, Intermix, Athleta, and Banana Republic — were to be dubbed NewCo, which would live as its own separate entity.
The plans were scrapped by January 2020 in favor of a leadership overhaul designed to revitalize the company. In March 2020, Old Navy savior Sonia Syngal was installed as the CEO of Gap Inc, and the company moved to shutter hundreds of stores to lower costs. It also signed a pricey clothing line deal with music icon Kanye West.
Despite some early progress in the turnaround, the COVID-19 pandemic has wreaked havoc on Gap's operations: The company reported a massively ugly quarter in November 2021 that hammered the stock, Gap's 2021 holiday performance stunk, and now there is a warning at the former crown jewel of the portfolio, Old Navy.
"Old Navy can get back on track," Yih said. "It's one of the stand-alone off-mall value-priced opportunities. They are in the right locations."
Yih still reiterated an underperform rating on Gap shares and slapped a $7 price target on the stock.