Gap Inc’s new strategy: less Gap & Banana Republic, more Old Navy & Athleta

The iconic U.S. apparel group has come to terms with the fact that, in order to prevail in an ever-challenging environment, it needs to shift the focus from namesake brand and upper scale Banana Republic to a more affordable Old Navy and trendy athleisure flagship label Athleta.

Earlier this week, the Californian group announced it will be shifting its strategy to focus on its two "growth brands" — family-oriented Old Navy and its Athleta’s sportswear lines.

The decision goes back to earlier this year when Gap Inc. Chief Executive Officer Art Peck evaluated the extensive chain's network, reaching the conclusion that hundreds of them were “terminally ill.” Gap and Banana Republic locations were the worst affected, languishing with same-store sales that have fallen 13 of the past 14 quarters at its namesake chain, and they've tumbled the past 10 straight quarters at Banana Republic, recalls ‘Business Insider’.

Gap Inc to close 200 Gap and Banana Republic stores to shift focus on Old Navy

In an attempt to accelerate the group’s turnaround, Peck will close about 200 Gap and Banana Republic stores and refocus on Old Navy and Athleta brands. To this point, Gap’s CEO Art Peck said last week the company expects net sales at Old Navy to exceed 10 billion dollars, with Athleta’s sales topping 1 billion dollars during the next "few years."

We're certainly not giving up on Gap or Banana, but we're acknowledging the world continues to change," Peck, 62, said in a recent interview. "And those are the two most mature brands in the portfolio."

Old Navy makes three-fourths of Gap Inc’s profits

This move has been very much anticipated by the market, as Old Navy has been the company's biggest division for the past three fiscal years, and it's estimated to account for about a third of the corporate parent's value. Additionally, Old Navy is contributing about three-fourths of the group’s total profits. With that growth, noted Jefferies’ analyst Randal Konik, Old Navy is well on its way to hitting 80 percent of earnings in a few years.

Konik has been one of the first analysts to comment on this decision, sustaining that Wall Street largely underestimates Gap's growth potential. Furthermore, he claims that Old Navy offers enough of a reason to bet big on the apparel retailer. In fact, Jefferies has named Gap one of its top "Franchise Picks," recommending to buy the stock at a target price of 39 dollars per share, up from previous 35 dollars.

"Old Navy continues to exhibit positive data results from our webscrapes," explained Konik in a note to market last week. "This makes us incrementally more confident about top-line trends. We believe this data, coupled with our store checks, suggests continued momentum for Old Navy ahead."

Athetica is growing its market share at fast pace

Meantime, Athleta is gaining a larger share of the athletic apparel market, Konik said, applauding Gap's push in this separate division. Peers in the athletic space include Lululemon, Nike and Adidas.

Konik added that Old Navy's fleet of stores is especially appealing since they're typically detached from malls. In Athleta, Konik expects the brand to continue to be a "share gainer in an attractive athletic apparel category."

Photo:Old Navy Web