What happened

Shares of Gap Inc. (NYSE:GPS) surged on Wednesday after the apparel retailer updated its long-term strategy. The plan includes a stronger focus on two of its brands, increased investments in e-commerce, shifting away from lower-productivity locations, and major cost savings thanks to increased efficiency. The stock was up about 5.7% at noon.

So what

Gap plans to focus on growing its Old Navy and Athleta brands, both of which are performing better than its Gap and Banana Republic brands. The company expects Old Navy, a value orientated brand, to reach $10 billion of annual sales in the next few years. Athleta, an athleisure brand, is expected to cross the $1 billion annual sales mark in the same time frame.

A man and a woman standing, with the Old Navy logo in between.

Image source: Gap Inc.

New stores will drive part of this growth. Gap plans to open around 270 new Old Navy, Athleta, and "value expressions" over the next three years, while closing around 200 underperforming Gap and Banana Republic locations. Online sales will also be a focus, with the company planning to accelerate investments in direct fulfillment capacity, loyalty, personalization, artificial intelligence, and data-driven customer experiences.

To fund these investments, Gap plans to slash expenses by about $500 million over the next three years. The savings will come from better leveraging its size and scale, cross-brand synergies, and streamlining processes. Only a portion of these savings will be invested in growth initiatives, with the company leaving the door open for possible margin expansion.

Now what

Gap CEO Art Peck believes that the first phase of the company's transformation is complete: "With much of this foundation in place, we're now shifting our focus to growth. We will leverage our iconic brands and significant scale to deliver growth by shifting to where our customers are shopping -- online, value and active."

Gap turning its focus to Old Navy and Athleta makes sense, especially given the poor performance of its namesake and Banana Republic brands. Cost cuts should help offset the shift toward more value merchandise at Old Navy, in addition to allowing the company to invest in its online business. With shares of Gap still down more than 40% over the past three years, a revamped strategy may be just what the doctor ordered.

Timothy Green has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.