What happened

Gap Inc. (NYSE:GPS), the parent of its namesake chain, Banana Republic, Athleta, Old Navy, Intermix, and Hill City, said last night that the company would separate into two, with Old Navy becoming a stand-alone business and the rest of the chains remaining as their own company.

Investors cheered the move, as it should unlock the hidden value in Old Navy, which has been growing much faster than its sister chains and now makes up nearly half of the company's $16.6 billion in revenue. The company also beat earnings estimates in its fourth-quarter report, which came out at the same time, and the stock was up 18.8% as of 11:06 a.m. EST.

Click here for the latest earnings call transcript for Gap Inc.

A woman ringing up a customer at a clothing store.

Image source: Getty Images.

So what 

Gap said that the move was a reflection of the fact that Old Navy had become significantly differentiated from the core business in recent years and that the discount brand had developed a separate customer base from the core business. Gap chairman Robert Fisher said, "Following a comprehensive review by the Gap Inc. Board of Directors, it's clear that Old Navy's business model and customers have increasingly diverged from our specialty brands over time, and each company now requires a different strategy to thrive moving forward."

The company also said the move would help streamline decision making at Old Navy and give it greater autonomy over capital allocation, expansion, and other key operational decisions. 

Gap also announced plans to close 230 Gap brand "specialty" stores over the next two years as part of a strategy to revitalize its namesake brand and focus more on better-performing factory and outlet stores as well as its growing e-commerce business. The store-closing news had been widely expected, as Gap had signaled further store closings after shuttering 56 locations last year. The decision also shows the company coming to terms with its oversaturated store base in an era of declining mall traffic.

In the earnings report, Gap said comparable sales declined at Gap brand by 5% and were down 1% at the overall company. Overall revenue was down 3.2% to $4.62 billion, and earnings per share increased from an adjusted total of $0.61 a year ago to $0.72 due to a lower tax rate from the tax reform law, beating estimates at $0.68. 

Now what 

The separation of Old Navy looks like a clear win for investors, as it gives them a choice between a steadily growing retail business in Old Navy and a business made up mostly of legacy brands (e.g., Gap and Banana Republic) in need of some turnaround magic. Given that, it's not a surprise to see the stock surging today.