When Gap (NYSE:GPS) announced last March that it would spin off Old Navy, investors loved the idea. 

The stock soared 16% as investors saw the spinoff as a way of unlocking the value of Old Navy, which has been Gap's most successful brand for much of the last decade, and better focus on turning around the company's struggling brands, which include Banana Republic.

Ten months later, after CEO Art Peck was forced out, a funny thing happened. Gap changed its mind, but the stock jumped again. Shares climbed as much as 10% after hours and finished up 5% on Thursday after the retailer said it wouldn't pursue the separation. 

Gap's interim CEO Robert Fisher said in a statement:

The plan to separate was rooted in our commitment to value creation from our portfolio of iconic brands. While the objectives of the separation remain relevant, our board of directors has concluded that the cost and complexity of splitting into two companies, combined with softer business performance, limited our ability to create appropriate value from separation.

At the same time, Gap said it expected full-year comparable sales to come in at the high end of its previous range of a decline between mid-single-digits and low single-digits, and for full-year earnings per share to be moderately above the previous range of $1.70 to $1.75.

Even with the improved guidance, the main reason for the after-hours jump was the reversal on the spinoff.

A group of young people in white shirts and jeans

Image source: Getty Images.

Something doesn't add up here

There's only one explanation for why investors were both pleased with the decision to separate Old Navy and the decision to, on second thought, not separate Old Navy. Investors are desperate for something to change at the casual apparel retailer

The company has struggled most of this century. The stock is down by more than half from where it was 20 years ago, and despite some ups and downs along the way, revenue has essentially been flat for the last 15 years. Though Gap's stores, which also include Old Navy, Banana Republic, and other smaller growth brands such as Athleta, still blanket the country, the company has lost its position at the forefront of everyday American fashion, falling behind fast-fashion brands such as H&M, Zara, and Uniqlo, among others.

Comparable sales have declined at Gap and Banana Republic over much of the last decade as efforts to rejuvenate those brands have fallen flat.

Fisher admitted as much in his statement above, noting weak business performance and a lack of value in the spinoff. He further explained the move, saying:

The work we've done to prepare for the spin shone a bright light on operational inefficiencies and areas for improvement. We have learned a lot and intend to operate Gap Inc. in a more rigorous and transformational manner that empowers our growth brands, Old Navy and Athleta, and appropriately focuses on profitability for Banana Republic and Gap brand.

The next steps

Gap has promised operational improvements before, but its efforts under former CEO Peck, who served in that role for five years, always came up short. Perhaps a new CEO can reorient the company toward growth, but managing Gap presents several challenges, including managing a sprawling collection of seven distinct brands, competing with fast-fashion purveyors who are able to undercut it, trimming a bloated store base, and growing its e-commerce business.

At this point, Gap is a company in disarray. A year ago, the Old Navy spinoff seemed like its best idea. Now, the company doesn't even think it's worth pursuing. In the 10 months in between, it has spent significant time and resources on a now-defunct plan. Fisher says that work has uncovered ways the company can improve its business, but we've heard that before. Investors should expect to hear more details on that soon, perhaps in the company's fourth-quarter earnings report next month.

Gap's problems aren't new, and changing the perception of such a well-established brand isn't easy. Despite fourth-quarter earnings coming in better than expected, the latest news just looks like another red flag for the stock.