What happened
Gap (GPS -1.74%) shares were surging 12.4% at 10:27 a.m. ET on Wednesday on speculation that activist investors might target the clothing retailer.
According to TheFly.com, Activist Insight suggests "an activist might agitate for changes at Gap," with the Athleta brand a potential spinoff or sale target. Similar comments were recently made by Adrienne Yih, an analyst at Barclays, who suggested falling sales could invite activist interest.
Image source: Gap Stores.
So what
Gap was a troubled retailer before the pandemic, and the lockdown phase of the COVID outbreak only exacerbated an already difficult situation. The retailer's stock is down 60% from recent highs, and it was never able to attain the heights it had reached almost a decade ago, let alone its peak back in 2000.
It seems to be forever in turnaround mode, and spinning off Athleta has been rumored before. The label is marching toward becoming a $2 billion brand, but without it, Gap itself would be doomed to mediocrity. Both Gap and its Banana Republic chain are in free fall, declining by double-digit percentages last quarter, while the on-again, off-again Old Navy chain was down by low single-digit rates. Athleta is all Gap has going for it.
Now what
While selling or spinning off Athleta would give Gap an immediate cash infusion, the brand would be eliminated from its asset base (even if Gap retained part ownership of it), imperiling the retailer's ability to raise cash.
An activist investor would undoubtedly push for such a deal in a bid to return value to shareholders, but it might not be in the best interests of the apparel stock's long-term health to do so.
