They tried buybacks. They tried dividend boosts. They tried new concepts.
In the end though, it didn't amount to a hill of beans for The Gap, Inc. (GPS) . So why not just stop trying to have stores for stores' sake, while you use the dwindling free cash flow to keep buying back stock, and split the whole darned thing up so you can bring out some value?
That's what Gap did last night, dividing its business into the slow-growth Old Navy and the no-sales-growth collection of Gap, Banana Republic, Athleta, Hill City and Intermix. I know it may seem like financial legerdemain, but I totally understand why the stock would sprint so high this morning and give you a 20% gain instantly. Frankly, despite the critics who call it desperate, I say, "It's about time."
Now Old Navy, which had a 3% comparable-store gain last year but an anemic fourth quarter, might be free to really grow on its own, while Art Peck, the surviving CEO of something called Newco, for now, is free to close the bad and extend the good. That's a godsend, given that the flagship of Newco, Gap, has a negative 5% comp this last quarter.
Newco is in urgent need of a new plan -- and a new name for that matter -- and the way to do that is to lose the Gap nomenclature, close all the underperforming stores and start over as Athleta, which is the fastest grower in the amalgam. I know, that name change probably won't occur, but given the 30% growth of Athleta, it isn't such a bad idea.
I think the company has no choice but to do this in order to return to growth -- and growth is all that really matters to the stock market.
Doubt me? Consider the history here.
During the 1980s and 1990s, Gap Stores, under the tutelage of Mickey Drexler, used to be the premier growth retailer in the country. Gap at that time was smart -- hip would be the word for it -- and its other concepts, first Banana Republic then Old Navy, just added to the growth legend. The stock traded for 20 cents, split adjusted of course, when Mickey started in 1983 and peaked at a little more than $50 in 2000. That is an extraordinary run, the last big leap coming from the rapid expansion of Old Navy just before the turn of the century.
Throughout this incredible period, the share count pretty much remained the same.
But then the darned thing punked out, Drexler was unceremoniously -- and in my opinion, wrongly -- kicked out, and it's really been all over but the buybacking.
It's pretty stark. Ten years ago, Gap started focusing on buying back stock, I think to the exclusion of organic growth as well as net new-store growth, and it has taken the share count from 716 million to 381 million. All during that period what have you gained? About six points.
It's a sobering reminder that the stock market loves growth, not value, and you can't buy back your way to greatness. In fact, I have only seen it work once, with Autozone (AZO) . The auto parts company has shrunk its share count dramatically -- from 63 million 10 years ago to 25 million now -- which has helped move the stock from about $100 to almost $1000 in the last 10 years, during a period where it increased stores from about 4000 to 6000.
At GPS, or Newco, Art Peck wants to change all that -- and in one fell swoop he at least gives the chain the opportunity to do so. If he can close the under-performers in Newco and get Old Navy as standalone, it almost reminds me of the days when Dayton Hudson became Target (TGT) and you got the fast growing off-price Target and the old fashioned department stores. Then the department stores got sold and you were left with the fabulous Target.
No, I don't think the goal is to get Newco sold, but I do believe that Old Navy can be a facsimile of Target -- and Newco, under cover of the split, can reinvent itself as a growth amalgam with no losing stores.
To me, that's one plus one equals two, which his 100% better than what you have now
Hence the gain.
I think it's sustainable and I applaud the maneuver.