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Gap Inc. plans to close about 230 of its namesake brand's stores over the next two years, as it works to restructure the struggling apparel business.
The retailer on Thursday also said it plans to split into two independent publicly traded companies, Old Navy and a yet-to-be named company, which will include the Gap brand, Banana Republic, Intermix and athleisure labels Athleta and Hill City. The transaction is expected to be completed in 2020, subject to final approval by Gap's board.
Gap said its remaining store fleet — after the closures — will be a "more appropriate foundation" for future growth, with about 40 percent of its future sales expected to come from online, and the remaining sales a mix of specialty and value channels like outlet centers.
Shares surged more than 26 percent in after-hours trading on the news.
The announcements came as Gap Inc. reported disappointing sales for the holiday quarter. Its earnings, however, topped analysts' estimates.
In the fourth quarter ended Feb. 2, Gap said net income rose to $276 million, or 72 cents a share, from $205 million, or 52 cents per share, a year ago. Profits were higher than the 68 cents a share analysts surveyed by Refinitiv were expecting.
Sales fell to $4.62 billion from $4.78 billion a year ago. That was short of the $4.69 billion analysts expected.
Same-store sales — a key metric for retailers — dropped 1 percent during the quarter compared with an increase of 5 percent a year ago. Sales were flat at Old Navy, the company said, while sales at Gap were down 5 percent globally, and sales at Banana Republic were down 1 percent overall.
"Overall, the quarter did not live up to what I know our brands can deliver," CEO Art Peck told analysts. "And we did not finish the year as strongly as expected." He said the Old Navy brand in particular didn't deliver as much "newness or excitement" in its merchandising during the holidays. At Banana Republic, promotions were scaled back, "which was a detriment to traffic," Peck said.
This fiscal year, Gap expects to close about 50 company-owned stores, net of any new openings or repositioning. This estimate includes 130 closures related to Gap's two-year restructuring strategy targeting 230 stores. The bulk of these locations are expected to shut in the fourth quarter of fiscal 2019, according to the company.
Gap said the closures will result in an annualized sales loss of about $625 million, along with pretax costs of about $250 million to $300 million. The actions will save about $90 million annually on a pretax basis.
Store openings, meanwhile, are expected to stem from Old Navy and Athleta this year. Peck said he still sees "tremendous market share opportunity" for Athleta, which rivals activewear brands like Lululemon and Nike for women.
In fiscal 2019, Gap said it expects to earn between $2.11 and $2.26 a share. Excluding the costs tied to the store closures, Gap said it will earn between $2.40 and $2.55 a share. It said same-store sales will be flat to slightly higher.
Gap also on Thursday said it plans to buy back about $200 million of its own stock. It shares have fallen about 20 percent over the past 12 months, bringing the company's market cap to roughly $9.7 billion.
Correction: Gap sales fell short of analyst estimates. An earlier version misstated the move.