After the separation, Art Peck, now the president and CEO of Gap Inc., will hold the same position with "NewCo", and Sonia Syngal, current president and CEO of Old Navy, will continue to lead the brand as a standalone company.
Konik said separating Old Navy, which is the primary driver of profit for Gap, would also make the budget brand as attractive as off-price retailers such as TJX Co Inc and Ross Stores.
Gap also announced plans to separate into two publicly traded companies: Old Navy, and a yet-to-be-named company ("NewCo"), which will consist of the Gap brand, Athleta, Banana Republic, Intermix and Hill City.
The moves announced Thursday are the latest signs of turmoil in the retail industry, as Sears and other chains struggle to stay afloat.
It emerged as new figures revealed that like-for-like sales at Gap continued to fall while Old Navy's revenue rose. "Doing so allows the market to properly value Old Navy for its high margins and strong cash flows", Jefferies analyst Randal Konik said.
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Gap reported full-year comparable sales of positive three per cent at Old Navy versus a decline of five per cent at Gap and a gain of one per cent at Banana Republic.
"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", said Robert Fisher, chairman Gap Inc.
Art Peck, who's been leading parent company Gap, said the company doesn't know the exact number of job losses from the planned store closures but will try to minimize the number. The separation is expected to be completed by 2020, Gap said.
Gap Inc shares surged as much as 24 percent on Friday as a number of Wall Street analysts lauded the company's decision to separate its better-performing Old Navy brand.
"Santa didn't bring the sales but brought Old Navy spin instead", RBC's analyst Kate Fitzsimons said. NewCo will have about $9 billion in annual sales. In November, Peck described Gap's store count as unprofitable. 'But for the Gap, this seems like potentially a last significant effort to help the brand find its place in a market where it has lost relevance'. "It's nearly as if they used Old Navy as a smokescreen to hide the absolute urgency to do some fundamental things with the other businesses".