"But over time, Old Navy's value creation levers, business model and customers have increasingly diverged from our specialty brands".
Gap said the new company, which it's now referring to as "NewCo", should have roughly $9 billion in annual sales.
Old Navy, meanwhile, has been a bright spot in Gap's portfolio, which also includes Athleta, Banana Republic, Intermix, and Hill City.
Randal Konik, an analyst at Jefferies, has been arguing for an Old Navy separation for years.
Looking forward. The spun-off Old Navy will have approximately $8 billion in annual revenue, and will continue to be led by Sonia Syngal, the president and CEO of Old Navy since 2016.
Global Positioning System stock was flying high on Thursday following news of plans to spin off the Old Navy business.
Its shares surged more than 20 percent in after-hours trading on the news. Outside of Athleta, the Gap and Banana Republic brands are sleepy relics of the late 1990s with sizable physical store networks.
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Additionally, the company announced a plan to restructure the specialty fleet, including the closure of about 230 Gap specialty stores over the next 2 years.
All of NewCo is expected to generate about $9 billion in annual revenue.
"This is great news for Old Navy, no longer having its success consistently outweighed by sluggish performance by Gap", said Tiffany Hogan, senior analyst at Kantar Consulting.
It is part of an effort to "revitalise" the brand and generate more sales online, where Gap hopes to reach 40% of total revenues. Sonia Syngal, now president and CEO of Old Navy, will lead the new public, stand-alone Old Navy company.
The 230 Gap speciality stores the company planned to close over the next two years, along with the 68 already shut, represents almost half of its stores, the company said.
Gap Inc. President and CEO Art Peck said that the company has made significant progress in executing its growth strategy by investing in its customer experience and digital capabilities that will be further optimized by the splitting of the two companies.
Numerous stores will be shuttered by the end of 2019, but the rest will close as their leases expire over the next two years.
Teri List-Stoll, EVP and CFO, said, "Athleta delivered another good quarter on top of last year's remarkable trends, resulting in a two-year comp of almost 30 percent positive".