Gap Shares Surge 25 Percent as Wall Street Praises Split

Gap Inc. shares surged 25 percent on Friday as a number of Wall Street analysts lauded the company's decision to separate its better-performing Old Navy brand.

The company, once a trend setter with its casual logo emblazoned hoodies to Khaki cargos, has struggled to keep pace with fast-fashion rivals such as Zara and H&M.

Old Navy has been the only bright spot for the company in the past few years, cushioning it from the weak performance of its namesake Gap and Banana Republic brands, where sales have also taken a hit from fewer additions of new designs.

"Separating Old Navy to a standalone company is what we have argued for over the past few years. Doing so allows the market to properly value Old Navy for its high margins and strong cash flows," Jefferies analyst Randal Konik said.

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.

"We are buyers," Konik said.

Gap said on Thursday that Old Navy would be spun off to its shareholders, while the other entity will consist of the Gap brand, Athleta, BR, Intermix and Hill City.

"Santa didn't bring the sales but brought Old Navy spin instead," RBC's analyst Kate Fitzsimons said.

At least four brokerages raised their price target on the stock, with Telsey making the most bullish move by raising its price by $6 to $40, well above the median of $30.

The company also said it would close hundreds of underperforming Gap stores in the next two years and would increase investments in its online business as they try to adapt to a more modern retail environment.

It already shut its massive flagship store on Fifth Avenue in New York earlier this year.

While analysts were encouraged by Thursday's announcement, some said concerns around the company's money-losing Gap brand would remain.

"While we are encouraged by the decision, we would note the company's brands continue to face intense competitive pressure, particularly in the U.S.," Guggenheim analyst Robert Drbul said.

Gap's shares (GPS) lost a fifth of their value in the past 12 months, while the broader S&P 500 Apparel Retail index rose 13 percent. The stock was up $4.85, or 19.09%, $30.25 in late morning trading.