Gap is buying a high-end kid's fashion line as the company tries to escape its cheap image and spins off Old Navy

  • Gap plans to acquire Gymboree's high-end kid's clothing brand Janie and Jack for $35 million, as it takes strides to improve brand image.
  • Last week, Gap spun off value-focused brand Old Navy to create two separate companies. 
  • The Gap brand has struggled in recent years — same-store sales were down 5% in the fourth quarter of 2018 and overall for the year. 

Gap is dressing up its image. 

After announcing that it would be spinning off its value brand Old Navy, a bankruptcy document filed over the weekend revealed that Gap plans to purchase high-end kid's clothing company Janie and Jack.

According to the document, filed in a US Bankruptcy Court in Richmond, Virginia, Gap plans to buy the brand's intellectual property, e-commerce site, customer data, and other assets for $35 million. The company is currently owned by Gymboree, a children's clothing company that filed for Chapter 11 bankruptcy protection in January.

This new deal fits in neatly with Gap's plans to clean up its brand image and distance itself from being seen as a "cheap" store. 

The Gap brand has struggled in recent years — same-store sales were down 5% in the fourth quarter of 2018 and overall for the year – and it has increasingly leaned on heavy discounting to clear inventory. This not only erodes profit margins but also damages the brand image.

Gap Inc CEO Art Peck, who will become CEO of the yet-to-be-named company that consists of the Gap brand, Athleta, Banana Republic, Intermix, and Hill City, believes that by splitting out the company in two, it will be better positioned to serve what the company sees as increasingly different customer bases. 

"Old Navy's value creation levers, business model and customers have increasingly diverged from our specialty brands. That divergence to me is now clear. And we think the best way for each company to grow and meet the evolving needs of our customers is to allow them to pursue tailored strategies separately," he said during a call with investors on Thursday.

The company plans to close 230 Gap stores over the next two years and as much as 50% of the specialty fleet beyond that. Specialty stores are defined as any Gap store excluding its outlet and factory locations.

"We have our work cut out for us this we acknowledge," Peck said. "But we know what we need to do to win. And we are committed to restructuring the fleet and revitalizing Gap brand to unlock shareholder value and drive profitable growth."

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