Cramer: ‘It’s about time’ that Gap decided to split its businesses

Investing

Gap‘s split up is a “sobering reminder” that companies cannot “repurchase” their way to greatness,” CNBC’s Jim Cramer said Friday.

The “Mad Money” host gave an exception to AutoZone‘s buyback program that was coupled with a growth story, but said it’s “pathetic” that shares of Gap gained just 5 points from $20 to $25 since early 2008. He was critical that the retailer opted for stock buybacks, cutting outstanding shares more than half, in lieu of organic growth opportunities over the years.

Gap’s decision to separate Old Navy into an independent publicly traded company from its other brands unlocked value, sparking the stock’s 16 percent rise following the Thursday announcement, Cramer said. The company posted mixed results for the holiday quarter.

“I know this may seem like pure financial legerdemain … but I think it’s a really fantastic idea and the move makes a ton of sense,” he said. “Frankly, it’s about time.”

With the spin off, Old Navy can grow on its own, Cramer said. The host pointed out that its same-store sales grew 3 percent despite an “anemic” fourth quarter. On the other hand, the flagship store Gap saw same-store sales shrink 5 percent, Cramer said.

The remaining brands, which includes Gap, Banana Republic, Intermix, Athleta and Hill City, will be clustered under a separate entity called “Newco” in the interim. Cramer said that umbrella is in “urgent” need of a new plan, suggesting that CEO Art Peck close all underperforming stores to focus on the good ones and find a new name.

“In short, buybacks don’t mean squat without a compelling growth story. That’s why Art Pell wants to change the narrative in one fell swoop,” he said. “If he can spin off Old Navy then close the underperforming stores that remain under the Gap umbrella, I think you’d see a dramatic comeback with this stock.”

Gap plans to close about 230 specialty stores over the next two years and expects 40 percent of future sales to come online.

“Think of it as addition by subtraction,” Cramer said. “We’ve seen it work time and time again, which is why I actually think after a lot of analysts poo-pooed it that the new Gap could have a lot more upside.”

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