Old Navy is about to sail away From Gap Inc.—and into some choppy waters

CEO Sonia Syngal prioritizes playfulness and innovation as the apparel giant prepares for its spin-off.
September 24, 2019, 10:30 AM UTC
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Sonia Syngal, CEO of Old Navy, at the design studio in Old Navy's San Francisco headquarters. Photograph by Cayce Clifford for Fortune
Cayce Clifford for Fortune

Old Navy employees heading into their San Francisco headquarters on a recent Monday were greeted almost the second they walked in with some bluntly candid customer feedback. “The lines are way too long & your customer service reps are not helpful at all,” griped one shopper. “If I get served one more Old Navy ad on YouTube …” lamented another. 

The complaints, taken from Old Navy’s social media feeds, whizzed high above staffers’ heads in vivid red type as a chyron streaming across an LED screen behind the main reception desk. The chyron was installed last year at the low-cost fashion chain’s sprawling home office in the Mission Bay district, under orders from Sonia Syngal, Old Navy’s CEO. The electronic comments often include more bouquets than brickbats. “Best jeans I have ever owned” and “I hated jeans until I discovered the #rockstar” read other messages (displayed in blue type because they were laudatory). But the whole light show of recrimination and adulation is designed to keep the brand attuned to its shoppers. And that perpetual reality check could feel especially urgent for Syngal and her team over the coming year. 

Sometime in 2020, most likely in the first half, Old Navy, a brand with nearly $8 billion a year in sales, will begin life as a stand-alone, publicly traded company, after its parent, Gap Inc., spins it off. (Gap investors will get one Old Navy share for each share they own in the parent company.) For the first time in its 25-year history, Old Navy will soar or sink on its own merits, free of a parent whose other top brands—Gap and Banana Republic—have endured declines that show how tenuous success can be in the pitilessly competitive apparel industry. “Everyone in the company will now be obsessed with serving Old Navy and the Old Navy customer,” Syngal tells Fortune. And if their focus wavers, they can just look up at the screen as they swipe their building pass.

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Captain of the Swatch: Sonia Syngal, CEO of Old Navy, at the design studio in Old Navy’s San Francisco headquarters.
Cayce Clifford for Fortune

For years, Old Navy has been the motor sustaining Gap Inc., thanks to its formula of selling trendy but inexpensive versions of basics like shorts and performance fleece, presented with a touch of whimsy in lively stores. Old Navy generates nearly half of Gap’s revenues and the bulk of its profit. According to Euromonitor International, it is the second-largest clothing brand in the U.S., a hair behind Nike. The brand’s global sales have risen $2 billion, or 35%, since 2011, accounting for essentially all of Gap Inc.’s revenue growth during that span. And much of that success has been owing to Syngal, a Silicon Valley veteran whose knack for logistics has helped make Old Navy unusually deft at rolling out desirable new merchandise, quickly and inexpensively. 

But Syngal’s inaugural voyage as an independent CEO faces choppy waters. In Wall Street parlance, hiving off Old Navy is a way to “unlock its value,” unhindered by its struggling siblings. But Old Navy has recently hit a slump of its own. The brand’s comparable sales (which exclude figures from new or recently closed stores) have fallen two quarters in a row, following a lackluster holiday season—a stumble that analysts and the company attribute to customers seeing too much of the same-old, same-old in Old Navy’s offerings. 

Other threats loom as well. Low-priced competitors, including Target (which rang up $5.2 billion in U.S. private-label apparel sales last year to rank No. 3 in that category), Walmart, T.J. Maxx, and European discounter Primark, are nipping at Old Navy’s heels. Stir in the possibility of a recession, and it’s little wonder why investors are less than euphoric about the spinoff: Gap Inc. shares are trading at around $19.50, down from $29.51 right after the move was announced in February.

Still, if Syngal and her boss—and soon-to-be competitor—Gap Inc. CEO Art Peck are right, Old Navy’s slump will prove to be a short, cyclical blip. Being a stand-alone will help shake the funk, Syngal is betting; indeed, she has vowed to lift annual sales an additional 25%, to $10 billion, and to nearly double its store fleet, though she hasn’t set a firm timetable for those goals. She compares Old Navy to the proverbial teen who is ready to leave home. “We’ll be able to move faster,” she says.

Old Navy’s origins date to 1993, when Gap Inc.’s then-CEO, Mickey Drexler, intuited that the stigma around bargain-priced clothes was dissipating. Drexler converted 48 weak Gap stores into “warehouses” to experiment with selling clothes that were cheaper than those at Gap and its rivals but of higher quality than discount chains offered and in a nicer environment. Company lore has it that on a trip to Paris, Drexler saw the words “Old Navy” above a bar and settled on that name for the new concept. In 1994, the first Old Navy stores opened. 

Offering clothing of nearly “mall store” quality at low prices proved to be a winning formula. An Old Navy sweatshirt of that era might have been 50% cotton and thus less “natural” than the 85% cotton top you’d find at Gap but more so than an equivalent item at, say, Walmart. Memorably quirky ad campaigns featuring fashion editor Carrie Donovan and her oversize glasses, actress Morgan Fairchild, and Magic the Dog propelled the brand. 

Thrifty moms and fashionistas on a budget took notice: Inexpensive didn’t have to mean boring and square anymore. “They’ve been the best value in the market for that consumer,” Stacey Widlitz, president of SW Retail Advisors, says of Old Navy. The chain immediately started to take market share from the likes of J.C. Penney, Target, and Sears. By its fourth birthday, Old Navy was a $1 billion brand, the first clothing chain ever to reach that milestone so quickly. 

The brand took off in the 1990s by presenting trendy but inexpensive clothing in stores that were more lively than those of discount competitors.
Cayce Clifford for Fortune

Today, the Old Navy aesthetic is just as dominant in middlebrow fashion: Wearing a $9 T-shirt with a designer bag is seen as savvy, not gauche. The brand’s annual $1 flip-flop sale and the $5 American flag tee it sells around the Fourth of July are ingrained in the culture. Old Navy created a buzz in Canada, its only major international market, when Prime Minister Justin Trudeau wore one of its pink linen shirts to Toronto’s 2016 LGBT pride parade. According to Prosper Insights & Analytics, the average Old Navy shopper is 39 and comes from a household with income of $75,000. That makes those shoppers slightly less affluent that those at Target and Gap—but more important, they’re younger. 

Variety is the secret sauce that keeps those customers coming back. While Old Navy is a go-to store for basics, one of its biggest assets is its ability to speedily roll out surprising new items, creating the “treasure hunt” mentality that’s crucial in the low-margin apparel world. Last holiday season, for example, during an otherwise underwhelming quarter, Old Navy sold 10 million pairs of cozy socks depicting cute seasonal beings like snowmen or ­penguins. “If they keep bringing in new product, their customer, for fear of missing out, will keep popping in,” says Fashion Institute of Technology assistant professor Shelley Kohan.

Keeping that stream flowing requires operational excellence—and that’s how Sonia Syngal came to be CEO. 

Syngal, now 49, has been passionate about both technology and fashion since her adolescence. As a lanky teen growing up in Canada, she found that many clothing brands didn’t speak to her or fit her well. “I was not easy to dress,” Syngal recalls. So she designed and made much of her own clothing and eventually did the same for friends and family. While still a teenager, she started her own small company, Style Montreal, inspired by that city’s trendy fashion culture. 

But Syngal particularly liked the logistics involved in making and distributing clothes, which led her toward science and engineering. She went to Kettering University, a college long associated with General Motors in Flint, Mich., that focused on STEM education. She met the work/study requirements by working the floor at Ford’s Taurus sedan factory. Being the rare woman on the floor, and a 20-year-old one at that, and supervising men in their fifties was a tough but crucial early career learning experience, Syngal recalls; she navigated the environment in part by cracking jokes with the boys. Syngal later got a master’s in manufacturing systems at Stanford—where she met her husband—and then worked at Sun Microsystems on its manufacturing team for almost a decade. 

But retail still called to her. “It starts with my love of fashion and the pure notion that clothing is wearable art,” Syngal says. The idea of building and operating supply chains, meanwhile, satisfies her left-brain needs. It doesn’t hurt, she adds, that retail is a more woman-friendly environment than tech, with a bigger proportion of women sitting on boards and in the C-suite. Equal pay for women is also more common in retail. In fact, it’s the rule at Gap Inc., a tradition with roots dating back to its founding in 1969, when spouses Doris and Donald Fisher each put in $21,000 to launch the company. It was there that Syngal took her first (adult) job in retail, as a vice president of sourcing strategy, in 2004. 

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Fall outfits on display at Old Navy’s San Francisco flagship store.
Cayce Clifford for Fortune

Her ascent at Gap has coincided with a shift in thinking in the industry. Clothing brands for many years had sought their CEOs among so-called merchant princes and princesses, people with a knack for intuiting which merchandise shoppers would buy. But today, says Gap CEO Peck, operations expertise is paramount, particularly at a high-volume chain. Old Navy gets to $8 billion in revenue “$9.20 at a time,” Peck notes, referring to its average revenue per item. When you consider that Old Navy sells 700 million clothing items a year, and introduces 4,000 new products or product variations every year, logistics aren’t just a nerdy consideration: They are the corporate lifeblood. “You’ve got to be equally agile with consumer data as you are with how to plan e-commerce, and as how you merchandise the store,” says Gap’s nonexecutive chairman Robert Fisher, a son of the founders.

Before and during the Great Recession, Old Navy struggled with intense competition from cheap but trendy brands like H&M and Zara, which specialized in spotting new vogues and rushing products to market to satisfy them. Old Navy’s sales, meanwhile, declined more than $1 billion between 2006 and 2008. A few years later, Stefan Larsson, then the brand’s CEO, decided to end what he’d called Old Navy’s “clothes by the pound” approach and get more on-trend products into its stores faster. That meant building a quicker, rejiggered supply chain—and that, in turn, played to Syngal’s strengths. After a stint running Old Navy’s international business, she became head of supply-chain and product operations for all of Gap Inc. in 2013. And her successes in logistics paved the way for her to succeed Larsson as CEO in 2016, after he left to take the helm at Ralph Lauren.

While all the Gap brands have shared supply-chain expertise, faster-fashion practices have had a bigger impact at Old Navy, where the culture is more experimental and playful. One best practice pioneered at Old Navy under Syngal, which Gap and Banana Republic have since adopted, involves buying huge amounts of fabric ahead of time and only later deciding what to make with it, the better to jump on an unexpected trend. Old Navy has also built a massive $1.6 billion online business, with a boost from another Syngal-era innovation: a “Fashion in a Flash” express line for in-store retrieval of online orders. 

Syngal’s tech background is becoming even more valuable given the growing role of analytics in guiding apparel makers’ strategic choices. That’s not to say Old Navy hasn’t had misfires over the years: Syngal cringes at the memory of the gold lamé bathing suits the chain tried to sell a few years ago. But she makes no apologies, for example, about Old Navy’s analytics-driven bet on men’s cargo shorts, a garment enjoying a renaissance (to the chagrin of many American women). “Poor guys, they don’t get to carry a purse,” Syngal quips. Still, the multipocketed shorts tend to be less baggy now. Besides, Syngal’s data tells her that men want them. Syngal has expanded the brand’s plus-size selection with great success. Now, jumpsuits for women are trending, and Old Navy is on it. “What will Americans be wearing in two years?” Syngal asks. “That’s our job to figure out.”

For years, Old Navy has been better than its sibling brands at making that kind of calculation—and thus has helped blunt the implosions at those chains. The namesake Gap brand, once a major cultural power with celebrities vying to be in its ads, has closed hundreds of stores in North America since 2011, and Banana Republic has also declined, unable to find a place for itself in fashion’s new landscape. 

Gap Inc.’s management had long dismissed Wall Street calls for a spin­off of Old Navy, arguing that staying together gave the brands collective clout with vendors, along with the ability to pool resources and learn from one another. Now, the leadership has changed its tune: Art Peck says the businesses and their clienteles are too different and Old Navy needs to fly on its own, calling the separation “cathartic.” To keep Gap growing without Old Navy, Peck is betting on the ability of women’s sportswear brand Athleta to keep competing solidly with Lululemon. Gap is also pinning substantial hopes on Hill City, a men’s activewear brand that’s currently online-only, and Janie & Jack, a children’s brand it acquired from Gymboree after that chain filed for bankruptcy. Fisher, the chairman, says not having Old Navy around will force the Gap brand to raise its game. “There will be urgency, and in this business, urgency is your friend,” he says.

Old Navy’s quality-at-a-discount ethos cannibalized business from Gap over the years, and Peck jokes that the companies may soon become frenemies. “Should we hug now?” Peck quipped to Syngal at a recent presentation to Wall Street to discuss the transaction. But in practice, he argues, the companies won’t be direct competitors. Like the Fisher family and all other major Gap Inc. shareholders, he’ll have an incentive for Old Navy to thrive because of the shares issued in the spinoff. “I will be a major investor in Old Navy, so I will be invested in its success,” Peck says.

As a design-minded teen in Canada, Syngal started her own small fashion company. Her interest in the logistics of fashion led her to train as an engineer: Today, she often relies on data analytics to steer decisions about what to stock.
Cayce Clifford for Fortune

Such goodwill aside, the separation poses challenges. The brands’ back-end operations—functions like IT and supply-chain management—are tightly integrated. “Sooner or later [Old Navy] will have to build some of that on its own, and it will be a distraction for management,” says Adheer Bahulkar, a partner at consulting firm A.T. Kearney’s global consumer and retail practice. And splitting up won’t come cheap: It will cost as much as $800 million in the next two years to build Old Navy a new distribution center and update its technology and logistics, among other expenses.

Still, fleeing the nest doesn’t unnerve Syngal. At a time when declining mall traffic is hurting retailers of all stripes, Old Navy stores are primarily “off mall.” And Syngal says that broad social trends like the rise of casual wear and activewear in the workplace will continue to position Old Navy well to ride a long wave of growth. What’s more, she says, Old Navy has grown large enough to wield the same clout with vendors that Gap Inc. has.

Old Navy’s bigger problem may be the perception that it’s playing it safe. Like all retailers, Old Navy struggles with the balance between offering enough assortment to keep customers interested and getting stuck with unsold merchandise customers yawn at. Peck and Syngal say Old Navy’s problems in the past few quarters have stemmed in part from getting that balance wrong—in particular, from not giving women’s wear customers enough new selections and betting too heavily on items that succeeded before. 

That’s a sore point for a CEO who has built a career on rolling out novel products. Not coincidentally, Syngal’s first major hire since the spinoff was announced is one that bolsters the more creative “art” side of the business: She recently lured away Nancy Green, president of the thriving Athleta brand and the executive who helped build Old Navy’s kids business a decade ago, to become Old Navy’s president and chief creative officer. 

In the short run, though, Old Navy’s health may depend on keeping its stores lively. On a tour of the brand’s 30,000-square-foot flagship on Market Street in San Francisco, Syngal explains the secret to the chain’s appeal. She points to features such as polka-dot motifs, jeans that hang on a wall in a long line to lift the eyes upward, hopscotch outlines on the floor, and tables where kids (and others) can color with crayons. Exhortations such as “Shop It Like It’s Hot” and “Hi, Beautiful” are painted on mirrors.

Old Navy, which has a rolling remodeling campaign for its fleet of more than 1,100 stores, has been livening up its warehouse-like locations with relatively inexpensive touches, including repainting the darker wood in older stores with brighter colors, adding lighting, and redoing fitting rooms. (One of Old Navy’s biggest challengers, Target, has been making similar moves, as Fortune reported in its September issue.)

Physical retail remains at the forefront of Old Navy’s growth strategy, Syngal says. About 14% of U.S. store transactions are in cash, meaning that business is unlikely to go online. The company also thinks it can grow big in smaller markets. “What we hear a lot is customers saying, ‘You’re not in my town—I have to drive 45 minutes to get to an Old Navy,’ ” Syngal says. Typically, the brand’s “trade area” has been 200,000 people per store—which means it has been less likely to expand in less densely populated areas. But Syngal thinks Old Navy can proliferate there: She points to increased business for the brand in such communities where a Sears, Macy’s, Gymboree, Kmart, or J.C. Penney has recently closed. In the past two years, Old Navy has opened 100 new locations; it has another 800 on tap.

Of course, stores will only get you so far: You also need the right merchandise. Unlike most mall-retail and department stores, Old Navy is not afraid to be goofy in its product selections. By the cash registers, for example, there is an abundance of hair scrunchies, an item thought to have been relegated to fashion’s dustbin but now coming back (and one, like cargo shorts, for which Syngal makes no apology).

Syngal also has faith in Old Navy’s ability to build blockbusters that could steer the brand to $10 billion in sales. Since 2011, the chain has created a billion-dollar activewear business from scratch. It has also turned its denim business into a juggernaut, thanks to its popular Rockstar brand for women—selling 40,000 pairs a day. Those jeans, which retail for around $35, struck a chord with shoppers for features such as four-way stretch and recovery so they don’t droop at the knees—the kind of attributes found on pairs that go for $70 at Gap or Abercrombie & Fitch.

The key is to keep Old Navy in that sweet spot: Not too fashion-forward but cool enough and of good enough quality. As long as it holds that position, Syngal says, Old Navy should thrive as a stand-alone—especially if operational chops and data science reduce the odds of fashion misfires. “We are in one-third of American households. Why can’t we be in half?” she asks. “Why can’t we be in three-quarters?”

A version of this article appears in the October 2019 issue of Fortune with the headline “Setting Sail in a Storm.”

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