Rumor suggests Old Navy could be severed as a separate entity by Gap Inc.

Gap Inc., the American retail giant, announced in February its plan to spin off Old Navy, its better-performing discount business. This move, the company claims, is "the most compelling path forward for our brands."

The proposed separation has sparked a wave of speculation and concern among analysts. Morgan Stanley analysts, for instance, question why the discrete brands are unable to develop transformation initiatives pre-separation. Credit Suisse analyst Michael Binetti, on the other hand, has expressed concern about lost synergies from the centralized and streamlined supply chain.

The spin-off plan involves leaving the struggling namesake Gap to carry on with Banana Republic and a slew of smaller brands. Old Navy, on the other hand, could stand alone as an $8 billion company, while the new Gap Inc., notching some $9 billion each year, would hold Gap, Banana Republic, Athleta, and others.

Old Navy's visit trends resemble off-pricer retail success story Ross, according to foot traffic analytics platform Placer.ai. This is a positive sign for the discount business, which has experienced five straight quarters of comp deceleration. However, traffic to Old Navy stores decreased in the third quarter, according to both Placer.ai and Cowen & Co.

The success of Old Navy may be closely linked to the success of the spin-off. Old Navy's brand chief, Sonia Syngal, is centering a sales goal of "$10 billion and beyond" on almost doubling its fleet of 1,000-plus stores. If the spin-off plan is not carried out, Syngal will remain the leader of Old Navy.

The prospects for the spin-off deal remain tenuous as more analysts rail against it. Wedbush analysts speculate that the spin-off may have been pushed by former CEO Art Peck as a way to extend his career. Peck, before he left, also singled out the company's recent $35 million acquisition of children's apparel line Jane & Jack as bringing great bang for the buck.

One brand that seems to hold particular potential is Active brand Athleta. Last year, Athleta revealed revenue of $900 million and a 23% compound annual growth rate over the past six years. The Gap brand, however, may face challenges due to a consumer less able, less willing, and less required to buy clothes.

As Gap Inc. leaves regional malls and embraces e-commerce, the success of the Gap brand will depend on its product and flawless execution on strategies. Finding a new CEO for the new Gap Inc. may take at least three months and as long as six to nine months.

In conclusion, Gap Inc.'s spin-off plan presents both opportunities and challenges. The success of the spin-off and the recovery of Old Navy will be closely watched in the retail industry.