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

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

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

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

“I know this may seem like pure financial legerdemain … but I think it’s a really eccentric 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 play the host pointed out that its same-store sales grew 3 percent despite an “anemic” fourth quarter. On the other hand, the flagship keep Gap saw same-store sales shrink 5 percent, Cramer said.

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

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

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

“Think of it as addition by subtraction,” Cramer utter. “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 acquire a lot more upside.”