One of the companies will contain Old Navy, while the other yet-to-be-named business, now called NewCo, will comprise Gap, Banana Republic and other brands, including Athleta and Hill City.
Old Navy has been the strongest brand for the parent company, accounting for almost half of annual revenues.
"It's clear that Old Navy's business model and customers have increasingly diverged from our specialty brands over time", Gap's Chairman Robert Fisher said.
The parent company of retailer Gap says it will close some stores in Canada as part of a global plan to shutter nearly half of the brand's locations over the next two years.
Additionally, the company announced a plan to restructure the specialty fleet, including the closure of about 230 Gap specialty stores over the next 2 years.
Gap plans to spend $750 million in 2019 on capital expeditures - including $100 million to build out its OH supply center and headquarters - and sell the main Old Navy office.
Peck said that he expects both companies will be strong enough as standalone entities to manage the large supply chains and relationships that keep them running.
Gap's shares were up more than 20 percent on the news in after-hours trading Thursday.
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"Santa didn't bring the sales but brought Old Navy spin instead", RBC's analyst Kate Fitzsimons said.
Old Navy has consistently outperformed sister companies Gap and Banana Republic, according to reporting from USA Today.
The move is created to allow Old Navy - which has grown to $8 billion in annual sales since it opened its first store in 1994 - to expand on its own.
After the separation, Art Peck, now the president and CEO of Gap Inc., will hold the same position with "NewCo", and Sonia Syngal, current president and CEO of Old Navy, will continue to lead the brand as a standalone company. The new company that Peck will run has about $9 billion in annual revenue.
Gap's chief executive Art Peck will hold the same position at the new company after the separation. 'But for the Gap, this seems like potentially a last significant effort to help the brand find its place in a market where it has lost relevance'.
Analysts called the split a smart one - and one the struggling parent company should have considered long ago.
The question for Gap will be how it rebounds and reorganizes after the split, Cohen said.
At Old Navy, the fashion is already more resonant with the latest styles, with blouses and dresses priced as cheap as $30.