GPS - Earnings call transcript Q4 2017

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Operator

Good afternoon, ladies and gentlemen. My name is Melissa, and I'll be your conference operator today. At this time, I'd like to welcome, everyone, to The Gap, Inc. Fourth Quarter 2017 Conference Call. At this time, all participants are in a listen-only mode.

limit to please per reminder, a your one questions participant. As your now Romani, like would host, to I Relations. introduce Tina Investor Director of go Please ahead.

Tina Romani

earnings Welcome fourth Good Gap, conference XXXX everyone. call. afternoon, to quarter Inc.'s

like to this on conference Before we and begin, remind that made webcast statements. the forward-looking contains you call available information I'd

on forward-looking our the could non-GAAP as of well descriptions supplementing all reconciliations of XX-K For statements. that actual and of please March we today's assume to as X, most based to cause information These refer our SEC, available on on are of differ as are earnings statements, the gapinc.com. results XXXX, update forward-looking measures, page as our remarks, press on noted financial our and with recent our Annual slides well obligation or factors materially revise which forward-looking no two from Report the to as and as subsequent publicly information Form statements filings on release,

on Joining Peck; and List-Stoll. the CEO, CFO, Teri Vice Art President and Executive and President me today are call

will using mentioned, at we the sections remarks, by going be can I slides to Investors our to gapinc.com. which As you supplement view

the the over like team be always, call that, Art. will As With with to available Relations questions. to after further it Investor I'd turn

Arthur L. Peck

of to today the results another is moving associated But minutes us everyone, parts longer the capstone turn Good strong then with going for who afternoon. this various appreciate Teri, a quarter. has pleased and with time joining to and we're some a I'm few thanks speak just you because very afternoon, us. I it spending really conversation the of to slightly that over this. share for

Similar of notable will I to we In an quarter, we you important the moment, progress fourth the of a year. out to be more and especially such a last will posting to close quarter all reflect through share as I the strong over Teri, before turn year. lapped as walk XXXX, who our strong While last results on is strategy obvious holiday key for like details, takeaways. some one our using reasons, is it quarter I'll to the the in do, but growth I'd balanced framework in

growing Active, with First, we are beginning Navy. in value Old

point XXXX, out risk $X.X that focused the During fastest-growing and fiscal grew the more Old all loyalty Old comped value, in to than successfully us assortment major is chasing to the quality maximizing win feed year and into on focusing growth. and on margin, apparel minimizing U.S. online to Navy's importantly, year, this in last on brand Navy stores retailers. both fit, Old our positively major X% surpassed assortments opportunities. categories, Navy and on among allowing brand delivering strong capabilities, and and categories filters I clear and units billion have continues by half with bottom-line market saw share The of and sits Nearly responsive business, top-line sales.

in back new in Old we with the accelerated in XX September, as over also store strategy presentation We indicated XXXX. Navy all had stores openings, – our

Republic delivered number Banana results Given also and businesses plan the Inc. Old Navy, the businesses. with Gap that at under however, does remains in sales include growth Complementing Outlet Store of significant and see expansion the value strong Factory to also seeing excellent versus in you, Gap peers, I and penetrated positive opportunity returns XXXX. the XXXX. those fact double we're that remind must we brand and the openings

confident last and than Again, Active year, top-line response Together, year very with but performance the Old Now, we're potential from about advantage The in and Athleta the things the of we was highest for strategic across a also powerful small we've innovation and our both Gap Active performance bottoms. existing driven the a expectations for growth seeing fabrication seen outside half an fabric the and very lifestyle engagement but industry-leading way in focused as this new minimal portfolio experience highly through and portfolio. for year particularly and portfolio, accretive. positive customers first at business from growth, Navy stores. success to girls to activewear, in Sculpt mid-XXs unique added drove doubled Athleta. product, the product that moved The brand our let outstanding, It's me has The limited Gap, to storytelling, created Powervita enable XXXX mid-teens to no Athleta by not Supporting innovation in center innovation, new turn brand's ROD significant much say In quickly incremental half to of high seeing been that and The Notably, isn't was also amount to growth for the responses Athleta, Active that inside our business, hard powerful and within businesses. and we're fabrication business exceptional proprietary ready-to-wear brands, core such a the sustainability this increasingly technical competitive a an the important sales optimistic becoming Athleta. The to businesses during in – anything to year. important our single-digit percentage innovation, makes given year. extraordinary. back fabric to have XXXX, our more growth proprietary innovation, and of very it for and and expense, Inc. with XXXX. design's information, success and businesses. the exceeded me The will in the to build in of delivered known not only this of performance. is of

$X This a pleased that we business exceeded for in Capping of move accretive We nearly online report for growth, million. quarterly reach billion sequential with growth, that and set great year our $XXX highest and digital businesses. online publicly digital to pillar is growth goal a to over and I'm next out of of Let me goal we year balanced our highest business. accelerating fourth businesses. XXXX, closed and the a this quarter return by growth our our XX% to

of being all, innovator experience baskets, a continue loyal improved to part customer such visits, history first year, creating that's This shopping. will outsized base of and our that to across monetize of we given returns. have a differentiated that facets capabilities third have; the unique continue traffic; delivered – of encourage and effectively grow many. we this and digital capabilities We and as: customer secondly, cross-channel This so a in invest conversion among of driving things bigger is the number technical area to is more cross-channel different and cross-brand a we

As single in us back September, only brand XX the than know customers that shop we and shared in worth when brand, visits in they to a multiple eight more times customer across shop channels across a we times that more are channels who who brands. multiplies and

growth blended a and the we multi-channel together drive goals We I are transformational against organization, are to brand financial a very delivering our strategy. single balanced portfolio must base and the focused out, These We're across have progress goal point non-financial this multi-brand, growth was, where on for return. customer migrating great already our our connections. Active in seeing customers connections investments intentional from to

business our and billion for the improvement the In addition again, delivered sequential teens e-commerce high year. to saw the crossing throughout $X growth threshold, year

is the has rapidly Really, that we're apps Our investment activities there's of and seeing to loads mobile to a our critical investments stars nothing this X.X strong mobile growth. will native growth approximately And site the revenue finally, to opportunity returns. We speed garnering sales this page mobile in million differentiated and digital, and but experience customers. front and and to behavior only mobile visits. of we continue remain confident X-second brands, in continue customer deliver page across timing $XXX across improved customer stores investments us. improved down drove benefits to deliver is from the meaningful an truly average delivered in load Site monetizing Customer on beginning, speed. evolve estimate our of

to Moving third our pillar.

to store We challenged are real rationalization. to estate reduce our exposure continuing through specialty

obvious. Over current is This stores with XX% however an apparel providing are experience even purchases are start remain matter. Stores the business. the stores. customers demand. relevant number purchases a why and to highly me of of committed they component of higher influenced Stores remain physical our stating we Let by our

we priced a not real demand. XXX estate largely Based store dealing testing the on for across market labor we problems We industry, program Republic Having we by customer so. continue both stores fleet rid ahead expectations. challenged conducting, of productivity target exception, have XXXX, estate Last will in these our or and technology. wrong attractive returns accelerate been the selectively our are with portfolio we in year are no locations getting as and be oversized in through the the in quarter, plans and are said Since that, we investments specially to investing store and older, of well to will yield location, as Banana experience. improved closures, there of do Gap announced current customer with disciplined real of end XXXX, and remodeling to

results top-line up know high intentional and give initiative. in of are take against for it paying as productivity. by SG&A increased a items traffic. spending These it, and including priority for you normalized of like as unusual extensive are further unusual making on me the that reinvestment underlying growth comp the let pillar Teri a healthy balanced will productivity by the final the is increase our drivers, to me, upside aside, our about some evidenced that items investments talk strategy, our off, are Now, are I work and is investments bonuses you. we moment is This there spending towards for business. Putting distorting and quarter; detail represents

spending the labor. expense of variable is store like Some

quick also a when keeping low in. the that. and just a we Beyond we in customer are enhance the with money additional labor experience. risk There's It's up to put pays, investing bet, traffic, pretty it payoff to

store some of taken the in hours traffic out too adding to many founded peak match times. quickly and hours we have back benefit see cases, We can we've selectively

engagement. and remain marketing. of seeing traffic The on require We our of are customer importance the you and we're SG&A effective and making advertising to of we about carefully to talked return this. the believe investments is clear We've spend brands monitor trends support are to the are investment Some direct drive marketing investments healthy and sound. brands

drive and across Our portion is traffic achieved in is of investment traffic company the QX. our to big throughout opportunity It the year and consistently customer outpaced opportunity The in areas one the positive remainder is industry productivity a aggressively, and but metrics we discipline. and digital. one with savings. of also A we meaningful pursue is that we clearly where overhead, will this see

Some beginning of be which will fruit, even that next year. low-hanging see expect to we

growth, Some will expansion, to our to operating competitors. aggressively, tied of our the pursuing our are differentiation initiative entire goals, it the our while we our back of And a structure. goal into this to over our margin of work, multiple will investing our will be key against flow bonus fundamental sustain require more organization's but versus is transformation years. XXXX built to which savings We progress our Overall, work. provide productivity also reengineering part pay incentive continue

and executing. moment will are progress on. more. Mark comp Banana, about Gap. I I seeing the to a Republic both progress for talk we turnaround see are me with Evidence and the the Banana expect and on pleased QX, quick that I'm the in team be Let

quarter, lack inventory brand's were and let late more some Gap improved that We're evolving. to seeing resulted operational a from missteps the we change seen traffic are in and investments. we customer to last In change to deliveries management and year made missteps in related you primarily engagement the in, see we've These brand. responsive. at for The to stores. the We've our the we the to made operating progress Frankly, Now, level as I a reiterate, I We to Gap model operating of I turn dug fourth situation, dramatically said, we positively To have very finish began brand. ability quickly a product patience discipline. product of brand. saw highest that zero diagnosed improved hindered That strong. is forward. marketing move me comp and week, in intend leadership

immediate. to one, until It's We Gap see difficult are this. all be the the won't half inventory we promotional we in the now fix. carrying a expect timing. pressure it but right correct flow at Obviously, brand more and we're We not first some see over

productivity we aggressive sequential through put actions the year-over-year have progression profit the in also move in as We with year. place expect and improvement brand

many that touch the value, of benefits experience, We and the in tax it expansion that impacts Teri, and turn over as enhances are growth investing come pointing the are tax and investments committed out very, health accelerating me customer proof reinforces that very ones making customer reform. and the driving today Teri, want on evidence retailers, clear, by focused this business. of are of of points A business earnings is the I business further long-term growth, beginning rationalizing we've and to over material about of and estate, and tax of The return the together, Before the strategy and let that down to brands the and I'll work positive progress enhance our non-performing our are expected Like they productivity. something our I our rate we on capacity reform a on reform, doubling outcomes. on pleased to value, the it our from yield and while remain make have turn the you. to Active are balanced with to grow the to right quickly and doing real and I and want digital persistent company. they that ability the unchanged. in they close represent employee elements fundamental of we talked fact strategies keeping I been been investments lower shareholder, to

Teri L. List-Stoll

Art. Thanks,

said, are a number Art of parts moving here. As there

against in going I'm and enough obviously, the them detail, I've and if to as and through So more as we mentioned, with results call. progress we to strategy growth available outlined after hope September. the transparency, to be needed, make continue deliver I walk Tina as balanced of we're pleased necessary I strong will quarter through in help then others to But another walk

initiative in been are the the flow, our a we recent our stronger are impact. brands productivity efforts step the than provide have to our Our fund value available in focused most we tax model. in future meaningful business, cash and of on where a reform they've to benefits change many earnings investments in increase our years creation expect can With and

Moving to fourth through the quarter performance and full-year start.

week, the today reported results inclusive metrics. are the with of the sales the all exception that of XXrd note Just comp

quarter sales consecutive sales week expansion. and difficult to let's So, start up quarter of of fourth for most year. considering, period XXrd to quarter the year. the the sales consecutive gross addition holiday in sixth X% X% the billion for quarter year. The positive of it's the billion and quarter quarter. primary $XX.X $X.X for particularly for the X% increased marked Comp fifth strong with comp fourth Net sales. were was and spread our driver the X% our comp for the This our of positive us, the The against comparisons margin was a very for X%

week from year. largely Regarding year, the offset growth last closures the our international the XXrd for by impact the was sales of impact the

Going to the brand level.

engagement. and Old AUR. against Art some improving by had see assortment, management X% Art positive but given trends against flat brand strength continuing results year. Underlying pleased last as year's quarter, well delivering the we issues operational an related flat or Navy with spoke As were about. health, largely trends traffic acceleration a saw that as the and evidenced Gap positive last disappointing holiday the pleased encouraging in comp their this, inventory strong an in stronger to comp positive January the was category We to outstanding improving stable throughout were traffic already comp. the season, as the in year-to-date We comp performance, broad-based are with said, momentum X%

negative year. year, AUR. reflecting by health. two-point the Gap's improving pleased against We Banana positive we delivered one saw comp, driven three was For sales, positive a Republic improved that a last improvement in primarily brand plus the This were comp

the strength and with categories trends pillar improved also pleased quarters. are and beating focused period. over strengthening particular have our the saw seen, We're traffic bottoms on We past industry holiday we sweaters the in two for

mentioned, online growth. a XX% quarter, with Art out closing strong remarkable the nearly had As very year

from Moving representing basis margin sixth pleased We year margin and our quarter XX.X%. gross an adjusted was trends, this of consecutive to margin. gross remain last expansion highest margin since XXX points with gross quarter restructuring with excluding quarter at to the level gross our quarter rate fourth XXXX. When fourth costs, up XXXX

an year. price, health business. XXXX Excluding merchandise percentage underlying at basis in of higher restructuring of saw margin a points costs, reg indicator last XXX versus expanded sales the We

restructuring occupancy driven primarily points, basis XXX sales XXXX growth. leveraged Excluding by rent costs, and

gross basis costs. the the was $X.X was profit points XXXX XXX gross to For margin full-year, excluding up billion year, restructuring last and

basis basis, was basis merch and XX same and occupancy the up On rent points margin XXX leveraged points.

walk Now, to let through minute you me Fishkill. take a

quarter costs SG&A, were from proceeds in offset During the Fishkill may the goods with by for the throughout impact year, recorded which elevated a modest operationalized. sold quarter, as margin while that proceeds positive the including or settlement our majority is that depending recovery of Fishkill fully incurred in SG&A. concentrated reached insurance in nature. our on cost providers, covering until exceeded impacts We on future original elevated $X.XX were gross either spread is costs any recovery The a had incur recognized an The their year, we as about we expectations QX. the all offset the was in of costs the final

net there For margin. material impact no on full-year, gross was the

million $XXX is XXXX operating SG&A. expectations. Moving This compared our when expenses expenses. at fourth adjusted about on above operating up prior $XXX quarter, billion, million $X.XX our In in total the to came to

through me spend. take walk incremental a So, you just minute let the to

and our increase quarter. in store an variable for half expenses naturally, versus higher the saw the these as original goals our spend. expense we expenses of Together, saw with First, in DC exceeded incremental increase bonus Similarly, sales expectations. internal the we over represented we

which loss Consistent in of Secondly, million, interest fee an and seen increase income saw in as offset as with card well in decrease income an to about SG&A. credit industry; a $XX we decrease our is we've the rates. a

I settlement. as received we insurance the mentioned, Third, Fishkill

our throughout recovery expenses the some kick as $X.XX the SG&A catch-up a in the made the to recovery over growth well strategy insurance year. For the excess With additional balanced benefit we costs of incurred and results, a to productivity topline was as proceeds, the as decision quarter, the was about upside of of strong actions. start our reinvest

our As part million of write-offs, we our on $XX find we I'll added this talk the of strength the key were better that employee-related the and with and costs streamline closures, pleased the in organization accelerate mindset settlement. to productivity technology leverage to work. asset than offsetting but more and took Fishkill We this, adapting actions incurred and portfolio organization some lease quarter benefit to accelerated I'm store approximately the of proceeds and focus priorities. excess Fishkill later, more of is we able how to the

Fishkill For to quarter gain proceeds total fixed on which insurance of destroyed $X.X the primarily the the assets a related second $XX were million full-year, benefit expenses billion, operating in fire. includes from

and, acceleration and showing investments payments were a initiatives variable digital increased sales associated advertising in incremental million our increases function costs, the primarily when Excluding on is are higher with work customer returns. up the that operating prior on performance, The year and costs of both this benefit, real inclusive of versus increased XXXX XXrd the to bonus compared against adjusted our lastly, week, productivity investments overhead in higher operating expenses. improved $XXX of from costs increase expenses

let move Now, taxes. to me

previously XXXX effective the reflects reform on tax net offset earnings; tax The Tax a benefit TCJA. charge of earnings taxes, quarter of one-time Cuts U.S. by related to net Our is legal impacted was $XX on which the as result provisional million related and primarily enactment tax certain TCJA. for reversal XX.X%. a of rate partially by net deferred one-time tax This of referred foreign provided also impact to previously the tax to Re-measurement transition related foreign tax. a the is impact tax U.S. Jobs and not the of taxes to income rate fourth Act deferred to entity as subject restructuring of the U.S.

quarter Excluding the rate. tax than effective all points our lower rate nine of these about was impacts, adjusted reported fourth

excluding about effective Our rate was fiscal XXXX lower. effective reform, net Again, two the to tax XX.X%. impact points adjusted our was tax related rate tax

continue be of the will We impact analyze XXXX. fiscal in XXXX tax and fiscal finalized the will reform provisional amounts to

impact When our increased insurance fourth benefit million, to of excluding week the $XX tax fixed to to the The related EPS $X.XX. full-year of an to $X.XX. per and net the second QX the impact reform excluding quarter related turning adjusted EPS net approximately reform was XXrd $X.XX Including related about in $X.XX of was $X.XX XXXX. fourth proceeds of a adjusted $X.XX. earnings compared versus share from tax charge, Now to EPS earnings. increased quarter quarter was XXXX's Reported $X.XX. $XX full-year When net adjusted million to of adjusted gain our X% assets, EPS to

full-year Additionally, – XXXX EPS as impacted respectfully well $X.XX, respectfully. FX and QX negatively by an $X.XX estimated respectively and

primarily about which approximately to related the $X.X insurance proceeds from includes free The XXXX flow the is million of $XXX and quarter equipment. We in million, ended Fiscal billion decrease with last the was to of lease flow. year $XX of cash cash increase year-over-year payments cash. timing Regarding and inventory. due property

the completed $XX share we During quarter, repurchase. of million

to quarter is we below return for of We outstanding, shareholders. While around this guidance, million. There or to and outside restrictions our window. open change around and to $XXX original repurchase million cash XXX the overall shares changing paid cash total million of a shareholders year-to-date, our million related of program XXbX-X to dividends returning share commitment philosophy was $XXX our $XXX shares ended no with our repurchases to the was repurchased it

in of Also the XXXX. last sales of we closings store year by increase. growth to points of up points. sorry, plans. XXrd attributed relative inventory as two drivers – increase few week Regarding the store this Overall, can in There the more liable New have About are we week as than a of we inventory, ended receipts inventory the Year, timing enter three be we FX of planned inventory negatively feel the openings, with planned comfortable and the do about considering composition levels impacted X%.

and store capital Regarding count.

XXXX is spend our capital on million investments Fishkill the about to On were fiscal year lower stores. rebuilding to down This we highest of our IT distribution net previous Our expenditures $XXX XX benefit reorient slowed XXXX under now than XXXX. our basis, spending center. ended growth stores with including strategy. million And closed a a priorities our moving and $XXX related expectations company-operated to in to largely X,XXX balanced as we the bit

of it presenting as as calculations earned gross classification, we was in new and an give change the impactful to does that of credit offset expected is but want in will again, Historically, Before naturally, we The margin to To an fiscal in recognition leverage. line COGS. be the sense changes of This our This comes program. the the P&L related magnitude you that effective XXXX. net beginning to will sales. the this million income $XXX most our impact out items are not we classified and to in impact our income rules, revenue SG&A but adoption XXXX, Under new classification cover guidance, get certain earnings, this offset be standards significant from expense recognition to as magnitude, credit and earnings, a I card of SG&A. to our not P&L. of card to the some it income impact incorporate income loyalty will recorded our FASB we in to

impact we impact part loyalty loyalty sold million the card This recorded reimbursements but of as discounts We our the related costs, we XXXX, now increase. given on $XXX will earned aspects will a expect gross Additionally, program income cardholders. for income not program of loyalty impact our have this rates approximately and consolidated net statements. cost other In financial sales. the by so program to as in offsets will a program, goods reduction loyalty earnings meaningful sales of presented not larger margin Again, program. net change previously impact impact redemption our our of be credit some adoption recognized to do received to

our outlook, just two key the incorporates presentation discuss to discussed. XXXX a be in basis I slides our two we've P&L for impacts couple now these that guidance these for impacts. key our the to As guidance. of And To helpful, illustrate we included

The We range be the assumes $X.XX to benefit $X.XX. foreign be earnings earnings of of XXXX. in in to per to expect currently compared expect share reported We share that $X.XX adjusted will per EPS about $X.XX be rec, to as growth week expected we of comp a exchange be range XXXX sales exchange. store slightly up from the spread we foreign to sales offset be and up flat to flat to translation loss expect benefit also to – new rev of slightly. Adjusting for the expect XXrd up the by are

timing QX of impact and a It's the much a includes the to XXrd lose XXrd noting associated worth are first $X.XX. XXrd QX small loss we add and larger Regarding as in benefit XXXX. we in timing XXXX, week negative to XXXX associated into shifts the May. range In the in week week that quarter, the the week February from expect with expected about week of our be impactful to shifts week both XXrd in guidance the from the with

impacted of is be Additionally, week. the the negatively to the expected loss fourth XXrd quarter by

legislation, our on fiscal reform. year rate the XX%. Now XXXX tax Based new to be on about we tax provisional the of expect full-year of impact estimates effective

our be yield to the new estimate guidance impacts share. about also rate XXXX we of is in may cash tax for $XXX At of rate in guidance, provisional reduction fiscal our about tax changes midpoint this benefits as per However, impacted currently reform. by million issued estimates the or the to $X.XX

on While XXXX's expect you the for normalize growth earnings progression, of X% this, of EPS XXrd week, adjusted the $X.XX. benefit plus year-over-year real about midpoint this represents we if at EPS

fundamentally mentioned, Art tax long-term change strategies. not As growth our does reform

cash sheet evolving generation flow win in investments make have reliable allowed strong us the historically, and balance landscape. to retail history, to Our needed

largely planned Going our from rate share believe lower productivity means our forward, in growth tax market our savings which increases investments fund we should meaningfully business possible, our to earnings capacity. is actions the realize the the

and We capital to to support remainder of investments. flexibility store to this supply-chain largely More than related additional related digital by the product to to provided our IT expect, spend tax reform, half particularly the million. increase $XXX our is given strategies, expenditures and with

We're is a of Art provide about expect increased investment. our will the the drive organization. savings As on to excited to sales focus of a our percent we mentioned, better, SG&A, regards be initiative productivity cheaper. a as full-year, offsets the way our and culture faster to it productivity focus but can for the productivity about change not as SG&A flat With just initiative

We have to of processes. and The do from fruit new Alongside millions We can more initiative of to has fundamental this, kicked be quickly. many these that are the our are benefits. savings our from work. seeing reengineering some improving low-hanging of can we thousands to literally identify off range done a already hundreds identified for ideas working very

per somewhere of the over been change modest points to our SG&A trend north basis That for we're year, de-leveraging year. look years, in approximately million. last is $XXX you de-leverage. XXX If This several has no worth striving

but demonstrates on productivity. we it all of the power of doing not the as Now, this work we're are thinking savings, of

amount are the Going the that goal mentioned. versus transformational savings forward, specific tracking we Art

sustained Obviously, meaningful cetera. and to historically. net approach going our benefits expect means our the investment in and to able from that $X.XX we time, is savings growth, EPS supply-chain, et we've value over without an become in tax Net, we increase a the the be meaningful effect deliver seeing immediate of model. supporting fund than business of been customer change and in deliver in business de-leveraging incremental XXXX should, digital, in future meaningful creation portion the and investments products investments more capacity, Some our this TCJA in and which advertising, will earnings

guidance. couple a around more details XXXX on Just of the

as the such from mentioned. pressures the costs. sourcing raw through oil, logistic transportation, We're work working and guidance and strategic Our impact these pressures network just aggressively embeds offset to initiatives optimization, I productivity inflationary range material current

at expected growth for We the brand, than expected brand. also implications previously challenges Gap in recent in the that operational which have results slower margin of built

XX We Banana will our In Active to net be space, continue openings new Athleta, Gap expect and stores. Navy Old the will closures Republic. focused towards weighted with strategy, while line and on add to value be in particularly

in with solid to momentum XXXX, $XXX in continuing drive overall, by share support around X% As pleased no to last announced in to there to uses similar quarter our cash the complete pleased we're the to dividend decisions our we have $X.XX share. increase is cadence fourth strategy. repurchases Further, on per results year, balanced million change our of philosophy XXXX. very we're intent In to through our the are closing, in making over and and growth to through business focused I long-term approximately plan while mentioned, growth

reform. in strategy, Our outlook making tax the I'll business increased our for both that, back Tina. and in turn XXXX the by demonstrates With capacity investments earnings the it and we're over afforded productivity to the confidence

Tina Romani

remarks. concludes prepared that And our

We questions will per now open to to questions. person. one up limiting your We'd appreciate the call

Operator

first Our Konik come Randy will Jefferies. question with from

Randal J. Konik

Thanks the you believe was single-digits, XXXX in mid-teens a were low the the you the in divisional I margin at that the seemed area. contracted around in be the some chart where I glaring to which with it from Gap calendar. seemed margins, competitive segment you of division, were helpful Old believe lot. color The was gave which when put where conference up margin opportunity Navy, in mine, Yes. Art, very

you model AUR like the some and, division. obviously, feels Old Navy, increases in in leverage getting you're Gap operating for good nice it difficulties, clearly, mentioned, So the

the type rate we expect Because very further cash future? opportunity could So, Thanks. corporation done I guess, maybe doing want Gap, timeframe of in around be the would color get could what normalized what around and driving you're that to higher just should can value, more drive on divisional flow be good margins that to in what type term? whole over medium you think be a we you of expect strategies, for those higher think organization, the or some a

Arthur L. Peck

you – hung said, I of got sort actually kidding. had But competition, I Randy, you when Yes. stop listening. No, I was that. on I'm up

a this – that on that comments Teri we is not of very we I a in, aesthetic few see on refreshed fact acceptance I update not issues. I'm a perspective let We've QX, give you were to We're product a haven't to let you as made saw me as want and the So this what seeing going an started just I give again, quick the me But rate not product information. point dug to and saw. issues change. It later really, in issue. parts out operational.

product at I quality Navy point, and issues that's hit the from issues, had the XXXX, port Product end a them across business some creative to on it's two news. rails what seen at we crisis we so not reboots, day. arrivals are that look road bump is respects, nothing not and or quite of having had legs late the was of me the Navy. But what to the take QX our here that at back coming less running quarters in this, Old This Old We quickly, Those at like than the the unpredictable that on where was, of that well. which Old when had under of in time. industry. is is would the similar that the reboots, Navy it back gives frankly quite and thing we've getting long going fit – we scale confidence in that in, good or as the it

in strong that, and the which business – rationalizing We're covers down grow underlying inside we're continuing as to results that is So is see the that continuing specialty. margin-accretive and we business, the underneath to online then path. go obviously, sector of value

So of up those back aspects margins the again. getting longer-term are

am happy. did and and action it. not we big I get right can me I pretty leader, opportunity in moving This You're things on took we it's like a I'm feel that relentlessly and make focused quickly. it with a good

Randal J. Konik

Thank that. you. Appreciate

Operator

Next, a Boss we'll question with from take JPMorgan. Matthew

Matthew Robert Boss

a Congrats nice Thanks. on quarter.

Teri L. List-Stoll

Thanks.

Arthur L. Peck

Thank you.

Matthew Robert Boss

your And can of lingerie, at more jeans, did Navy, can February speak the concept, in Old to And loyal you the quarter momentum as you baby? to categories, Gap the from business fourth you into the At carry separately the performance then the progressed? cadence quarter see speak so far?

Arthur L. Peck

good (XX:XX), seeing Yes. I quite the Active – but a a a cleaned I'm strong. men's of with as good tops men's we've and some key the We're the in we've Gap, business categories. always it's woven little well. we've very bit in if body skirts. business And you knit seen and the a struggled little We've then there, good aesthetic seen mean, has look lift. up Part levels. business performance well, the dresses sorry, been service of outerwear women's we've category and KB of performance and seen number business. bottoms We're across out denim wovens seeing as that very in at bit franchise

well we're in. across do on in not to execute not continue divisions acceptance been So when say, things always have that you best the quarter the but strength was we that – the guide the to broad bag don't – franchise have and like business. any most or and Old going a that. of I'm did we opportunities you scale it's product really jeez, we the issues don't again, I categories but going we walk of Navy, any And idea, On it for store have key of to a like feel mixed

cart. So the in I message super QX which business. of the with acceptance, coming one that's go et cetera, diversified performance there. good and don't levels, inventory really on was had obviously, not want terms They, in across diversified, carry, product we a relying feel particular key strong the it And into just a any portfolio my was good of strength success, XXXX. the to was good point they It very the horse the obviously, divisions to pull

Operator

Our come from will Ike Wells next Boruchow Fargo. with question

Ike Boruchow

you of about Gap margin stick that Hi, merch margin insurance then just one-time my gains that of – comments QX, merch I And gains XXX was just margin that core information. you to lot merch you in whatnot? for kind brand able inventory, out on was sort versus of And much points is the thanks Or basis of taking Old year made plan go-forward smooth question you the a that line. kind be of Teri, GPS question. just part hoping for make merchandise the much Thank focus first merch just Can think saw help take kind or back margin? my that to of out gave margins. us a and you fiscal to you. in and saw? you any of are – half that were might – how with more the related a half going have setup? Navy how does us The to strength us of with is

Teri L. List-Stoll

Yes.

offsetting Fishkill the impact proceeds timing are it the because points, on impact largely margin, costs when those issue modest XXX just merch recognize. very costs on was So basis and a a it's really

nothing know, basis points, major. XX don't I So maybe XX,

be how or have going The or other. to don't would or get I I forward situation, Gap guidance. know promotional is But given going little Gap able to gross what somewhat margin, as of coming to the I I strength, in quarter that work pressure look the we they're said, margin as the be is on momentum, to first every I've necessarily Expectation, say not should we'll brand, that that probably offset we we we terms reason independent, do fully well look year. each see this. into so In have in Old would quarter-by-quarter merch continue a more to them are we positioned Navy into at to through two. expect are able say believe

think them different. I of as

said, as possible impact. we're as aggressively fast as be working Gap track on to Art little going hand, as the On with super other to get

Ike Boruchow

Thanks. Great.

Operator

Lorraine Hutchinson Lynch have from America question. our Bank next of Merrill will

Lorraine Corrine Hutchinson

Are seeing there that to Gap. wanted you ask service mentioned pockets on invest? about wages. and hourly or a continue Thank where places you wages, question of you. competitors the increasing levels to at of and off-mall With need your any pressure? stores I also, And both are to do salaries many you

Arthur L. Peck

is several we're wage making what that we're in And wages. meaningful. that took action always any where we're average had when Yes. seen On market of always say Glenn, before wages we We're years me, – What – competitive geographies. that differences across wages, we'd sure any none if acute would initiatives significant ago our country. given the wage some I on in isn't I the different Francisco, to right would lot parts different of anything than forces are hiring it's continued than other see. of that competition normal particular are you're of, is of seeing say now what are those in But the a pressure not market and we've we San other anywhere and in downtown there's

I of lot our been two stores all. accelerate So maintain is service there service sight making facing thing or if return there's of we'll and I is am line spend $X some levels, really fact customer putting mention and the we're that's $X our is, to I I I'm into did that see, $XX with which wouldn't that easy to On do payroll at I highly components and clarify matching as – were that something back, And do. our that's focused, or in that. $X the or to want discontinuous we an has because a stores, marketing, payroll of is And always signal or to of aligned back that a to and I One that dollar footsteps the conversion. with levels. just get a sure very $X to always easy hours that

is issues, Outlet and Specialty. depth, both in of inventory we that's levels other Gap component had Gap some where service The have and

And basics It bag a hand. with minimal much seasonal on in that incremental there's can a risk. have is of in more up the towards against color better inventory liability floor combination inventories chance their out their people walk not where and size, that oriented of available our is relatively And and the is finding much of so fashion. some bringing style, basics,

Lorraine Corrine Hutchinson

you. Thank

Operator

Barclays question. Chethan our Mallela has next from

Chethan Bhaskaran Mallela

out so that rolling that Store investment? had? in of initial about the wanted Hi. Online, you to commensurate Can Pickup pace just far a that's Good how you've I and the may ask be Buy magnitude any of also you're and couple afternoon. And about cities. you've that test any how thinking talk about gone learnings launched and in

Arthur L. Peck

people It's really they're as cities Old no put been coming two geographically availability We Navy. where far so constrained it we in. to in see marketing against other and than the

without encouraged far, obviously, of by relatively here. is stores, the So and because giving uptake, number specifics few And we've extremely number you encouragement early we've results numerical been days it's the a the seen the that that store, two, who build picking are they've number around one; basket something bought that's or a come of the number people already and then online stores into very up in our encouraging.

on, technical far. level it's which seamless are at it, been working to we're going operationalize the pretty so and both the store it, still We operationalizing but

and before you we go that's to challenges of sure right to when And and customers. middle delivers not physical. we're want hard issue to you're the a from XD right just to yet customer's what we biggest of have year, make make it yet to to are get a that the I we there is when brands. the mean, really XD, looking other rollout As consider deliver, to we there connecting we you're our because go then digital we're all now. always way don't the Navy wanted Old you sure the in experience just taking, the we schedule broader-based to get I at present

not safety often about our does for excited benefit we're investment benefit. that's give which also below the really direct line. incremental And a us it thing economic it because expense capacity significant a fulfillment nice for is without talked and valve other is about The business

it take the to doesn't it to fulfillment through fulfillment pivots cost our pressure below off centers. does direct BOPIS, drag volume again, of some As us line. allow of the And

an very attractive it's from economic standpoint. So

Chethan Bhaskaran Mallela

Great. Thanks so much.

Operator

Chen next our question. Oliver Company, and Cowen has

Oliver Chen

what on the how see second that conversion Gap to And we on goalpost we of division, Gap you're division? traffic monitoring over any terms regarding Art, expect And on engagement within as division question and are you. thoughts should Thank what related is are in what versus the there a monitor for you your Hi. consumer the time? model. over looking time

technology engagement lot Could changing been a mentioned what good Because and the of You you you. integration curve and few lot's ahead a the seeing Thank remarks the CRM. on there? of the data engagement you're and in is? elaborate your engagement just see of very and on you've been a you you that prepared have where with times opportunity with

Arthur L. Peck

we're we that's Same Gap, planned product have most out difficulties, some the not efforts traffic is marketing Parker have here our me noted, interrupt the the stores. message That On our our we we're coming front said, in as because frustrating now is part line. bottoms has of with of we out of customers, align Sarah that We been that Jessica very monetize presented worked as the we probably the traffic true operational the to with sure fully in to well. hard having make and product the to our colored on coming for had there to don't frankly, strong, with marketing. Yes.

much even we have time that the it is product around its and immediately and in acutely summer the relative over-discount out what deliveries, products that to want into dates the if period to go comes in build product of that really So, on do potential here. obviously, moment, we're I misses trying that is don't sure But at a liable. don't spring product to not conversion. late plan we have you because the your has to the if specifics make impact to we But

that So we think it's saleable.

sure So and again, well, the there box to to be in pressure. expect levers of the working promotional move traffic some don't do we're make is strong rest negatively we as but the

rather the we this have pretty we a bring Navy? talked a mentioned, and maximizing have XXx and some what's his have We is value really and time him referred the here, the to engaging important. across and customer, an sense order brings data as across man science have and longitudinally you back as in What's brands, him a into customer; much that have to value And as customer? cetera, capabilities, significant of this that in, really in I a had our of customer before. better what's multi-channel We never to Old On single-channel first begin that purchase now spend, the of, multi-brand, pointing than about of pulled And the it, are able divisions. categories the channels, standpoint brand, example, across dollars a marketing I our And we single customer, start that at few et again. to built surgically it capabilities back of engagement is as a value is investment much part September a together, analytics from customer profiles. more those we've

to of push down of activation in ever And continue it so path. to as continuing we customer level have purchase It level and precision this precision frequency. and that it a company acquisition, super is a that had to customer a develop not is is exciting are we

path into objectives customer do single-channel year to also to brand, We our transformational is a multi-channel built which a value we single new a sweet that is a portfolio, customer increasingly entire number customer a customer and being, this to how our to a the to migration muscle, say across move from multi-channel are multi-channel goal, multi-brand multi-brand, one, very know we what customer in and move that we but and customers few that spot. today of the customer, migration know of how is down them that multi-brand,

upside as company. loyalty for it very the significant opportunity and see economic we So a engagement and

which share many share their work, And our our that I do. a brands of deeper have and relationship than structural life. single-brand of early span talk We have have opportunity brands that family, call is it's out, in that People parts premium, of span company competitors a multiple So of to life. multiple of wallet. than a with point days. we life span would more the participate we it It value share and we monetize customer a is, more that extensively channels. and I can a Active, an multi-brands, much company advantage with which much

So us. very blend and with exciting. the and the the way of business. more coming because we the is things believe parts data The in be those of together, the of than the the all has super together coming art science always all that exciting sum the But the data end it's to it's product art two for not and the is

Oliver Chen

means Art, follow-up. you with to your experiential begs a And you think do and of mean, of what just just It retail, the Gap that life. so quick I Gap, mentioned lot division question share of large and brands about in are life iconic you're have that your because Gen many how of Inc. a with at and parts thinking and participated Z? just millennials interpretation

Arthur L. Peck

brands we, clothing payroll that when as cannot brand payoff. you then, and I But comes is to simple to reason experiences. some and relevant stores a Art they our we kids Gap lives, a of dollars Gap to participate experienced The of of were very lot a physical many part customers thing to and And Art our broad high because Gap that all about one isn't are way. which to customers' It's brand our orientation relevant something continuing what in us positive tell stores that saying because retailing, of are are there usually find in doesn't and that principles, achieve this is the when and dressing millennials it come across anywhere was especially is saying it because back non-customers a Art is broadly the a tell our you pretty brand this where their giving find store except Yes, parents them us the towards back see in just haven't offer yet demographic put fascinating couple create of a is to be friction it permission were touch those this, else not which have retailers, and anything. we that This if we're consumer, that they as very is it wishes true things. we and us our brand.

inside So for and mantra low converged retail. high our the a actually company defines now think touch opportunity friction, and we is pretty right compelling that

Oliver Chen

for on Thank the Thanks LTV. details you. all

Operator

Our the last from Brian will Bank Royal the today from question of of line Canada. Tunick come

Brian Jay Tunick

some about for you we're should thinking puts I guess, I including, be estate thanks. versus be dollar And Square. guess how marketing and Teri, Thank first, increase about in ROI projects, XXXX? XXXX? sales And we Great, a lapping takes ROD XXXX how leverage talk you're Times maybe sort measuring of of on talk spending opportunities spend? real may into may lots Can you be as this percentage in increased you Art, very of much. can or and about the marketing

Teri L. List-Stoll

Yes.

the us it said little has nothing for some really and we particular, speaking, and So pressure, we there's as about takes through will to have But little bit terms many ROD. of bit of time so happy investments puts you today. making, changed terms ROD investments then that, spend to some of to as the in But continue some of, that ROD depreciation think a in having more guess, them what base about capital the off-line of broadly we there. of calls we're are come asset a think into watched in I leverage

it growth. is a really of the how function deliver we So sales

Brian Jay Tunick

well? marketing on comment a Then as

Teri L. List-Stoll

Yeah. and good a those Art bit alluded investments. we to, feel course we've returns marketing quite I seeing spend, the year on Again, are as our talked during about up stepping the this of both about we and very

engagements trends to see the traffic we in obviously, presentation brand positive pretty that very mean, slide the health activities across visibly traffic the included with absolute in in and of the them and of trends. and see it's we've to the remarkable and see attribute brand with a chart good, can You a in sense green then, invest quite this and our particularly brands advertising and we number of in. meaningful some been so to environment much that's to brands willing periods a with traffic I

we balancing we'll step an return So, sure continue about sure. up for see attractive super to expanding that disciplined that out continue and spend to before and be making we

it's seen. have rate at For same about continuing the we most part, as the

Tina Romani

our That conference. you. Thank concludes

disconnect. now may You

The Gap, Inc. (GAP) 1 Mar 182017 Q4 Earnings call transcript