GPS - Earnings call transcript Q4 2021

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Operator

Good afternoon, ladies and gentlemen. My name is Jenny, and I will be your conference operator today. At this time, I would like to welcome everyone to The Gap, Inc. Fourth Quarter 2021 Earnings Conference Call. Today's call is being recorded. participants a all mode. time, this are listen-only in At [Operator Instructions]. like I Investor host, to Joe now Relations. Scheeline, and your Finance introduce would Corporate Head of Please go ahead, sir.

Joe Scheeline

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

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

consistent on differ Form the forward-looking Exchange not any well section as as on Securities on generally on materially description are or and which update and as financial remarks we with gapinc.com, company's gapinc.com. factors reconciliation and assume with the XXXX, statements X XX, which forward-looking annual Commission could any supplement slides based March revise website, statements. shown our March cause subsequent principles. Commission, as well to statements XX-K and obligation forward-looking information that information on filings publicly earnings accounting from any For today's with actual the to to available of no of our and Please Investors results accepted XXXX, These Exchange Page our today, Securities today's the as of measures refer of report the X, filed of on all the are release,

the I'll the call turn Executive on Officer, Sonia. Officer, that, With Sonia call Chief me today are Financial over Joining O'Connell. Syngal; and Katrina Chief to

Sonia Syngal

to like us. how are would address strategy, joining Good set then in plan for XXXX. power to by are afternoon, our and reflecting we in everyone, thank and where up executing I start on we you compete I'll

made to profitable I'm XXXX, growth. proud we've on long-term our strategies on drive back of the Looking progress

absorbing versus of This through X.X%, of of the inclusive revenue disruption delivered XXXX, operating of approximately unprofitable billion as and navigated record divestitures. a $XX.X chain X% sales of year And operating margin last navigating X.X% air another half. of XX% volatility, and cost of reported an and margin in shedding estimated closures unexpected second $X.X we up a While estimated while billion. year growth adjusted we X.X supply we achieved versus store is the sales points

transitioned to non-strategic brands. Over while have we our nimble store we've road and the expenses. American mindset. smaller of XXX into company. fixed our more restructuring focused and has completed both necessary store in last years, European leaned fleet that, a in a rationalization With over undertaken become significant business closures, capital-efficient through we in XX% resulted and divested two partnerships This reductions digital-first costs All North with

I'm product brands and in have brand sales versus particularly by growth XXXX, Old Gap XXXX. well Importantly, such and revenue. Keys' with to positioning sales the a Gap hold our Simone our crossing Alicia year, Athleta, EasyGap, billion through NEXT enabled health in year comparable launched, venture pleased Navy discount versus four Republic's improved growth last we've its of healthy relevant our the for and to with marketing in and rates AUR on and billion new revived $X XX as delivering and percentage With America, saw we customer led Europe. driven taking joint demonstrating relevant by the brand Collectively, Walmart core Biles and that lower Banana North partnerships in Home way standout businesses. elevated comp XXXX. sales $X XX%

in of of loyalty sales marketing Kids Banana It's XX% QX, us online accounted billion up the growth. shape. relationships health, product of in grow to workhorse have our the that range with to Today, right, much offering progress are teams and leg With focus drive these disruption years more novelty both of the our chain price classic sizes, the and Throughout, long-term outperformed and we're as and four We heavily pre-COVID XX% Navy's now a and redeploying next back trends file X% market our ESG value in to to issues pandemic-related investments balanced for And to emulsion sales to acquisition value. to pant, deeper and the sustainability used we and consumer our all a of unwavering supply The sharing goals. ingenuity deepen our XX% alone. well. positioned Gap have eight in leadership front delays new grew a longer I occasions business, prolonged purchasing drive our expansion purpose-led on we an half. our Coast million. reach to air customer climbing brand best-selling a colors. brand of revenue. Especially two versatile in while playing transit market are Athleta's of and pivoting by $X.X And wide of report. advancing saw our Vietnam, fashion, seasonal sales, In return We XXXX, important investments our to Banana in awareness, what's fashion brands blazers from also order In and forward communities utilize in the in XXXX, times in In as sports, Active, our we categories. in of to we over West XX In doing type, with are essentials range from ultimately customers our and continue versus customer customers XX-week expect demand, XXXX which navigated setting connections in look on all note and closure XXXX Old and technology khaki cost customers we in a while customers roughly seeing And enable drive into dynamic could. kids our behaviors, much company of product our in In we partnerships landscape, to Denim, month's holiday that especially can growth and expect we occasions out in-person customer school port play on-trend also employees a active rise customers our serve. for XXXX. returning the factories to sudden across Kids on high women's freight to to we demand-generating proud faced Baby and Baby. weighing the with we with perform as significant and reduction. Republic's share Republic, to intentionally meet At a revenue delays headwinds. and U.S. specifically of flare ages, Gap's of important premium. category asset-light have fixed face through these driven we brands, elation January return staple, face while pixie to expectations, pant contributed modern XX% across to leaned market use business points of attract in These to our and through deliver experienced that performance,

We you: XXXX were a a improve more for As deadlines sales profitably a to few and I'd in spring pressured. first, to result, and of delivery portion and even strategies of have share earlier. the levers we with on-time those our studied accelerated product like XXXX, we booked muted booking profits summer

the we built have accounted full times and worsen, in delays for delays. saw believe elongated we transit for current buffer we enough As

Second, with assortment, the moving our on we through majority are ports, delays are than Eastern we exposure. the better diversifying port of Coast. West Southern Beginning summer materially where products vast and our are

including manufacturing, sourcing optimize to proximate and beginning are we Third, speed. increase enable flexibility to

are XXXX. in product are to the suppliers more accelerated growing America rapidly teams adoption at significantly fourth, we In and Specifically, our so, and innovate with sourcing doing and digital creation And Old our product Central lines. of development Mexico Navy. time reduce design capabilities able we

a For its our way reduction Old time samples year-over-year XXXX. in versus season, creating total development XX% XXXX total with and the led fall a XX% reduction in in development Navy fall assortment

We Navy and brands. at our this, both across Old build will continue to on

freight have half, expect through go-forward By expected deliveries time more will the the summer only will necessitated that be are air the transitory product first aforementioned moderate end to our have the and and P&L. flowed QX costs a air. normalized result more While delays of actions, of modest mostly we air the require as on

on forward, outlook first for will year our Katrina the share more and quarter. in the Looking seeing what we're

dynamics watching keenly the are the of macro we As environment.

health QX. year's me product XXXX jaw-dropping as anniversary to Gap such are strategies building brand, Navy of Democracy for in speak momentum across quickly by first is look balance better the disproportionate Let consumer from its with categories and great Old has of pivoted confident that versatile more in into whole and we women's in tougher expecting the fashion, prices. pricing fact stimulus, overall and benefit mix. for showing our underrepresented tops, which I our its as a Navy's dresses in Old to remain chased at as half last family fueled on Teams the and authorities. the brand's product Navy the position up strong portfolio. offering value the Style is to have Old compares

Gap On the and engineered the globe. base and into around its extend now Home, fleet, by partnerships the rightsized EasyGap of a brand Balenciaga reach EasyGap further healthier is relevance to leaning core its and

'XX, investments After we the of in the the And customers. The in investments helping on drive of from while Biles Athleta full-year of Athleta XXX by significantly year as helped new is partnership generated in sales. that is from partnerships, marketing space, in marketing investment. now luxury alone. ones categories about the five AURs, with we its Gap its summer. will inspiring the marketing point significant while by channels grew in year was partnerships a drive Republic's billion announcement as resilient launch sales This premium brand optimizing Athleta are in Simone for for Take, example, Banana Now confidence for extracting fiscal restructured, is by a value in well 'XX those by double-digits, to and track in a big this Supported file landed customer pickup rebrand growth TV, and giving driven XXXX, that the new And brand's AthletaWell. in premium focused XXXX new world-class its earlier by accessible technology claiming commencing of last online its basket and customers now nearly space on is led in we and to BR in digital franchise. adding including price that new enabling growth ahead partnerships, wellness through points positioning of adjacent with XXXX licensing size entering distribution The Baby, the be announced for which the them these dominance, has scaling week. authority. brand higher $X can awareness attracting like which core. are year stores us The X significant half and into traffic new increase stake QX investments. months reach hit customers maximum capture

Specifically, we're key at looking three areas.

and program loyalty our customer using first-party growing better data First, monetize to relationships. our

loyalty increasing who members We tier our on core are value rigorously our spend on that members than over the of members, Xx focused in of particularly growing our level more QX. XX lifetime million average

data is do at greater the marketing customers' personalization particularly by this and loyalty changes scale, media landscape the with made with integrated from we across acquired we consumption happening will fully from media happens. investments program. through We our insights This we've first-party in year, coupled the customer gained enabled important the last rich

distribution waste. processes are get and eliminate to costs, Second, hour. implementing product overhead reduces from split that shipments includes transformation, the in saves inventory that drive logic digital This cycle under automated efficiency on product and end-to-end centers supply improving returns development optimize and chain our ample its time shipping creation that we in to back trims where an

our the higher capabilities will in which addition relationships ability -- environment. our potentially and management We vendors. to on chain origin And single near-shore less de-risking our average rebalancing in face promotional unit third, hold deeper believe are even inventory countries working with balancing sourcing category supply to rely of to we mix, of by we're building to on retail improve building on

unlocking forecast making Navy, Republic's more creating customer in and allocation place into fashion we data predictive product Banana leather, New to and stores we're From pants style. better location And our agile and inventory and reducing AUR. where AUR by across to assortments dresses, Old digital meet accuracy X,XXX mix such and tools demand, are suede analytics using precise us higher helping perspective, as company-operated category cashmere turn, maintain a tops. products, woven silk, and like leaning and new markdown essentials about at

for provided style, value while top some We're power an customers as consumers. of price As of and I look from others seek our the on a continued pieces mind to get tighten portfolio. where a and and sales ability range environment to represents out profitable premium, to and year. quality of advantage. XXXX to offer our our are competitive growth deliver path luxury leaning we ahead strategy particularly The into is forward today the Versatility outlook statement budgets, through disruption our our with step priorities for QX a

entering While portfolio. would not progress speed with against executing focused compete, can we firm acknowledge which of challenges the the our and to our we remiss be year building fluidity the we with the to levers and impacting on unlock on are macro a have strategy, the the grasp I value on

and deliver the hand customers, for we taking strategic ultimately our employees, As Katrina. view to the it our remain our shareholders. for environment account With that best that, and all balanced, comprehensive a macro evolving I'll and always, outcomes of address options

Katrina O'Connell

ROD We Sonia, highlights outlook. billion margin basis. cover as and while you, a begin since progress offsetting retail annual approximately year I'll with North discounting year with the towards XXXX. XXXX XX% growth gross Comparable reached sales and seven these strong We improved well Thank results points results driven through leverage significant Fiscal billion unit expansion sales to better considerable year and restructuring, walking sales year, as last good sales from last international away America XXXX X% two-year product X% X% and versus unproductive grew making or partnerships net on QX and fleet less afternoon, everyone. fiscal and on our achieved versus before airfreight XXXX by percentage margins divestitures $X.X year from XXXX. average of higher generated versus $XX.X some our costs. moving then

approximately QX shareholders and and program the before our debt returned note we annually repurchase long-term year share Finally, A to to and dividend in $XXX million during beginning able saving our to over restructure XXXX. results. million through in expense interest and full-year we're plan, reduce moving $XXX

Our $XX in pretax million a to divestitures, our to $XXX European $XX model adjusted transition the restructuring charges related with exclude to million long-term of fiscal fees year results in million of the of charges our debt. business related XXXX partnership associated and

down Global, comparable and about divestitures, permanent sales Moving X%. percentage follows: X% on to Old XXXX, QX which billion Two-year impact included transition. results. X%; XX%. Navy, points versus $X.X Net Republic, Banana were partnership Athleta, of up sales were European from sales down Two-year nine up X%; closures flat; by our of up as Gap store comparable brand were and

be turnaround results with comparable the continue of of Athleta. North disruption two-year Republic Navy core with at Old momentum the in supply at Banana Gap strength impacted the to sales of America pleased We and were by quarter. Gap disproportionately the plus XX%, the

an deleveraged estimated to adjusted XXX basis points quarter. the On margin. XXX versus XXXX gross due air versus gross Reported basis gross nearly margin gross basis, XXXX, basis for XX.X% points to of in points costs. Moving deleveraged reported XXX margin margin

fourth of longer adjusted expanded Excluding reported lower expect with shift Units we LY XX.X% and and continued. offerings seen was retail points mix air marketing, share margin mass. ocean per ending XXXX The the margin product, X.X%. trends ROD driven into quarter air, quarter and resulting move product delays half line higher share AUC by new leverage points deleveraged XXXX. ended like discounting. operating $X.XX. of longer XX up About basis expense. was down compensation versus the of basis, XXX we at loss XX% multipack XX.X% technology leveraged and SG&A operating increase of XXX from in an port incentive sell is points versus as to items times by a versus through through elevated adjusted SG&A remaining costs was average expansion and from due $X.XX, as air Fourth and margin with schedules product margin an basis, the year. of of the BR's The the was inventory single-digits per from continued in-transit loss X.X% with increase first On realized gross cost as unit basis throughout XXXX. Reported driven higher versus through On to shift adjusted higher sales SG&A higher that out we

Moving to results. XXXX full-year

BR, investments expense an at X.X%, growth on and points due XXX incentive basis higher $X.X higher air SG&A Adjusted technology with costs. air chain a margin lower of Adjusted as was an estimated offsetting Reported as up marketing For points for X%; points improved the but and basis adjusted points primarily Old margin. year-over-year and Navy, follows: freight XXXX. for XXXX supply versus full-year, a billion, plus on earnings XXX AUR and XXXX constraints. X.X% the 'XX XX% for sales basis. North deleveraged Athleta billion was margin fiscal discounting. in sales XXX Gross to of well growing adjusted SG&A with up were with points points full-year. accounted sales XXX was basis higher margin Operating compensation inclusive through operating Comparable reported versus Gap ROD $XX.X Two-year basis by was year 'XX full-year plus per XX%; two-year share reported gross Global, was the brand $X.XX XX% XX%; $X.XX versus Adjusted adjusted up improvement. are X%, X% basis. for SG&A an as XXX versus of on up comparable XX%. XXXX estimated margin basis plus on of a reflecting basis basis. of the EPS for was America, sales X% XX.X%, down of XXX XX.X% ended of Merchandise basis year incremental

year closure in brands. expectations stores closures, and our of Navy expand XX Regarding with of plan footprint store nearly and plan power the counts, year America we the line of complete. in to during our opened growth ended XXX cash net the as Banana cash part Athleta store for XX closure Old The our We now the plan well with Republic and Gap strategy progressed XX% North in store million over with $XXX year equivalents. the

to million offset XXX program. returned shares through million $XXX and dilution reinstated dividend our year, shareholders, cash we the in to in During over repurchasing

in as operating sales on competitive yielding margin for hold to and navigating single-digit through low are As model presented centered we time, value is total XXXX of progress the return pandemic with of part profitable growth, ongoing uncertainty we double-digit Investor The take XXXX, that growth shareholders shareholder delivering the combined a we've XXXX EPS had our noted low The dividend. on model, we through to of leverage across relevance against XXXX, made XXXX unprofitable and achieved. long-term and areas delivering the the of we brands priority is our portfolio in economic our economic XXXX. Day. especially transition that focused At our was building our will to growth the enabling all come to fruition to a we strategy, economic the goal model returning in repositioning which have which

Moving to outlook. our XXXX financial

our a We to is to Of range approximately expect million planned the our model note, the DC the transition with of now guidance be sale include net of full-year reported European $XXX $X.XX. partnership $X.XX $X.XX adjusted of EPS EPS $X.XX, reported U.K. that our in to benefit from of complete. metrics range in

business, $XX we approximately where proceeding successfully our charges partnership required expect agreement Navy Old regulatory have related in reached million and we addition, are a Mexico through In approvals. to

Here XXXX financial a about expectations. few other thoughts are

in the year sales for to low be expect We the range. single-digit growth

flat slight increases be a mid-single-digit offset We a price we margin, improvement gross offset margins be merchandise to by merchandise in in expecting commodity year-over-year margins Within be are decline for ROD. by largely in to are continued favorability with planning airfreight. relatively basis to on

fourth the XXXX more to spent air expedited realized XXXX. XX% half an XX% through be aspire expect roughly quarter estimated we spend than Improvements for of plan made to to air While in in year. first flows. in freight the XXXX unit come air the to million sell usage which full-year in our we is as $XXX QX expected QX we've beginning retails should maintain product we planning summer through to of expense less to we line A XXXX, fiscal and we in little average in about be We fully bear levels. to and with to in cycle, back reduce half

be through as the rate AUR management consumer able we with uncertainty and AURs keep from by our manage mix higher resulting transformation flat shifts into product spending, macroeconomic well reversion, discount leveraging efficiencies current we to are inflation we'll inventory some as As ongoing experience planning regarding about to work. but

service and Over we've company of the years, last two making investments growth strategy. our transforming the in been

next Moving leverage SG&A. strategy, and phase plan into the XXXX we the of to

in we in have within We operations. set are to to our the X.X% and an but up versus and the to of X.X% X% pleased to marketing on also improve offset with areas, last is demand-generating basis times. focus that range QX a the to efficiencies effectiveness our on ending bookings spend due specifically be Operating inventory levels to mid-XX% we adjusted on early expected to driving transit longer in year spend, is drive X.X% basis. expected margin reported

interest For million. we net anticipate $XX approximately of the full-year, expense

a our related down natural early capital. and to payments in to merchandise QX mid-quarter near-term significant working ABL million we a expected higher And cash costs. seasonality in realizing transit navigate point normal restructured from related on unique airfreight and long-term where for dynamic longer in year. we XXXX, have a year, timing bookings to balance QX we have earlier leads times in bridge low in debt cash QX drew QX XXXX, to note $XXX where payment our early quarter impacted our bringing This cash. interest balances As our to debt a is overall reminder, usually A savings. the

tax the We the to full-year first expect Act material the from in legislation. of 'XX related inflows half cash year refunds CARES

tax about effective full-year of We expect rate a XX%.

closures during count, we're planning net approximately store year. the Regarding XX

intact. to remain capital Our principles related

we the strong on to returns invest to drive in we feel the is capital. our priority invested business degree can first Our

total that in to we we offset return as of believe part we return buybacks shareholders intended last, look an Next, to important And dilution. annually a is cash paying to with income. competitive to we grow net shareholder plan dividend see share growth

of principles chain projects planning slated against of on largely investments technology automation, we're dilution. supply our along repurchase portfolio. Investments were our and In the expect network, pleased With XX% mind, fiscal we and to remain dividend and efficiency CapEx offset a to strategy capabilities approximately with within these XXXX, fulfillment focused Dividends approximately personalization increase QX shares $XXX be to XXX in we to driving maximize digital full-year million. speed million return a enhanced loyalty in across and will our key XXXX. component shareholder to versus announce total QX XXXX

out the on first some in particularly provide sales throughout stimulus the as year in growth half I with we our likely fiscal uneven the call, comparisons headwinds particular color supply QX with I'd tailwinds that sales lap and sales half, in focus XXXX. additional in for to lap demand as the of QX constrained we continued Before year the will some close that's for second like in contemplated benefit disruption cadence be supply challenges XXXX. with the Year-over-year then guide

estimated store versus single-digit with last Old category in lapping company XXXX lapping softness divestitures, to to from total short-term expect QX of EU related high an at the and generated down from decline balance Navy to sales mid related our two coming partnership. by points points negative We imbalances. year's be sales the strong five the And largely closures benefit stimulus, of to

XX% that is to chase Navy be brand built Old strong cozy adjusting between ability fashion the fashion. into mix Sonia in chase their adversely category Old impacted As to more QX balanced described, been against beyond achieve bottlenecks. supply has Navy and to firm us progress margin the We brands capabilities still and but core our model. In responsive beginning in up closing, has allow deliver trends, and our have grow a long-term this sets by operating year made conviction time. the to ability economic ongoing to a our our strategy over we've chain

that extend on is it light minds line. may the modestly possible look beyond our we is time line forward, in of goal While this still much very recent time headwinds, as this original

to is business long-term primary Our the consistent delivering focus profitable and the shareholders year growth value year. through health of on after

We priorities growth. on With back to and turn acutely begin efficiency Q&A. the most that, call our XXXX operator driving are over operational are clear to and on I'll sustainable, profitable importantly, the increased focused realizing

Operator

Thank you. [Operator Instructions].

will to go question We first Boss of our Matthew from JPMorgan.

Matthew Boss

and Thanks the all for color. Great. thanks

Sonia, between 'XX year progresses? see at today? the Katrina, do think you best positioned categories so with for how Old opportunity across about How as then, Navy inventory guided outlook think to any the X.X% levels remaining margin you would X% and to And operating be from gross the just is helpful what really that see split opportunity margin, I SG&A to way here? the

Sonia Syngal

Hi, Matt, thank you.

with They're radical by active, silhouettes last and along categories with at year, new well and leaning or and cozy, the inventory them It's composition pretty for Old preferences. change from Navy was leg back-to-work that for are changing fleece. shapes. into pants as is customer like which So dramatically dresses driven new as denim the working a

in the half, as as and Baby that Navy the team Old we And you number of one denim, kids market trend well the high with market as share in that chase working dominance progress space dresses. we're share, confident very has well in as composition in rebalance as know, as the as Kids we And that so And to balance is and intact. the will the inventory. first see

it opportunity shifting levels. is then an preference. well as But authority, working So amount, really a they I'll comment balance. chase into on we're consumer the the composition and actual And have inventory dynamic very the overall the a let shift as on Katrina perhaps to

Katrina O'Connell

Matt, And operating how margin, that relates to beyond splits XXXX, out? talking about it Yes. you the are as

Matthew Boss

to we from where best how I X% SG&A? do split here Exactly. between it was gross and X.X%, to go thinking and

Katrina O'Connell

Yes.

as forward, air I the able we look of from incremental opportunity So think shed will margin to last that finally there's expansion come in the being freight. the

about should having need and talked we we air XXXX, really, XX% benefit freight. prior But in beyond, XXXX in how from XX%, we than are the starting that about So not some less year. air getting

think I that see. basis so how benefit And operating And we we been that's overall XXX has airfreight about talked about margin. a should meaningful drag of on the points

majority of some the year. this comes but that year, play the out So in into

costs So the actually cost we and it's But to about places returns opportunity. after really it's digital of big get combined using And that split with new the and I sales of finally going in really cost that, that out portion be then lot like Breakthrough more the differently big or where able flow think margin, of creation. be the I product margin of have getting when through of fixed really work of to margin out spread business. of a a the talk tools example ways about beyond shipments between operating. that's or An cost this is SG&A. digital to split figuring ways

to us a of you lots this we lot be we investments. made So really way of have opportunities refining And think heard the we've I year, say, beginning operate.

in new digital working. into we investments really to out getting it's to begin the then and pull off how those capabilities more and Now do leverage ways through of cost time start business of really lean

Matthew Boss

color. Best the all luck. for of Thanks

Katrina O'Connell

Thank you.

Operator

we'll from our of next question Baird. move Mark Altschwager And to

Mark Altschwager

down like for the in the think, for pieces Thanks It half promotional incremental little I lap bit would question. maybe concentrated slightly, some wanted into in to in but first first half. pressures half, as seeing afternoon. reversion, year. the the you're in the QX there starting of a well. more. sounds of of back good gross the some Hi, then I But Lots overall some taking margin just you'll my margin the be moving dig to air

I the quarterly just more flat you color can that have very to any on to overall I helpful? So right, the provide the think but for cadence would you. get year Thank be

Katrina O'Connell

of Yes. is there's and complicated. Sure, it a takes. you And Mark. noted, mean, I as puts lot

with margin continued hoping keep occupancy. start exactly I overall if flat, and the simplistically, think right. year, I with in benefit to We're really you're rent

we a take discounting, as that revert, we've more prudent So to much when average the last you possibility consumer while is we restructuring outlook benefit there been that year merchandise the retail to doing. trying promotional. say, saw we're it And get continue through we lower need to for the to and from year real great would the comes margins, could improvements unit be then

that. planning proactively So for we're

Of that to using gains to do like to of we're changes everything of assuming buoy we have at course, AUR the all management that not we to purposes of addition inventory hold to are then our we to disposal, guidance, we're combined try some And the prices got. from can face commodity know is escalating we making are if the airfreight. discount that on have And the against instead, off inventory in for the in tools matching on hold mix and that, But of optimization, to increases the were we we we benefit with have cotton going and primarily really even some revert. that. that the we yet to that we have

think do margins we relatively that say gross to that flat. still of all hold but we can complicated, it's So

and tailed to Sonia did challenges, we've remain a to to tools still that first navigating levers And where back new get think what have supply really first but with airfreight in in quarter. half, mostly acute. We into and say, the order to through different don't plan potentially to then do we other bit in long, sell coming necessitate that still story half, little of QX, navigate will used said, a the fairly we which as to airfreight. lot was use of Now as freight air particular, a you the QX

make margins a significant air that should we that for in the as And half benefit in then we the QX. more experienced. real back lap So normalized

guys I helpful, and know lot that's to talking keep it's a but we'll learn hopefully, it digest, you to we about So as more.

Mark Altschwager

That an SG&A focused And Thank initiatives how marketing I is Thanks over from XXXX? curious helpful. the maybe planning could you. takeaways just your question, marketing but holiday on follow-up you're again. and overall into spend if with

Sonia Syngal

Yes.

sales made. In really QX, of growth over QX lines. for we've I SG&A saw the marketing discipline four at think build brands. QX we the And good us many in we're with investments helped investments three our pleased

with have. value, We're are to It's our we increasingly continue this Katrina increase year. And as in us more a marketing of give our the of our all that, don't advantage we is personalized in off. we're making, benefits their coupled marketing data we're rate the patterns, going their that's understanding think, we communication customers. effectiveness, lots sustained that's know paying first-party to We have the And brand think And So investment to we direct and them. communication right. with maximum said rich their the investment about on the them really big based with expect voice effective. shopping preferences. patterns, category of extracting earlier, We investments share the one

So no expected. growth expected, more effectiveness

Katrina O'Connell

say Yes. brands relevance the really in of that historically just And We a in as had point generation of that. and I their the has lackluster resulted think being performance. put company did underspent our and that company, demand on we a in sort to

to think Sonia's opportunity purposely brands. even leverage invested really were we company focused of I grow we to And getting sales. point, as so didn't we've we because out we relevance done while the of restructuring those lose now are we've the want To really our And made on that we investments the successfully. build

spend. So it's optimal more definitely a to getting leveraging in pivoting of our SG&A and year

Mark Altschwager

this Great. Best of luck year.

Katrina O'Connell

Thank you.

Operator

of on we'll to And our Barclays. Yih next from question move Adrienne

Adrienne Yih

Yes, very much. you thank afternoon. Good

I'll merchandise in distribution Is the start much. focus the is are us is what What it wanted to can give we've net details? heard the I the that And very basis edge So -- impact retailers? of Sonia, inventory from margins? P&L? So exactly processes the how optimization sort did other more some Thank you there. that that that on overall benefit this implemented year. being you points in at

Sonia Syngal

a units great. X,XXX lot we That's Yes. stores. distribute Listen, buy to to of

and so our to we're more from stores. is advanced doing applying more DCs AI our distribution And optimize what analytics and our to

for whether replenishing get better, sell-through, we optimization assortment sell-throughs. even or size markdowns whether or more it's just seasonality that's optimization less So

well we're that, that on forecasting. front as so as expecting benefits on fashion nice And some

we allocation. so And and around have will a this multi-year year transformation the plan be wins management on big inventory

Adrienne Yih

And on Okay. just finish up to inventory. the then, Katrina,

So down transit, at being up the is single-digit, units are low X%. inventory

XX%, about about So is like but AUR it talking you're flat. inflation sounds

many that initial understand to doesn't we're Is price from broad if guess Just sound I'm sort throughout trying wondering leverage? correct that's just of I without So being others, price Thank the -- margins it a offset the that would price by merchandise that impact? imply retail you. assumption? year, pressure what's I increases hearing mean -- taking on like and scale how you're increases.

Katrina O'Connell

Yes.

cost, into about So in that the which was in. inflation, we the AUC the that were when if mid-single-digit. say heading just that million and the to math, think in carrying air $XXX the sitting Adrienne, think cost is that what's did air QX, about But I do inventory you we cost And is product million, not $XXX AUC. is you we said also

potentially on the QX, to -- quarter the we sell will margin but have as that pressure in cost. an in saw So not the the level through we will quite gross to not the certainly QX margin first impact air

benefit we better being is some margin a we using expect of for that then get commodities that's pressure that by air And these offsetting we're back I where in get don't what described that Now continue, which management will should to on capabilities see and reversion year, alleviated. the potentially yield. discount offset we then since to to get inventory

Adrienne Yih

be those pressure a GM It early that for the sounds rate but us, QX. flat Any lot the in year, you of Okay. to pieces, what in color the all given want first like should quarter? to provide

you So the should those think model for QX you how -- kind of do in moving we how line? should pieces gross margin all

Katrina O'Connell

a the air outcomes the basis the for air points on depending it's of tell impact in XXX impact, of is of different there's But the margin you do I can mean math I gross on range lot sales. about what quarter. if you

And subsides. is you through of on math guys so let the play outcome sales think And what That the it. would that's rest you what do hopefully, helpful. I'll on and the

Adrienne Yih

much Thank luck. of very Okay. and you best

Katrina O'Connell

Thank you.

Operator

Instructions]. [Operator

comes of Kimberly Greenberger from Your next question Morgan of the Stanley. line

Kimberly Greenberger

and costs, air your costs? the Great. Katrina? Vietnam shift? much. ask help between that the costs you. set just you it's freight wage you're I'm mix like product just between us Thank if that out in understand if primarily aside shift in and and cost could are really you I'm But asking and the seeing cost, inflation ocean of cost got that the you're sounds general -- expense because freight general and expedite And inflation factory product just to you of your in what in. ocean wanted whether inflation mix It understand wondering, to of seeing. you inflation, you are air, Thank I about costs, product closures trying seeing I so about and mix -- outside whack

Katrina O'Connell

that Sure. Yes. right. right vectors now, of we're There are so navigating all inflation many

we So talked there that is this air-ocean mix about.

we've think about I that talked dynamic.

product seeing in cost the also increases are We mid-single-digits.

that And escalation freight to I are are there then that's wage think as that's that costs had price seen. we we say, and cotton then you, costs said the what you higher primarily are higher. and that

All of that is contemplated just in the guidance that gave. we

with the things. But able Ukraine use to Russia, on better employee the to the to it relatively have suppliers. lot as long-term make cost that. AUR finding side doesn't And that have for of we out hard bunch able on the to we that then ways can, contracts on work then wage the that And various and freight thing scheduling navigate help we of we're side working other pay I been levers we've talked all other we've be overall about of to our well to and we're efficiencies and find by tools watching proposition our product working a places been certainly, we've carefully, far, look, navigate to in think make things, a with mix. value the of so things, the

radar but to the in then navigate, time easy today. on an just and our we not So have all contemplated those outlook been provided

Kimberly Greenberger

you. Thank

Sonia Syngal

in AUR. Gap premium while seeing or premium in cost to positioning. the into product we new see seeing we're Athleta to I'll such are I have think select mid-single-digit we Katrina's stretching as categories point, increases, go those increase where do Banana opportunity We just and trying or elasticity some to we areas full ticket add, Republic's prices are

holistic helps we that but levers addition of. those that not level, levers select so planning spoke to we at That do inventory management being said, have in the it yield transformation And on around a to areas. we're

the Katrina at outlook the that continue the margins provided. So we'll to use levers all disposal our to to manage

Kimberly Greenberger

Sonia. you, Thank

Operator

go we'll Lorraine next of America. Bank And to Hutchinson of

Lorraine Hutchinson

good you've progress of a with Katrina, ROD lot the Thanks, transformation. made leverage afternoon. fleet on the

us margin that had behind through long-term you here? As margin is bulk on Or from further of the and line? merch the of be past the the are opportunity the think gross gains year rest to targets, there

Katrina O'Connell

No, a you, question. It's thank Lorraine. Yes. great

the in as partnership. But we think our really opportunity of and well America bridge we line, that would Investor the that as the As are where there's done. We'll as value closures other there I some from, the ROD Day Europe at markets is assess. about come see largely most if in value expected we North part, international for getting value more the the we through the definitely gave to creation I both the store think from

margin and digital second that the retails in I expected shift invest help that the had was offset average let The grow generation that again, in demand we expansion think our And that's piece out played we to largely unit we talked business. as gross to able about to being expected.

than the efficiency. that side we've offsetting, I margin we unit through supply leverage. offsetting In value. very then was the operating before we gross probably made the largely adding fact, retails this it was if And not digital. And was chain more last At thought SG&A really, on time, the just progress average expected pressures, leg much think

more as significant it after honestly, value disruption macroeconomic And operations big we and creation levers. these changes. was hadn't the Now see digitizing we what contemplated and going really

growth, line modestly, probably should all the likely. mostly but is us. to the ROD behind us, say, we leverage with sales leverage that continue benefits to material behind But So most

Sonia Syngal

a coming the transformation I add et operations returns, out management, we business, and focus and like the emphasis SG&A stronger core renewed on will cetera. have is coming we're like this the like cost think splits, And what on Yes. expecting I fixed of year, leverage that inventory with focus

that saw to we us, and We into And and expect benefited as discipline continue lever that. a in progress leading times important really to that -- dynamic lean good are lean XXXX. in we very into in QX

Lorraine Hutchinson

Thank you.

Operator

we'll And from to question Paul of next Lejuez Citi. our move

Paul Lejuez

Hey, thanks guys.

the about you you talk curious to which grow the sales in I'm for the are if looking Thanks. at increased the you if talk for growth there? And can overall. landscape the other amongst at Old guidance Navy? expect you just brands gave but assume could You I 'XX? set competitive curious Athleta, Any brands. year about then second, signs competitive of promotion

Sonia Syngal

them growth. it's as great said I We're balanced ask brands and is as was year well of expecting value contribute listen, to questions. Yes, that's the would in expecting. And as hoping to been a years our portfolio. sales question. to of we're the really, of the of Because these four someone company. that's coming, this growth my a I speech, the profit all the And Paul,

Is So I be Navy. et question sorry, was? Athleta, continuing what top in big brands with trend, to of And cetera. will competitive your I'm for all that second contributing our different growth have proportionality. line margins expecting will question, their your was think pressures from around We're But different Old brands growth.

Paul Lejuez

Yes, on set. any curious amongst seeing the front landscape competitive just promotions you're what competitive the for increasing signs of

Sonia Syngal

it promotional was Yes, to I than expecting year, environment a a more year mean be stimulus. Last last we are right? big

half. first the in particularly consumer, happy very a think I

the see is overall benefit with continue brand of contribution being on own That will is I think becoming the for really to we as we will to consumers value value we in drive compete can value compensate Navy space levers in some the and of I business to important of more like different as inflation, a this there. hold times typically equation and So to to grows. well conversion. as compete And lap to very a price well. lot apparel that. the like said, And And retailers conscious, Old manageable, the inflation, because our pressures are it that, seeing think that and are

will year. at well benefit prices expecting we're as we're Old fast we'll jaw-dropping for the customers value continue. trade-down essentials to And that of proposition So expecting this that for Navy see the family

and out, how a this we our all So our and in Baby we'll market good of resilient almost across but it particularly environment where quite it business, be have environment. brands Kids kind see plays should XX% share

Paul Lejuez

leadership plan to a in in take after share, price to investing market you Do maybe little that? role bit a going do

Sonia Syngal

as as is to and flow-through. share brand really, the investments well more and sales been in profitable technology market have drive to health of important, have our Any area marketing really in conversion

our prices those our competitive. are good feel competitive I So is areas. brands we're with about And think very we price where their our all of positioned. sets. We benchmark against happy And

Paul Lejuez

luck. good you, Thank

Sonia Syngal

Thank you.

Operator

of question And we'll from Sachs. go to our Brooke Roach next Goldman

Brooke Roach

and questions. so taking morning our you for Good much thank

today, how you prior be I'd down income trending you're across portfolio is I think hear each your Sonia, trade the seeing demand curious consumer mentioned across brands? of to what landscape potential benefits consumer cohort And down across of of Old course happen the next the banner Navy today? in something a question. that of to anticipating in the Or few seeing that you're the Are quarters? that you already trade is over benefits

Sonia Syngal

opportunity sector. terms in or premium think, realization start customers in growing there. price higher percentage Income their I the resiliency brackets. premium a from high both, and income Athleta, and of We're are space Banana customer are I'll of the So in with of an Republic lot levels the achieving and in strong seeing aprotic

So that good. is

premium. retail of Old they Navy a growth, comp many And year. so their attracting, making the seeing over through do shoppers there's customers value a average growth, really working Gap unit $XX,XXX I think value they're space, in I think, strong balance through

quite of all mean Baby those I focus. business. forward segments. that we to assortment Kids right the So management about opportunity range across they and think their spent and say would and right is because the a brand win of there's I having really customers It's what

headwind is half. in as first So anniversarying Katrina stimulus the said, the certainly, of a the factor,

of think lowest so the income inflationary And bracket prices. the consumer typically in do we is part

watching that carefully, short-term. some that headwind we we'll the So in in be and expect do space

Brooke Roach

of time in in sourcing. the big Thank And plan of talk that's and margin the long-term forward. to process has the Can and you of speed increase plan? you. Thank that, go as organization one the for to the maybe And the initiatives agility merchandise and you of quantitative this aspect then the opportunities you. remarks, line the you for talked impact planning prepared Katrina, about in several that

Katrina O'Connell

Sure.

creation year the other Sonia that I with first very deployment is think that that of on they're the the to product inventory science more performing in stores to we happening spoke in. that we're have the that leveraging have the have. how is main Also better them data the that math those we they CBX, putting value this capabilities allocation purchase sell product management data in better primarily they and see on our where to versus stores giving inform much

first creation So say year leg. the growth the then line. SG&A the is this value from the would in I in operating our in And from sales that's coming coming addition, guide leverage

we as be -- we're we are and about, to value can. what going that Sonia talked fast would year. beyond. gets science for the this items. We're those. those optimization, But that XXXX many returns cost I big future the The if are after those those those is getting So going the of this year most work split can to to get and those levers lay as Brooke, will are really data other foundations value to big say, likely, shipments creators

So would think it. that's I how about

Sonia Syngal

just look, just fact is of for the Yes, That say, logistics I year. this the be times will long the industry. would lead

for more is product manufacturing. way mentioned, we is well so out digital driving cycle we're it which And the as as taking the weeks by compensate development looking to product into proximate as moving creation of

our and Latin expanding And we're Mexico so manufacturing this in year. America

build longer will well. some speed lead as start chain create to balance And times. this that of so responsive into supply some as our we And some those back capabilities year

Operator

the of come And with from Boruchow line our Fargo. Wells last will Ike question

Ike Boruchow

thanks Hey, everyone.

I two first. maybe questions, So guess Katrina,

you XXX On suggests the laying airfreight basis margins, year. the beginning you're out back points of math next so another kind

your is X.X% to strong to point? in Are follow-up that next just a much at the for Or with goal the you has become a pressures both year? of that margin then given margin. comfortable stretch Athleta, this really And too quarter business, XX% of another comp, all So to I still cost kind I the Are of get of the you. XX% growth. you giving tell X% guess, could about I for, you would the market second value the us you EBITDA generation right your you my not And these think the asset is business, look you at guys trying Thanks. of when extract shareholders? when in for internally business? guess your anything that market the for about cap. guess you margins full conversations now clearly have value to point that

Katrina O'Connell

so Ike, we there's still know my so yes, I said in margin I why have our don't no fully in remarks, prepared the XX% operating reason sites.

of year while XXXX with we're we margin We air. XXX in X.X% operating As the significant X% we disruption headwinds think even pleased the we And business. from say, this get achieved to with or points achieved can you in not best we basis we the plan, as which margin operating given We makes have getting the speed the them our while pushing the goals. there, sense. on macro XX% we're navigating still in new headwinds, think still with forward we which with are still can

given we challenge Athleta? speak get XXXX, then by goal. there, that said, be little But if mean it material just challenging, from will headwinds modestly in bit given into new I have a that delayed current to do we're doesn't you We still want to environment Sonia, navigating. on actually Maybe, stays ourselves and as XXXX. believe If might it the that more XXXX. maybe to macro the definitely up XXXX, not As are fundamentally

Sonia Syngal

the into and I growth. growth, power They by our leverage within the enabled company, right and growth et customer right Athleta's And We has it healthy margins whether margins. the site, the the Yes, to believe data, of first-party Canada, was they're of the pleased seen with work we're to enable our the also that we grow think been Athleta's portfolio. we've And doing believe launch e-comm in cetera. strategy. the operating have

well our our my is be around understood. job -- So and and on of Katrina strategy. at executing point value options. at parallel look That brands. to well always said, do it focused we're we'll your being looking options taken happy always, we all continue as with in creation is and We're to And and growing

Ike Boruchow

Thank you.

Operator

ends And question-and-answer The and thank does session, today's That conclude Inc. that you. earnings Gap call.

now You may disconnect.

The Gap, Inc. (GAP) 4 Mar 222021 Q4 Earnings call transcript