Good afternoon, ladies and gentlemen. My name is Lisa and I will be your conference operator today. At this time, I would like to welcome everyone to the Gap Inc. Third Quarter 2016 Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] I would now like to introduce your host, Jack Calandra, Senior Vice President of Corporate Finance and Investor Relations. Please go ahead sir.

Before we begin, I'd like to remind you that the information made available on this webcast and conference call contains forward-looking statements. For information on factors that could cause our actual results to differ materially from the forward-looking statements as well as reconciliations and descriptions of non-GAAP financial measures, as noted on page two of the slides supplementing Sabrina's remarks, please refer to today's earnings press release as well as our most recent Annual Report on Form 10-K and our subsequent filings with the SEC, all of which are available on gapinc.com. These forward-looking statements are based on information as of November 17th, 2016, and we assume no obligation to publicly update or revise our forward-looking statements. Joining me on the call today are CEO, Art Peck; and Executive Vice President and CFO, Sabrina Simmons. As I mentioned, Sabrina will be using slides to supplement her remarks, which you can view by going to the Investors section at gapinc.com. With that, I'd like to turn the call over to Art.

Thanks, Jack, and good afternoon to everyone. I’m going to talk as I have in all of the calls that we’ve had really about both the long game and the short game. And let me start continuing to address the strategy and many of the things that I’ve been talking to you about and give you an update on where we are there, but then also obviously a deeper dive into Q3 and the prospects that I see as we look into this holiday period and Q4. We are – I would say well into transforming and re-building parts of this company, starting with our product model. And I’ve talked to you about the work that we’ve been doing to enhance our responsiveness across all of our brands in key categories to pivot towards a much more continuous and demand based buying process to test our products in advance of the buys that we are placing to go into season open etcetera and continue to be pleased with the progress that we are making, but also acknowledging the fact that this is a journey and there remains significant work in front of us. First and foremost we need to win on product. And as I look into Q4, I am feeling very good about the product that we have in our stores across all of our brands. Obviously the consumers will tell us how well we are doing and how well we did with the products after we hindsight the season, but if I look across all of the businesses I feel like we are in the best place that we’ve been now for several seasons where we are lined up against trend where we have consistent quality appropriate to the brands, where we’ve gotten our fit dialled into the…

Thanks so much for your generous comments, Art. It's been a great 15-year run and a true privilege to serve the Company and our shareholders. Now moving on to third quarter performance. Sales totaled $3.8 billion, down 2% versus last year. Comp sales were down 3%. We were pleased that third quarter gross margin was up 200 basis points over last year largely driven by Old Navy. Merchandised margins expanded 220 basis points and rent occupancy deleverage 20 basis points. Moving to expenses, third quarter total operating expenses were up $78 million to $1.1 billion, including about $35 million related to restructuring charges. Marketing expenses were up $6 million to a $148 million. Regarding taxes, our reported effective tax rate was 45.2% the higher rate was driven by the impact from our restructuring actions, primarily in Japan. Our adjusted effective tax rate was about five percentage points lower. Turning to earnings, on a reported basis, earnings per share were $0.51. The non tax-related restructuring costs were about $30 million in the quarter, this brings our year-to-date non-tax related restructuring costs to about a $180 million. Excluding the tax and non-tax impact of restructuring, our adjusted earnings per share were $0.60. Regarding the balance sheet and cash flow, we ended the third quarter with inventory down 4% year-over-year. We expect total inventory dollars at the end of the fourth quarter to be down low single-digits year-over-year. Our year-to-date free cash flow was an inflow of over $415 million. Regarding capital expenditures and square footage, year-to-date capital expenditures were $383 million versus $505 million last year. Square footage was down 2% compared with last year. With regard to our outlook for the remainder of the year we are reaffirming our full-year adjusted earnings per share guidance range of 187 to 192 excluding…

That concludes our prepared remarks. We will now open up the call to questions. We'd appreciate limiting your questions to one per person.

[Operator Instructions] We will take our first question today from Adrienne Yih, Wolfe Research.

Good afternoon. Nice top on the third quarter, Sabrina you'll be greatly missed and when you've been a great steward of the company, but even better you've been a great person to work with, so I just want to say that.

Thanks.

Art, this is the question for you. I wanted to know what your thoughts are about that much talk about denim cycle, how you can play that at the Gap brand and when you might see a kind of some real impetus behind that that cycle becoming more prominent. And then for Sabrina actually you know with the loss of the unit have you thought about the business as you plan for next year and whether you could and should be running with far fewer units in order to get better gross margin dollars? Thank you so much.

Thank you. And I couldn't agree more first of all with your comments about Sabrina. I could talk a lot longer about that, but I know you have some specific questions. The denim cycle I would say is its clearly hit bottom and down stuff we've talked about that. It is an important part of what we're seeing at Old Navy right now and continuing to power the performance, and then it's important part increasingly important part of Bananas business and Gap's business as well. It's not as consistent as I would hope it is and I see that across the whole industry right now. It is clearly she's refreshing her closet but it's still not a strong dominant trend with super news out there. Obviously with Gap will focus on that. Stretch in across all fabrications across the entire family of something that were rapidly ramping up both in the kids business as well as the adult business. But we're hoping there is more in front of us because it hasn't really hit our view that you know turn up inflection point where it's really starting to power the business right now. Sabrina, I'll turn it over to you.

Yes. With regard to inventory, as tragic as the fire was, there were some really important lessons for us and that and one of them for sure Adrian is you know just when you think you're already running tight that you can actually run tighter and bring those that margin rate up in the margin dollars. So, sure as we look into next year we're trying to incorporate that lesson. Now Q4 was obviously bought, most of spring bought, but as we look forward to summer fall and you know holiday 2017, I know the teams are really embracing the lessons from this fall and holiday, and very much are aligned in looking to continue to survive units very tightly. Now that said, you don't want to get so draconian that you don't give yourself an opportunity to positive comp. So are we walking that tightrope? But yes for sure it has been a really, really good lesson.

Okay. Fair enough. Best of luck for holiday.

Thank you.

Next up, we'll hear from Lindsay Drucker Mann, Goldman Sachs.

Thanks. Good afternoon and Sabrina also you will be missed. Moving on to my questions, I wanted to ask about the merchandise margin improvement in the third quarter and how we should be thinking about the opportunity that sequential opportunities in 4Q, in other words do you see as much opportunity for merchandise margin recovery in 4Q as you had in the third quarter? And then, secondly on SG&A, you had a bigger increase in the third quarter than we were expecting. Does that reflect some of those initial marketing initiatives that you talk about that impacting on the fourth quarter and maybe giving us some perspective on what type of marketing you plan to invest in? Thanks.

Sure. So, starting with the margin, we were obviously very pleased with the Q3 results. A couple of things to point out in terms of differences between Q3 and Q4 Lindsay, as we all know Q4 tends to be much more promotional and competitive than Q3, and then this Q3 of course was unique because we lost a lot of units in the fire, a lot of those units were fall fashion, so we were super tight on fashion in Q3 and that likely supported the nice outcome on margin. In contract in Q4 we didn't lose any holiday fashion and threw it in the fire, so we still have basic and seasonal basics that were lost and supposed to be sold, but none of our holiday in any meaningful way was lost. So we have more passion in Q4 than we had Q3. Now if traffic improved and we move the unit as expected the time we wanted and the velocity we wanted then all is going to be well. But as we mentioned traffic has started out sort of stubborn and still challenge. And so I just sort of feel like given the fact is too early to get overly optimistic. Although, obviously the teams will be driving toward that some improvement year-over-year, so that's the margin peace. With regard to the expense piece, there's lots of moving parts and expense. Marketing was actually only up 6 million and there were a bunch of other components some of which are investments for the long term that the company has decided to make. Art mentioned for example the whole customer states and hiring a Chief Customer Officer and what comes with that. So, we are starting to invest them. And then as I've been talking about for some time since we're laughing many years of very tight expense management that it really gets super task to try and leverage unless you have a very solid positive com. Art, do you want to?

I think that pretty much said it all. We can provide more detail and marketing and probably not just to go into all the right now, but guess back on TV for the first time and it's significant TV presence we have a catalogue behind the Banana business, it's dropping right now. I walked out of the train station this morning to see a transit take over here which we're doing in a number of markets, so it is a it is a significant uptick in marketing. And as we said don't -- hope certainly we get an immediate return, but we're not assuming that the case because we got to get the flywheel turning again.

Great. Thanks so much.

Yes.

Next, we'll hear from Matthew Boss, JPMorgan.

Thanks. So just a lot of moving parts on the expense side into next year. I guess what what's the best way to think about timing and cadence of the expense save. And then just with wages and some of the investments offsetting part of this how should we think about overall SG&A dollars in terms of moving forward?

Yes. I'm not going to get into 2017 too much, Matt, because of course I'll leave that to my successor, but I'll tell you remind kind of the actions we took this year and the shapes that it should take. So the actions we took, we said, should result in annualized SG&A savings of $275 million. Some of that coming in 2016, but probably most of that coming in 2017. Now what we said at the time is again after years of very tight management part of the reason we chose to do that restructuring is because it would help offset some of the natural inflation that you get running our business and would allow us to continue to be discipline in our operating expenses. We are starting to make some decisions to make certain investments in the business. And I talked about one or two of those already in overhead and people in the form of people and also in marketing especially in Q4 and we will talk more or the team will talk more about what those investments look like as we move into 2017 on the Q4 call.

Got it. And then just follow-up. At the core cap what level of traffic you need to drive a potential positive comp and if you could just talk to some of the underlying trends that you're seeing beneath the surface, beneath the comp in terms of AUR traffic, know just any green shoots that you're seeing in some of the new product potentially?

Yes. We think when we started the year that we knew traffic wouldn't jump to positive. So we were kind of planning on a low single-digit negative and with that kind of number and a healthy AUR we could drive a positive comp. That was the plan. Unfortunately traffic has been more tending toward mid and high single negative digits, and that's really been difficult for us to get traction on. Art can talk more about what we see under the covers. But certainly encouraging to see that women as a year has progresses it has been stronger than men. Year-to-date margins overall have been helping it gap. So those are some of the signs but for sure the progress has been slower than any of us hope for. I don't know art if you want to add anything to that.

Yes. I would just say that the part of the silver lining such as there was of the unit side of the business is it allowed us to really demonstrate and validate the pricing authority of the brand as we've tightened up and not have to move that many more units against the higher-than-expected negative traffic tend, so it's actually given us pretty good validation of where we are from product standpoint. And then the other part of the validation is just the -- we have a close look to the process of understanding consumers perspectives on the product after they buy and the metrics there are moving quite nicely in the positive direction around fashion, around it and around quality. And so I'm cautiously optimistic obviously for bucking as a whole industry is overall a traffic trends in the mid to high single digits and that's a tough number to look at it from the standpoint of pulling out a positive comp against that.

Great. Best of luck.

[Operator Instructions] Your next question comes from the line of Susan Anderson, FBR Capital Markets.

Hi. Good evening. Thanks for taking my question. I was wondering if you could talk about the international business maybe just give us an update there. I know for a while Gap U.S, was outperforming the International, so just wondering about still the case if you've seen international turn a little bit better? Thanks/

Yes. I mean the international business is obviously a composite of a number of different markets which have a variety of things going on them. Probably the most consistent theme obviously has continued FX pressure there and gap is more exposed to that as you know than any other business. If you look across the key pieces of the portfolio for Gap brand you know the Japanese economy has obviously been challenging for everyone. We've seen some firming up of the business I'd describe recently but we have a long way to go there to get to the kind of performance we want to look at. I talked about China my remarks I don't really dwell on that, continue to be optimistic in the long run. but it's been I think probably the most promotional time we've seen in that market since we've been present with all relevant competitors both local and non-local breaking sail far earlier having sailed go deeper and longer than we previously experienced which indicates the miss balance of inventory and demand right now within that market. And then Europe continues to be Europe. We've announced obviously the actions that we've taken there in terms of closing some stores. We have a very good online business there, the specialty business obviously carries a very good online business there, the specialty business obviously carries a very significant blood on its P&L and that's been an issue we've had there for a long time. So it's a real mixed bag. And then in parts of the business in Canada, Canada has been very strong for us. Its been very good business, so it's really a function of which market you're looking at.

Great. Thanks. Very helpful. Good luck next quarter.

Thanks.

Our next question comes from Ike Boruchow, Wells Fargo.

Hi everyone. Thanks for taking my question and congrats, Sabrina best of luck going forward. Just a question I guess, the profit plan next year's was asked about and I think you're exiting the Old Navy Japan business. Just curious when you look at your portfolio across all brands and all geographies, are there any other maybe geographies that aren't really hitting their ROI hurdle that maybe even eye on that maybe you know down the road over the next 12 --24 months the business might look to evaluate as well?

Yes. I would say that when we announced the actions that we took earlier this year, we try to really get at the things that we have line of sight to in terms of them not being strategic or not having a place to get to the kinds of returns that we wanted to see. So I cant preview any other significant things that I see in front of us. Obviously we're living in a very volatile time right now and we'll continue to re-evaluate this as we always do on an ongoing basis, but I would like to believe that we got at the great majority of the things we need to get to over the course of the actions we took this year.

Great. Thank you.

Our next question will come from Brian Tunick, Royal Bank of Canada.

Thanks. Good afternoon. And Sabrina, we wish you all the best as well. I guess are two quick ones, just maybe on the supply chain if you could give us an update there on what metrics you're seeing to help us understand the progress and maybe how much open to buy you have this holiday versus last year and where do you expect that to go? And then secondly, on the share repurchase program it's been such a big part of the story over the last couple of years, so I know you still have some of that revolver outstanding, but has the philosophy changed regarding the company's capital allocation or minimum cash position? Thanks very much.

So, let me actually address the second one first. Our philosophy hasn't changed at all. We've communicated clearly on the loan that we have outstanding and flexibility there, but you've seen what we said about that before and nothing's really changed on that. We slow down this year obviously on share repurchases against the volatility of the backdrop and what was a challenging environment we just felt like that was the prudent thing to do. A policy of returning excess cash back to shareholders remains pretty much intact I would say no real change and no discussion about changing that. Right now we want to just make sure that we can maintain flexibility as we see and hopefully as traffic firms up et cetera and we see performance stabilize we get a sense of how the various things that are taking place in the world impact the marketplace we'll come back and look at that as we go forward. But I would say there's no fundamental change at all. We want to communicate with respect to our capital policy our cash balances or anything like that. Sabrina, do you want to add anything to that?

No.

Okay. I'm sorry. With that that brilliant explanation of supply chain yes, let me come back and talk a little bit about supply chain. We'd really and this is why I said in my last remarks maybe a quarter ago is that we are continuing to move down a path and I'm not going to go into a lot of specifics because it just it's really category by category, brand by brand, if you think about demand-based buying, if you think about the response of platform et cetera and so the answer can differ to. We're still buying one category on a traditional pipeline like outerwear, but in other categories like bottoms and mix, we have significantly improved the responsiveness of the category. We're making excellent progress and really more the challenge right now is the operating model of businesses and being able to exploit it demand-based buying as an example, we're building tools against that right now versus doing it by brute force. It's more about the front end of the business than really the back end of the business right now. So, I've been pleased with the progress that we've made in our supply chain facing our vendors, consolidating vendors, consolidating our best class platform in fabrics all those types of things and we're doing the front end work right now, but this again is this is a season-over-season thing and I am seeing material meaningful season-over-season advancement in terms of these capabilities. Operator, is there next question.

Yes. We'll take our next question from Lorraine Hutchinson, Bank of America.

Thank you. Good afternoon. Art you talked a little bit about the Gap brand and working on your pricing authority, I was just hoping for an update on how you view your current denim and tops prices at the Gap if you think you're at the right place and if any changes need to happen as you add more content to the product?

Yes. We're actually doing some pretty much, pretty deep work right now on pricing, so it's something that's really on my mind. We did some work at Old Navy which are now in the process of implementing which highlighted some pretty material opportunity and we're repeating that work inside of Gap around as well. I guess I'd highlight a couple of things if I look at denim. First of all, if you look at where we are from the standpoint of both our tickets and our actuals, we actually play in a pretty narrow range. If you think about denim where it is. Denim starts in an $8 entry-level price point all the way up to multiple hundreds of dollars. And we really across all of our brands are very tightly banded. So I think there is a breath of fabrication, good, better, best if you want to think about that way. The Gap has an opportunity to step up to in terms of product development. And that's probably the biggest on my mind right now. The second issue is we have seen where we've been able to have pricing authority, but it hasn't been consistent enough and that comes a bit with the quality of our buys and it comes I think with making sure again we're dialed in and on trend across the entire buy. I'm really focused on denim from a market share standpoint and that's how we're thinking about the company. And I've been very pleased with what I've seen it will maybe where we have been on a up consistent posture of gaining market share in denim. And down and we're doing the work both in Banana and Gap to make sure that those businesses are moving forward that way as well. Again if I reiterated probably the biggest opportunities I see it is the breadth of our development and therefore how straddle where demand sits in the marketplace right now from a price point standpoint, and we're pretty narrow relative to where I think we can play.

Thank you.

Our next question today will come from Randy Konik, Jeffries.

Yes. Thanks a lot. Sabrina it's been great working with you all these years and I wish you nothing but the best. Actually have a question for you Sabrina, if you think about the merchandise margin improvement, I think you mentioned bulk of it was from Old Navy. Can you give us some a little perspective on where we are in perspective merchandise margin cycles of each division, trying to get some perspective on where we are versus peak, obviously if we can go back to peak where we are versus more normalized trend across three divisions, and when you look at the composition of inventory I believe down 4%. How does that composition look by division right now? Thanks.

Yes. So, on the margins I would say since we don't segment report Randy I'll try and get some color, but mostly keep it at the Gap Inc level. I would say that I'm if you exclude the impact of foreign exchange which has hurt us for the last several years especially Gap brand. If you exclude that we're actually not at horrible levels. We're not at peak levels. So we're not at horrible levels of merchandise margins. What I would tell you is that over the course of this year as you all know from comp reporting and our sales reporting, Banana has had the most pressure over the last little while. So directionally they're probably the furthest from peak and directionally Old Navy's probably the closest, as they've been recovering and having some good business. So hopefully that is helpful. With regards to inventory your question was around remind me.

Yes. The overall inventory is down which is very good. I'm just trying to get some perspective on composition, a little color by division?

Sure. Okay. Got you. Yes, it's almost I would say by Channel, right. So we've been buying very tight in the specialty channel especially for Gap and Banana Republic given their tougher business. Old Navy obviously has also been very disciplined and bought very tightly. But that business is a business that moves units, right, there in the value sector so we move a lot of units especially this time of year. So they're probably have more inventory but from a historical perspective are also still bought very tightly. So specialty down the most and then Old Navy in our outlets to have a little bit more than the specialty channel I would say.

Got it. Very helpful. Thank you.

The next question is Dana Telsey, Telsey Advisory Group.

Good afternoon, everyone. And Sabrina back of luck, congratulations, what a pleasure to work with you.

Thank you, Dana.

As you were talking about the advantage of scale, and if there's work still yet to be done, when does that pay-off? What does it look like, does it differ by brand, and does that differ by front-end and back-end, basically for both you and Sabrina? Thank you.

Yes, Dana, I would say that we’re -- I mean let me step back for a second, and I’ll just simplistically characterize the work that we're doing, which is we've operated this company historically more as independent businesses with relatively separate the duplicative activities inside of each business, not entirely because we had a common sourcing structure, a common IT platform etcetera, but in a lot of other places it's been relatively more independent. And the work that we're doing right now is to really build, turn the core operating platform by bringing all of those things together that are not customer-facing and then skinning that operating platform where it faces the customer and the brand needs to be expressed. And I've talked about that before, and that is a process is underway right now. And certainly doing that from a product standpoint, we moved first in terms of product a few years ago when we moved away from a geographic base sourcing that worked to a category based sourcing network, so there's one office doing denim for every brand on behalf of the company where we can then bring to bear our scale working with mills and vendors in order to get the best possible cost and the best possible quality simultaneously. It's been a bit mixed inside of other things as well. I think we have an opportunity especially in the environment we’re in right now, from the standpoint real estate now relationship with our landlords. And then there's just a wide variety of costs, some media that we buy and have bought separately, we are bringing together etcetera, so I’d love to tell you and give you an exact number, it is material and it will continue to progressively paid out. I mean, I’ve been very clear with the company on this one, that I want this done, I want it done ASAP, I want the benefits in hand and then we'll choose how much of those benefits we want to invest and how much those benefits we want to bring the bottom line.

Thank you.

Yep.

Our final question today will come from Oliver Chen, Cowen and Company.

Thank you. Sabrina thanks for the partnership and we’ll definitely miss you. I was just curious about how you're thinking about enter playing marketing programs versus where you feel that your product is right now, in terms of you know balancing that. And are, where where do you think that the Gap brand, and where do you think the assortment is, are you happy with the alignment with where you want the brand to be an optimism and said or which parts of the assortment, you know have opportunity? Thanks.

Yes, where I think the product is relative to our marketing is, as I think Old Navy is lined up appropriately and it shows in the business. I think we have -- I think the product is better than our business right now in Banana and Gap, not perfect by a long shot, but better than our business and therefore it's why we made the decision to put some marketing into the business is to start telling the story. You know I – when I was running Gap back in 2012, we fixed the product, we have a strong trend, and the business turned on a dime. Obviously I had hoped that that was going to happen here as the product better, it's not, it's tougher environment we are operating in right now with negative traffic, therefore the decision to put marketing into Q4 and to make sure that we are budgeting marketing as we go forward as well, really tell the story. And tell the story about all the product being on brand and on trend, but also about the restoration of quality of fit, of technical attributes, and those types of things as well. I have a very strong conviction, that successful brands today our story made brands, it's all around us, and you can see the ones that are telling the story and the ones that aren’t. And we have a great story to tell. We've just been a little too quiet with Banana and Gap. By design, well we’ve been quiet until we felt like the product merited telling the story. And that's really where my head is at right now. I think, I will take –I will take the credit here, we want it to be conservative on marketing because I did not want to invite aggressively invite customers back into our stores, and so I felt like the product was going to be where it needed to be. On Gap rent specifically, again it's not perfect, but the clarity of presentation that you should see in our stores where we've really tried to tighten up to a category merchandising. The trend that we have in our stores, and I asked the question the other day of all of our brands, so I just send a note out over the weekend as I was travelling and watching and listening to people, I said, just tell me we all had velvet [ph], and we all actually have velvet which is super on trend right now across every single one of our businesses from Athleta, Old Navy in the intermix. I feel like we're on a better spot, and we're getting better season over season as well. So I am not, as I said before, I’m cautiously optimistic on Q4, and I will continue to be as we look into next year. Thank you.

Thank you.

I’d like to thank everyone for joining us on the call today. As a reminder, the press release which is available on gapinc.com contains a full recap of our third quarter results, as well as the forward-looking guides included in today's prepared remarks. As always, the investor relations team will be available after the call for further questions. Thank you.

Ladies and gentlemen, that does conclude today's conference. You may now disconnect.