Good afternoon, ladies and gentlemen. My name is Ashley and I will be your conference operator today. I would like to welcome everyone to the Gap, Incorporated Fourth Quarter 2016 Conference Call. At this time, all participants are in a listen-only mode. As a reminder, please limit your question to one per participant. I would now like to introduce your host Jenn Fall, Senior Vice President of Corporate Finance and Investor Relations. Please go ahead.

Good afternoon, everyone. Welcome to Gap, Inc.'s Fourth Quarter 2016 Earnings Conference Call. 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 our forward-looking statements as well as a reconciliation and description of non-GAAP financial measures, as noted on page 2 of the slides supplementing Teri'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 February 23, 2017, 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, Teri List-Stoll. As mentioned, Teri will be using the slides to supplement her remarks, which you can view by going onto our Investor section at gapinc.com. With that, I'd like to turn the call over to Art.

Thanks, Jenn, and hi to everyone on the call, and thanks for joining us today. As we close out 2016, which is my second year as CEO, I want to spend a moment to reflect, reflect on where we've been and where we are and where we're going, both in terms of the work that we're doing but the overall industry context as well. When I took over two years ago, that's two years that has flown by, we and I knew our performance wasn't where it needed to be. We knew that we were in an industry that was changing dramatically. And looking back on it now, I think we probably all underestimated the magnitude and speed of the changes taking place. It's been pretty stark what's been happening over the last year as we've looked at – some competitors have exited the market. That said, we finished the year strong and Teri will take you through our results. And I'm pleased with the progress that we've made, but we are in a market that is in significant disruption. Let me share a couple of truths, at least as I think about them, that are on my mind. First, the apparel market is growing, whether you peg the number at 2% or 3% or 5%. We're in a market that has long-term structural growth, has continued to grow, and that is a good thing. Secondly, the market is, and we have clear evidence of this, continuing to move towards rewarding size and scale, whether that's vendor relationships that provide favorable pricing and innovation, whether it's us with a multi-brand portfolio doing business with our landlords to optimize our real estate footprint, or frankly whether it's our balance sheet and income statement where we see scale in investments, whether it's…

Great. Thanks, Art. So good afternoon, everyone. I'd like to start by first saying how happy I am to be part of Gap, Inc. and its portfolio of iconic brands. As Art said, this marks my sixth week with the company and so far I've been extremely impressed by the passion and the commitment that Art and the team have around continuing to move the company forward in this difficult environment. Over the last few weeks, I've been diving deep into the business to better understand where we've been, the progress we've made and the opportunities ahead. I'm really excited to be in the role and I welcome the opportunity to help continue to sharpen our operational discipline and execute against our transformation strategies that position the company for long-term growth. For those on the call that I don't know yet I look forward to meeting you and working together. Moving onto the fourth quarter and full year performance, starting with sales, our sales for the fourth quarter were up 1% to $4.43 billion. Comp sales were up 2%. Net sales for the year were $15.5 billion, down 2%. Comp sales were also down 2%. Moving to gross margin, fourth quarter gross profit was $1.5 billion, representing gross margin expansion of 110 basis points to 33.9%. Merchandise margin was up 50 basis points with positive AUR at all brands. Rents and occupancy leveraged 60 basis points, driven by the positive fourth quarter comp and the benefit from certain restructuring actions. For the full year, gross profit was $5.6 billion and gross margin was up 10 basis points to 36.3%. Merchandise margin was up 30 basis points, and rents and occupancy deleveraged 20 basis points on the year. Regarding SG&A, as we've noted, we expected Q4 SG&A to deleverage as we…

Thanks, Teri. Really appreciate it. As I mentioned and she mentioned, we've been working now side by side for really six weeks. And one of the things that I saw in Teri as I was getting to know her, and I've seen in spades since she has joined the company is that she comes from a culture and a background where operating discipline and cost control are sort of second nature. But she also comes from a culture and a background where the power of innovation and brand building are equally second nature. And I said it before; I'll say it again, I'm very much looking forward to her partnership. We are both committed to ongoing cost control and we view many of the initiatives that we are taking as ors, not ands. In this environment with the competitive turmoil we're seeing with the skittish consumer that is out there, having a lean cost structure is not just a competitive advantage, it's an imperative. And I also believe that in the environment that we're operating today, with the volatility that we're seeing, we would be remiss if we were not constantly grinding away at our cost structure and looking for opportunities for efficiency. I do want to highlight the fact that underlying that, we are working very hard and are more done than not to really rewire the operating platform of the company. And what I mean by that is, historically, we had many functions that were duplicated across our brands. And we have been working really over the course of the last 12-plus months to bring those together in what I call a best-in-class and best-in-cost operating platform. Wherever we can work on a shared basis and work more effectively and more efficiently, we will do that on a…

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

We'll take our first question from Richard Jaffe with Stifel. Richard Jaffe - Stifel, Nicolaus & Co., Inc.: Thanks very much, guys. If you could just think back to what happened at the Fishkill campus and the learnings that you've realized in the fourth quarter of operating with a very different inventory level at the Gap brand and how that will translate into what's going to happen this year, 2017, by brand in terms of inventory level in stores, online and some metrics we could perhaps use in our modeling as well? Thank you.

I'll just give you a few thoughts, and I'll turn it over to Teri. I don't know if she's prepared to give you a lot of specific metrics right now that are down at the brand and channel level, but. I mean, obviously, we had a lot of inventory that was taken out of service. The primary impact was on Gap. We had a big impact on our online and our outlet business as well as the specialty business. And I wouldn't have wished for the fire to happen, but we did see that with that reduced inventory, we were able to see really nice progress on some of the key metrics of the business in terms of AUR, the productivity of our inventory and that kind of thing. And it has very much informed our thinking about inventory going forward and the size of our buys (43:57). That all said, I do believe over the long run that continuing to gain market share is going to come both through better and more productive inventory, but also through units. The other thing that we exercised with the reduction of inventory selectively was our responsive capabilities to be able to feed units back into the business where it was appropriate. And again, I've said this a lot. The vision on my mind is to be able to always buy conservatively and be responsive enough in key categories to be able to feed units into the business, like Old Navy did in its dresses business in Q4, where we see we have real upside in terms of unit growth. Teri, do you want to add to that?

Yeah, I would really just echo Art's comment and then translate that into kind of an intuitive view that there should be room for more efficient management of our inventory levels. I would guide it to down low-single digits in the first half. In my gut, I would expect us to be able to do better than that. I'm not in a position to commit to that this early in the game, but for all the reasons that Art cited, as we get better at our responsive capabilities and these systems come online that we've invested in, I would expect us to be able to continue to make good progress in inventory discipline. Richard Jaffe - Stifel, Nicolaus & Co., Inc.: Thank you.

And we'll take our next question from Ike Boruchow with Wells Fargo.

Hey, Teri. Just two quick questions. I know you gave us the 53rd week being in the guidance. But I'm sorry if I missed this, but did you let us know what the sales and EPS benefit will be to you this year in Q4? And then when you gave us the 50 basis points of merch margin expansion for the quarter, I just want to make sure that was an adjusted – on the adjusted gross margin. Thanks.

Yes. So it's on the first – the last question first. Yes, that was on an adjusted basis, the margin guidance. In terms of 53rd week, we didn't give you the specifics. So what I would say is that on an EPS basis, we expect it to be in the range of $0.04 to $0.05. So about a couple of points on the growth rate.

Great. Thank you.

And our next question comes from Lindsey Drucker Mann with Goldman Sachs. Lindsay Drucker Mann - Goldman Sachs & Co.: Thanks. Good afternoon, everyone. I wanted to ask about traffic and maybe just expand a little bit more in terms of what you're seeing in traffic. And how you're thinking about specific initiatives to drive traffic into the stores across the year.

I'm sure you see the public data and you could tell that traffic continues to be tough. We saw, as I've said that we saw a – we have a pretty consistent downturn of about 3% a year and now it's gone deeper than that. Sometimes we see deeper than that. The public data would say that February started out significantly deeper than that due to a number of things, not the least of which was the holiday shift. So we will have, as our backdrop, a negative traffic assumption that we're using as planning. We think that is appropriate and conservative. Now, that all said, it's really two things, which is how do you beat the overall traffic number? And that is one of the reasons, one of the specific reasons that we are putting marketing back into the business. And it is not – a lot of it is not the traditional advertising. A lot of it is digital marketing that has a line of sight to returns. We can look and see how do we spend down on an ROI basis to the appropriate level of return and know when we're at a diminishing level of return from our spend. The second thing, and it was really exciting to see was – and to me it demonstrates the relevance of Gap brand as an example, we had '90s Re-Issue Collection. And with a very simple amount of marketing behind it, we got 2 billion impressions out of spending not very much money. And it shows you, again, when you get something right in a brand like that that has ubiquitous recognition and a lot of love, how much you can get for not spending if you go out, craft it and do it in the right way.…

I'll do the forensics on February when we have February in the bag. I'm really not going to try to assign a coefficient to the delay of tax refunds and the weather and the holiday shift, et cetera. What I do know is that product acceptance when she's in the store, product acceptance is excellent for us and she hasn't stopped buying clothing. So I'm really spectacle that it's some big things typically don't happen in a matter of a couple of weeks. And obviously with Old Navy in particular, we had a super strong holiday and carried that strength through into January. So again, I'll do the forensics when we can look back and put a bow around it rather than speculate right now. Lindsay Drucker Mann - Goldman Sachs & Co.: Got it. Thank you.

Yep.

And we'll take our next question from Matthew Boss with JPMorgan.

Thanks. So on the margin front, how would you rank drivers of the 50 basis points merchandise margin expansion? Just the best way to think about the cadence. And then do you actually see gross margin up this year after we think about ROD and FX or are those offsetting factors?

Sorry. What was the last part of your question?

Overall gross margin, after we think about...

Okay.

...rent, occupancy, depreciation and FX. Is it flat, up or down?

Yes. So you're asking for a lot of detailed modeling questions, and we'll be happy to spend a little more time with you offline. But just broadly speaking, if we think about the impact on margin, I'd have to go back and look at the exact ordering, but as I said, we're expecting some AUR progress, but we have the marketing investments and we do have the bonus accruals which are fairly sizable. That's a big part of what we're seeing on the overall margin impact. There is an FX impact. On gross margin this year, I think we had about 50 basis points of impact. We'll have the similar effect next year, so there are countervailing effects there between some of the positives on AUR and then the offsets. We'll take you through more detail offline, if that's helpful.

No, that's helpful. Just a follow-up on the SG&A side. What comp do you need this year to lever your expense base?

So on ROD, I think we said low-single digits.

Okay.

Maybe low- to mid-single digits, I guess.

Okay. Great. Best of luck.

Ladies and gentlemen, as a reminder, please limit your questions to one per participant. Our next question comes from John Morris with BMO Capital markets.

Thanks. Really nice work in holiday, everybody. Nice improvement and really good improvement in gross margin or the margin pickup in particular. Art, I think my question's for you on product. You've said, and we totally agree, it's all about the product at the end of the day. So maybe tell us a little bit about where your team, your merch team sees the opportunity for the spring season for product. What you've picked up on, particularly at the Gap division and maybe expand a little bit more on Old Navy, but the opportunity for spring this year versus last year. Thanks.

I think the opportunity is going to be across a number of things. I'll just share some observations. And I'd encourage you obviously, as you probably do, to get out to the stores. I was in all of our brands this morning across the entire portfolio from Old Navy to INTERMIX. And I guess where I see strength right now, we're getting traction across the entire company in bottoms. And that is a really good thing. We're seeing that at Old Navy both in men's and women's. We're seeing it inside of Gap, and they have a very strong bottoms development plan going forward. And as you know, to a certain extent, as goes bottoms, so goes the business. They are a loyalty category. If I go to BR with their for-fits (54:04) and the resonance that we've gotten across that for-fit (54:10) bottoms complex and then Athleta, which has had a super bottoms business, partly driven by their responsive platform and then fiber innovation as well, those are opportunities for us as a company. We're always strong when we have a strong bottoms business, and I'm encouraged by what I'm seeing. I'm not going to – probably for this call, it's probably not right to go into a trend-by-trend assessment. Some of these trends are continuing out there in women's tops. Obviously, cold shoulder and off-the-shoulder continues and all the brands have embraced that. But it's really the strength in the bottoms business that gives me – it gives me confidence quite honestly, and the consistency that she has registered particularly about our fits across all of our brands.

Great. Thanks.

Yep.

And we'll take our next question from Adrienne Yih with Wolfe Research. Please go ahead.

Good afternoon. Art, I wanted to ask you – can you hear me?

Yep.

Okay. Great. I wanted to ask you, what has given you sort of the confidence to reinvest in advertising, particularly television at the Gap brand? And kind of along with that, the changes that you've made at Old Navy, why the operational improvement? Why have they taken longer at the Gap brand? Thank you very much.

I think that was two questions. Let me just...

Sorry.

No. That's no problem. So I'm sorry. I was thinking. Can you state the first question again just really quickly (55:41)?

Yeah. The confidence that you've had to reinvest.

Yeah, (55:44).

Yep, exactly.

Yeah, the confidence really comes from starting out slow, reading whether or not we're getting the payback which we did a little bit in fall and then in holiday, and then we put more money into it. You would have seen our – hopefully seen our ad that we had on the Grammys. And it's confidence we got through relatively low cost marketing vehicles where we're seeing the ROI. It sits on a foundation of the fact that we're connected to our customers and when our customers are responding to the product in the store, when they feel like it's right for the brand, it's the quality, it's the fit, it's the trend, it's the fabrication, et cetera, I've always said that that's the moment when you go out and you start to get a little bit louder inviting guests back into your home. And that's really what we're doing right now. I was not willing to do that back in 2011 until I felt like the product was up to what the brands want and what we're really doing with our customers is saying, come back in and give us a try. We believe we have what you want and we want them to trust us. And we're seeing – again, it's not a go out and blow it up in terms of huge campaign, but it is building on some of the validation points that we've seen that suggest that we can get the incremental payoff by putting additional money into the business.

Great. Thank you. Can you answer the second part?

Yeah.

Thanks.

Time on Gap.

Oh, the time on Gap. Yeah. Frankly, the issue with the time on Gap, I would say, is a couple things, not the least of which was Gap had wandered much farther away from its core equities than Old Navy had. And I view brands, and Teri and I spend a lot of time talking about this because she obviously grew up in an environment where brands were paramount. Brands at their core are about trust and when we have done this where we have swung the aesthetic, where we've gone away from categories she has expected, where we don't deliver the quality and the value that she has learned that we stand for, that's a trust issue at the end of the day. And the deviation inside of Gap brand as we wandered away from the aesthetic and did some of these other things was much larger than what we had in Old Navy. And secondly, as we said, also Old Navy's responsive capabilities were more developed than Gap's were. And so it's a combination of reestablishing the equities of the brand and also building the responsive capabilities out underneath. Old Navy clearly is also in the value space. The value space is very strong and checking right now. But I think if you look at those two things, it explains a little bit of the latency between the work we've done and seeing the results show up in the numbers.

Great. Thank you very much.

And we'll take our next question from Anna Andreeva with Oppenheimer. Samantha Lanman - Oppenheimer & Co., Inc.: Hi. This is Sam Lanman on for Anna. Thanks for taking our question. Mine is on the Gap division specifically. I think you cut SKUs at Gap a few quarters ago. Any color on how that's resonating? Are there specific categories where you see additional opportunity? Additionally, I think you've talked about ticket and maybe evaluating ticket at the Gap division. Can you talk about that as well? Thanks.

Yeah, I'm sorry. You may have broken up in the call. What was the first phrase that you used at the Gap brand? We missed it here. Samantha Lanman - Oppenheimer & Co., Inc.: I was saying that I believe you cut SKUs at Gap a few quarters ago and I was wondering how that is resonating and any specific categories where you see additional opportunity.

Yeah, we definitely had gotten over-assorted in the women's business. So if you go back to summer of 2016 as an example in the knits business, we had way too many CCs on some of – I think we have six knits programs which she really responded to, but we found that the color depth that we had across CCs was way more than we needed. So we've tightened – gone to these programs and season-over-season really tightened these things up. And that's another case also where Gap has really gotten traction with a category we call snits, which are knits but seem like knits – seem like sweaters. And so we've tightened up our traditional knit fabrication in order to create some space for snits. It's a wonderful spot to be because it also gives us AUR lift as well. And frankly, she has responded to it. You see it in the stores. The stores are cleaner. They're easier to shop. They've got a stronger point of view, et cetera. I was in the store this morning at Aventura Mall and I haven't seen as clean a presentation of that in a long time, where the store was just clear what we stood for, the categories were well presented and it was a very easy store to shop. And then, sorry, I think you had an add-on to that question as well. Samantha Lanman - Oppenheimer & Co., Inc.: Yeah, I was asking about ticket.

Oh, yeah, ticket. Samantha Lanman - Oppenheimer & Co., Inc.: I think (01:00:37) may be evaluating it.

Yep. And we've done work now. We've been doing pricing work to really start with ticket integrity from a competitive standpoint and then understanding how the competitors and we play into whether it's a high low model, an everyday low price model or whatever. We're just getting some of that work completed at Gap and it's yielded some very interesting things. Overall, we believe that we have really high quality integrity in our ticketed prices. And again, that's work benchmarked against the competition from the standpoint of value and the quality that our customers are getting for the ticket. We are doing work and we have shown progress under the covers of reducing our frequency and depth and breadth of promotion. If you've been inside a Gap store over the last three or four months, you would notice that we have largely eliminated our, what we call, POS events, where we go further in the store. And that's an example of continuing to, under the covers, back off of some of the discounting we've been doing. We have a lot more to do. I'm not going to kid you, but we've made some progress there and we have confidence. What we haven't done is any kind of wholesale re-pricing or anything like that. Frankly, we don't think it's necessary. There may be some categories where we think bringing tickets down makes sense in terms of competition. The work is also shown in some categories where frankly we had more authority that we've been pricing for as well. Samantha Lanman - Oppenheimer & Co., Inc.: Thank you.

And we'll take our next question from Paul Lejuez with Citi. Please go ahead.

Hey. Thanks. Just curious, within your flat to slightly up comp expectation for the year, can you give any color by brand what you expect concept-by-concept even just directionally? And also, just hearing what you said about the first half earnings, curious about first half, first second half comp expectations. Thanks.

Yeah. So we're not going get down to brand-level margin guidance. Happy to talk about some (01:02:43) company drivers offline, but we're not going to get down to the brand level. As we said, we expect the comp on the year to be flat to slightly up. And that's based on our current expectations factoring in the start to the year and what we anticipate going forward.

Sorry, Teri. I wasn't asking margin by comp. Just I was asking about comps by concept? Any directional color there.

No. No, we won't go down the brand level. Sorry.

Okay. Thanks.

And we'll take our next question from Lorraine Hutchinson with Bank of America.

Hey, thank you. Good afternoon. I just wanted to follow up on SG&A. There had been about $275 million of cost reductions coming out of some strategic actions last year. As we think about the SG&A line, I know you went through a lot of offsets to that. But how much of those have been realized at this point and then is there an opportunity to have SG&A dollars down in 2017 because of those reductions?

Yeah, so we did begin to realize some of that savings in the current year. So we haven't disclosed the specific amounts, but a meaningful portion of those were realized this year and the remainder will be realized next year. Those are largely offset – more than offset by the investments that we're making than we talked about in terms of the digital capability and then the advertising spend. So you're not going to see a reduction in SG&A. You'll actually see some growth and it's just a bit of a lagging as we make these investments and then we'll start to see the benefits come as we move forward.

I would just jump in there also and say, reiterate the comments I made. I know Teri feels the same way. We're never done on looking for opportunities for efficiency inside the company. One of the reasons I really welcome Teri's eyes, one of the many, is a fresh pair of eyes sees opportunities that we may not have seen sitting here. And so, that is very much on my mind. And I'm not previewing anything in terms of another cost restructuring or something like that, but I remain convinced that we have to continue to get to a lean cost structure as I said.

Thank you.

Yep.

And we'll take our next question from Dana Telsey with Telsey Advisory Group.

Good afternoon, everyone. As you think about the store base and the footprint, you mentioned about the net openings. What do the closings look like by brand? And how do you think about the store footprint over time? What do you want it to look like? Thank you.

So we do have some planned closings. I don't think we've disclosed the specifics, but they're largely associated with Gap following on some of the programs that we had this year. We had closings in BR International largely and Gap. So there will be two additional closings next year.

And the other side of it is, Dana, and it's nice to hear from you, I view Old Navy as an opportunity to incrementally open some additional stores. We have some infill opportunity there. We're experimenting with a small store format. So, that number, as you know, is a net and it's a very different story if you look at an Old Navy or an Athleta versus Gap on the other side of the equation.

The last thing, not unlike inventory and SG&A where Art said, we'll be looking at everything with a fresh set of eyes. The real estate footprint is the other thing that we need to look at over time and we'll continue to think about whether we have the right locations and in the best footprint overall.

Thank you.

And that does conclude our conference for today. You may now disconnect.