Good afternoon, ladies and gentlemen. My name is Justin and I will be your conference operator today. At this time, I would like to welcome everyone to The Gap, Inc. Third Quarter 2019 Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions]. I would now like to introduce your host, Tina Romani, Senior Director of Investor Relations.

Good afternoon, everyone. Welcome to Gap, Inc's third quarter 2019 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 the forward-looking statements as well as the description and reconciliation 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 November 21, 2019 and we assume no obligation to publicly update or revise our forward-looking statements. Joining me on the call today are Interim President and CEO, Robert J. Fisher and Executive Vice President and CFO, Teri List-Stoll. As mentioned, we will be using slides to supplement our 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 Bob.

Thank you, Tina. Good afternoon, everyone. It's a pleasure to speak with you all. It's been a while for me. I want to provide some very brief remarks before turning it over to Teri to cover third quarter results and expectations heading into fourth quarter. First, this is a pivotal time for the company and taking on the role as Interim President and CEO of Gap, Inc. is incredibly important to me. Over the past 35 plus years in various roles here, from merchandising and general management to Chairman of the Board, I have gained a deep understanding of our company operations and the retail space. I’m deeply and personally committed to the success of the company and I’m approaching the role with both a clear view of where we are and urgency about where we need to go. While I’m confident about our future, I'm also realistic about the challenges ahead. Clearly our brands are underperforming today and have been pressured by uneven execution. The diverging priorities of our two largest brands, coupled with the overall complexity that has been building up in the organization over time has led to a lack of focus, operational discipline and efficiency in many areas. To ensure we’re appropriately assessing the business, making the difficult decisions and taking the necessary action to improve our operational execution, I'm constituting an executive committee that will streamline operating decisions and drive better accountability during this interim period. Sonia Syngal and Mark Breitbard will be responsible for brand leadership, Teri will add operational oversight to her role, and our Global General Counsel, Julie Gruber will consolidate administrative oversight. We’re fortunate that a strong bench of talented leaders supporting me in driving operational excellence and greater efficiency that will help position us for improved profitability. To that end,…

Thanks, Bob. As we shared a few weeks ago, Q3 was a challenging quarter, the traffic trends remained soft across our brand, along with continued product acceptance challenges, particularly at Old Navy. I'll start with an overview of performance by brand before getting into the specifics of the quarter. Starting with Old Navy. While we're not pleased with our performance we entered the quarter knowing we would face headwinds particularly around traffic. As we discussed with you last quarter history has shown us that traffic rebounds typically lag product acceptance improvement, as such traffic remains challenging throughout the quarter. With regards to product, while we believe we have correctly diagnosed our women's product issues, we have identified opportunities for better execution, particularly in the areas of marketing and merchandising. To this end, we have added a new Chief Creative Officer role that leads these two critical areas and acts as a direct link to our Brand President. While our Chief Creative Officer’s full vision will likely not be realized until next year, the brand strong bench of creative talent has been hard at work incorporating learnings from Q3 into holiday plans. Looking ahead, we have an opportunity to better execute on Old Navy's unique value equation and positioning, with style, fit, quality and price, all working in balance. Focusing on Old Navy's Q4 plans, we believe that we are better positioned for the holiday season given that we were able to fully infuse key learnings and insights from Holiday 2018 into our plans. It's also important to note that three key categories we began leaning into this fall Denim, Fleece and Active continue to outperform the overall brand in terms of sales and margin comps and we have gained market share in Denim. Regarding marketing, we had frankly become too…

Thank you. [Operator Instructions] Our first question will come from Alex Walvis with Goldman Sachs.

Hello, this is [indiscernible] on for Alex, thanks so much for giving - for taking the time for a question. I was wondering if you could dive into Gap brand a little bit deeper, specifically by channel and geography. Can you help us break down trends between Gap stores and Specialty Gap outlet and then also if you had any impact from some of the disruption in Asia and Hong Kong this quarter?

Sure, as I said, the Gap brand had some bright spots in the quarter particularly as it pertains to the Denim initiatives that they had stated were going to be a priority for the brand. And so we were quite pleased with the performance of Denim really across channels and geographies. We don't disclose the specific results by channel but I would say that particularly in Specialty, we were pleased with the progress we saw overall. We did definitely have some disruption in Asia. The Hong Kong situation is a very difficult situation and obviously had an impact on the business in that's part of our China business. And so we saw some challenges there. We also had some softness in Japan, which was a little bit of a product acceptance issue, but also some other macro factors that affected traffic overall in that geography. So net-net as you look at it, as I said the progress we continue to see against margin rate is exactly what we think is a priority. Seeing the success in Denim when we bring together great product with great marketing and great in-store execution, does give us some optimism as we continue to drive that same formula across more categories and more channels. So still lots of work to do on the brand, but seeing some positive signs.

Great and if I could just ask one more as a quick follow-up regarding gross margins on your outlook for the fourth quarter, you're comping off of a relatively easy comparison for 4Q 2018. Can you help us understand some of the moving pieces and puts and takes by maybe brand and how you're thinking about the promotional structure with particular eye on how you're thinking about the Old Navy gross margin, given the performance hasn't been quite as good as you had previously thought it would be?

As I said on a year-to-date basis, most of our gross margin challenge has come from the Old Navy brand, and we've actually had some positive from Gap, particularly in the third quarter. The expectations for those two brands actually came out different than we expected. And so as we move into Q4 and particularly with the revision in guidance we've made, what we've acknowledged is that the trends we have been seeing have not yet inflected. And that's why we provided the guidance that would say Q4 margin is going to be fairly consistent with what we have seen year-to-date and it's the same primary factors driving it, which is largely Old Navy. Again, as we said, it's early days for holiday. So a lot can happen. But that's our current view.

Great. Thank you so much.

And our next question comes from Randy Konik with Jefferies.

Thanks a lot. I guess Teri just following up on margins, you gave us perspective that the gross margins for Gap had been up, it sounds like for three quarters in a row, which means that Old Navy gross margins has been down. If you look at the annual guidance you've given us, what does that imply for the segment margin of Old Navy on an annual basis for the end of this year? And I guess the question we're all trying to get towards is what would -- what starts to kind of stabilize those operating margins or segment margins in Old Navy and when? That's my first question. Thanks.

Yes, so I think what you can anticipate is that there is meaningful margin degradation in the Old Navy brand on a fiscal year basis at the segment level. And we will likely provide some additional detail with that as we close out the fiscal year. But what will really need to happen in order to address that is for us to see some of the benefits of the actions we've taken with regard to product, particularly the women's product. And then as we continue to buy leaner, we bought quite a bit leaner in the back half of the year as we've talked about, but the traffic drag has done a little bit worse than expected. So we're still not where we want to be and as we've leaned into Q1 and Q2, we've tried to balance the fact that the product will continue to get better with the changes we've made, but also recognizing that same traffic lag, so I would expect the combination of improved products as we move through Q4 into Q1 as well as the strengthened marketing plans that we put in place and will sustain as we move into Q1 and then the leanness of the inventory should give us a little more margin leverage.

Helpful and can I just maybe ask a question for Bob, I guess Bob since we don't get you on the call that often, I just want to get your personal perspective or view of what you think the future of the Gap brand should look like or look differently from what was being previously pursued under Art. Just want to get some of your thoughts there and just expand upon what type of quality or different qualities you might be looking for from the new leader going forward? Thanks.

Yes, look I'm objective about the performance of the brand and realize that significant improvement is required. There is a lot of transformation work that is going on and will continue with urgency. We really looked at the separation as a catalyst for reimagining the operating models, the process, the culture, our focus is going to be on improving the profitability of the brand. We need more standardized processes, that's better leveraging of our investments in systems and capabilities, adopting a stronger culture of accountability. We're looking at a common operating platform and a more focused investment choices. Those are critical for us. Regarding the CEO search, we got talented leaders in place who are looking at their businesses and taking the necessary actions. As the Board looks at potential successors, its focus will be on leadership candidates with operational excellence that can drive greater efficiency, speed and profitability in a creative environment. We are a mixture here of left and right brained. And so far as you find that, that's important.

Very helpful. Thank you.

[Operator Instructions] Your next question comes from the line of Matthew Boss with JPMorgan.

Thanks, great. So as we kind of break this down, what would be the outlook for comps by brand in the fourth quarter relative to performance that you saw in the third quarter, and then at Old Navy maybe larger picture, where on the women's side do you see the biggest challenge with the product assortment currently. And what do you think is the timeline to turn that business?

Yes, so we haven't broken down comp by brand as we think about the guidance, we've given for Q4, I think what we have said is that, that we weren't, we weren't thrilled with the Banana performance on the quarter and obviously, some of that was just timing of product flows relative to fall. So hopefully we will see some positive inflection there. But for Gap and Old Navy, we’re not anticipating a major turn versus what we've seen. With regards to the Old Navy product issues in women's, we've talked about it a bit, it has tended to be a bit of a combination of factors in terms of some of the silhouettes and the prints and patterns that that we just kind of missed and we lost sight of what our consumer really valued, it was a little bit exacerbated by some of the broader trends in the market not being necessarily democratic but and is relative to our own customer needs. And so and then obviously as we have challenges in women's product that does cast a bit of a shadow over the rest of the business because our primary customer is the mom, the woman and when she comes into the store and doesn't find something that she loves, it obviously affects her willingness to shop, men's and kids, babies. So we've been very much focused on is we have strengths in the business in Denim and Fleece and Active. And so as we lean into those for fall, that does give us a little bit of a bridge as we continue to drive the improvement in women's products. I think the sense of [indiscernible] come in to that business from Athleta is that we're making real good headway. We understand the issues, and we will continue to see progress there, not saying about what we're seeing has any reflection on our long-term opinion of the strength of the brand, or the growth prospects of the brand, it really is very much product issues, which has led to some traffic pressures. And we're working our way through it.

Great, and then just one follow-up on the margin front as we think about expenses, Teri what's the best way to think about Gap versus Old Navy as we think about balancing marketing, wages and investments against some of the outlined efficiency opportunities more as we think beyond this year for the Gap and Old Navy?

Yes, just make sure I'm answering your question. So let me take a shot at it and then tell me if I have hit the mark. But our priority today and our priority even leading up to in post separation will be to ensure that we're allocating sufficient investment to the growth prospects of Old Navy and Athleta. So we're going to make that a priority to ensure they're both stood up for success against their respective strategic priorities. The Gap brand, we are investing behind the brand, but very thoughtfully, intentionally. So for example in Q4, we will have a little more marketing investments frankly across all of the brands, because it's an important season as you know and to the extent we have had traffic pressures, we need to be able to invest in engaging our customers to drive more frequency to acquire new customers to just ensure we're getting the foot traffic across both stores and in online. So we will be investing in all of the brands but with a definite distortion to fixing Old Navy and continuing to support the growth of Athleta.

That's great color. Thank you.

And our next question will come from Mark Altschwager with Baird.

Good evening. Thanks for taking my question. Teri, maybe just following-up on that last line of discussion. So I meant at Old Navy, it sounds like women's is still an issue. But you do have you're seeing some positive trends in other areas of the assortment that perhaps over index, over holiday if I heard that correctly. And it also sounds like marketing, it's been identified as an opportunity and you are investing more heavily in that marketing in the fourth quarter. So I guess if I have those two things correct, why not more sequential improvement in that comparison in the fourth quarter, I guess the down mid single digit guidance, it seems to presume that trends don't get much better despite the easier comparison. So I'm trying to reconcile all that things?

Yes, no, no, it's a fair question. And maybe it's just while we're leaning into Denim, Fleece and Active, I don't think that that can offset some of the challenges we have in women's partly for the reason I described that is the women's product isn't drawing her in and starting her shopping. It does have impact on the other categories as well. But definitely, particularly even in holiday even though we'll be having, we have Jingle Jammies which is a great promotion for the brand and we have other things going on. At the end of the day, if we're not strong in dresses and woven and the things that she wants to buy for holiday, that's going to have a bit of an impact. Now, in fairness, we've been working at this and we have seen some positive trends, we've seen over the last few weeks, some positive sales over traffic. There are some indicators that that are been encouraging, as I said but we remain cautiously optimistic given how early it is. And we would like nothing more than to be able to come out of holiday and tell you that we saw the inflection, we had originally been hoping for. We just -- it’s just premature for us to call that today.

Thank you.

And moving on to Oliver Chen with Cowen and Company.

Hi, thank you and congrats Tina and Katina. Bob and Teri would love your thoughts on the state of the store base and how you're thinking about the lower productivity Gap stores and what may happen there because we're cautious on traffic trends being under pressure there and the future as well. And also on the broader topic of speed and cyber platforming and your thoughts on changes that can be made to the business, that's been a journey for you in terms of that has been an area of focus, would love your thoughts on what's ahead? Thank you.

Yes, I guess given I've been here in the seat two weeks, I'm going to let Teri take that one. But I appreciate you’re asking me.

And I'm happy to start with and Bob may have something to add, because Bob and I spent some time this morning even talking to one of our landlords about, about the stores and this is, this is an important part of our transformation of really the specialty business, but particularly the specialty business in the Gap brand. And we have acknowledged with our fleet restructuring program, that we still have too many stores that are oversized, not performing the way we need to need them to perform, maybe in locations that are no longer on her path that aren’t driving the profitability that we need. And so it's critical that we get our store face down to the appropriate number of stores with the appropriate level of profitability is where we actually have the ability to invest in the stores. I mean, Bob can share his experiences over the years but it's clear that a lot of our stores are oversized, a lot of stores haven't been invested in to provide a differentiated experience to our customers. So we're very, very much focused on getting to the right store base. Now, the flip side is specialty of course is on the outlet side and the factory side for Banana, the value of space is certainly more attractive. It has store economics, not unlike Old Navy with nice margins and lower rod and those in fact have opportunity to certainly perform better but obviously more financially attractive from the get go. And we are continuing to look at how we drive those and could potentially even add stores there over time, as the business turns.

You also asked a question about speed. This has been a long, slow journey to speed. And it's not anything that I'm terribly proud of, I think we can do a lot better. And I think we have to look at the entire way we design, develop, sample, source, and distribute product and get into the 21st century.

This is one where we have invested in a lot of capability. And so what we really need to drive adoption of some of the capabilities that we do have and it does take some intentional planning and operational discipline, you have to platform the fabrics, you have to take some best in some cases, and importantly you have to leave yourself open on inventory to be able to respond to learnings you have on both demand and trends. And so that is an area we need to continue to exploit because we've already invested in the capabilities.

Thank you.

Until our turns are better than average, we can do better.

Next question?

Certainly, our next question will come from Westcott Rochette with Evercore ISI.

Thanks a lot guys. Going back to Old Navy, you’ve obviously built-up a lot of goodwill with the customer over time as a value fashion oriented. Are you seeing signs that that customer is still seeking you out and looking and just not happy moving on whether it's online as a pre-shop things that are showing that the customer is still looking and you can easily kind of win them back and thinking about that there's a value oriented, off-price retailer to sit at 10% like a parallel comp. Do you think that customer to this kind of migrating to other places right now, but you find that you can pull them back? Thank you.

Yes, it's a really fair question. And obviously, the competition in the value space is very strong. We've seen some of our best competitors do very well during this time where we've been challenged with some of our own operational issues. But when we look at the fundamental measures of brand health, we still feel very good about our share levels, the menus share, the brand health that we look at from a YouGov standpoint, which is a measuring service we use, our NPS scores as we look at experiences of customers in our stores. These are all positive indicators. And so I think to quickly answer your question, we very much do believe that our customers is still engaged, and that as we tailor our promotional activities, our marketing activities and continue to return to delighting her with our product offerings, that the customer engagement will be as strong as it's ever been.

There's no question that some of the competition is getting better. But this is still a very highly fragmented industry with fluid shares. And when you have that and you perform, you should be able to grow share.

Excellent. And can you just provide or give an update on what your digital sales are whether the activity in the digital is significantly different than what you're seeing in-store? Thank you very much.

Yes, across the board, our online trends are better than our store trends. And in fact, in our growth trends at Old Navy and Athleta the quarter had double-digit growth in online, Athleta is actually about half online given its heritage and still posting double-digit growth there. So there is a definite spread there. And that's, that's really what we're focused on is how do we create seamless experiences for our customers, so that digital is embedded and seamless for them, so that we can capture them wherever they shop, and wherever they buy, which tend to be not necessarily the same place. And so we were pleased with the progress we're seeing in our online business, but also see that as a continued opportunity for growth as we move forward.

Thank you. Good luck.

Thank you.

And moving on to Kimberly Greenberger with Morgan Stanley.

Great, thank you so much for taking the question. Bob, I wanted to just get your perspective and Teri yours as well. We're trying to understand from the outside, it's a little more difficult. The what it is about the organization that prevented Gap discretely and separately from Old Navy from focusing on each of their respective customers and having a differentiated strategy because as we understand it from the outside, there's these are completely separate organizations. They have a different staff in each brand. And so we're just trying to figure out what was it about these two businesses being in the same organization that sort of prevented that separate individual focused on each of their customers that you think can be addressed and fixed through the separation?

Sure. The fundamental business models are different from between the two, the two businesses between the Gap, Inc. portfolio which sells about 425 million units a year but produces over 35,000 styles. So that's 12,000 units for style. Old Navy is we talked about it here as machine, it’s a units business. It operates on a different scale than the brands in the Gap, Inc. portfolio, it sells 700 million units a year, concentrated in 9,700 styles, that's about 70,000 units of style. It's an $8 billion brand and operates at the intersection of value and specialty. And it's in order to have a specially focus, I think we need to have everything aligned around I'm sorry, in order to have the value focus, we need to have everything aligned around value. And that's not the way the other brands are.

And Bob maybe I would just add that that there are -- there's friction whenever you have a portfolio and even though the brands are run separately and Sonia very much today is focused on the growth of Old Navy in terms of day to day execution. When it comes down to capital allocation or even how we might roll-out initiatives that are beneficial to all brands, but for whatever reason, the timing may be influenced by the needs of one brand over another. There's just a number of places within the portfolio where the friction affects the speed and ability of Old Navy to be able to be singularly focused on both the capital allocation and operational choices that would allow it to win in this highly competitive values.

Great, that's really helpful. Teri, I just had one quick follow-up for you on the capabilities. When Bob talked about, not proud of the performance on the long, slow journey to speed. You mentioned that you've invested in a number of capabilities, but perhaps they're not being utilized. Could you just remind us what are a couple examples of those capabilities?

Yes, there has been a number of tools that are a function of the overall speed model, whether it's testing or whether it's use of data science and some of our inventory planning. There's just a number of places within our -- what we call our PEES, which is our Product End-to-End System, where we built in capability that hasn't been fully utilized. Some of it also as I said, just planning, it takes a different level of discipline to be able to get the benefit of speed model. And then the last part is co-creation where we have not ramped-up our co-creation capabilities with vendors as much as we have, as we would have expected. We invest in those relationships. We have some very sophisticated vendors, but we haven't fully exploited what they can bring to the party in terms of co-creation, which also can help with speed.

Great, thank you.

And our last question will come from the line of Dana Telsey with Telsey Advisory Group.

Bob, you've lived with The Gap, Inc. as your whole life and separation has been a topic in the past never obviously is foremost now. And given the current dislocation in the retail market, and in the retail market and what you see for the different brands, how do you look at, do you see any acceleration of timing of them being standalone, and is the timing for the separation still Spring of 2020 or February 2020. And Teri given the changes going on in terms of what you're seeing. Athleta I think there was a little bit of a hiccup in this quarter, anything that we should watch in terms of the people side, given the changes going on that could accelerate or hinder progress as we move through 4Q? Thank you.

Dana, there are lot of questions in there. We will take a shot and then make sure we’ve gotten them off.

We did a thorough review of the strategic tenants underlying the separation as well, the operational and execution of plans. We remain confident in the value creation opportunities, it presents inclusive of our current business, current view on business and the expected cost of the transaction. We're looking at mid-year for the transactions, and but we're going to, the planning and the execution of this is complicated and people are working really hard heads down. Fortunately, much of the work goes on in the more corporate functions. I've been really very pleased that I don't see a tremendous amount of distraction going on in the brands, which are the ones critical to execute holiday and beyond. And yes, it was a -- it was a difficult decision but at some point parents let their children leave the house and go out and do great things. So I think that was the conclusion we can give.

And Dana, I think you asked about effectively talent retention is that’s the last part of your question?

Exactly.

Yes, this is one where, this is a year of change. And it's a year of business challenges and obviously, that that can create more work for everyone in the organization. And so you have some risks. But I do think in many respects, particularly even over the last few weeks, as we work through the leadership transitions, I think there's renewed optimism about our ability to have the clarity of the path forward and make the decisive, take the decisive actions that support that strategy and have a sense of urgency in driving the transformation and setting both companies up for success. So I think that employees are energized by that, and we can already start to feel it in the building today.

Thank you, best of luck.

Thank you.

Thank you. That does conclude our conference. You may now disconnect.