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 Incorporated Second Quarter 2021 Conference Call. Today's call is being recorded. At this time, all participants are in a listen-only mode. [Operator Instruction] And I would now like to introduce your host, Steve Austenfeld, Head of Investor Relations.

Good afternoon, everyone, and welcome to Gap, Inc.'s second quarter 2021 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 any forward-looking statements, as well as the description and reconciliation of any financial measures not consistent with generally accepted accounting principles, please refer to Page 2 of the slides shown on the Investors section of our website, gapinc.com, which supplement today's remarks, as well as today's earnings release. The Company's annual report on Form 10-K filed with the Securities and Exchange Commission on March 16, 2021, and any subsequent filings with the Securities and Exchange Commission, all of which are available on gapinc.com. These forward-looking statements are based on information as of today, August 26, 2021, and we assume no obligation to publicly update or revise our forward-looking statements. Joining me on the call today are Chief Executive Officer, Sonia Syngal; and Chief Financial Officer, Katrina O'Connell. With that, I’ll turn the call over to Sonia. Thank you.

Thank you, Steve, and good afternoon, everyone. Katrina and I are glad to be here today to share our second quarter results. First, I'll share my thoughts on the quarter and how elements of our Power Plan 2023 came to life across our brand, platform, and portfolio. I'll also share how we're positioned to grow well into the future through digital transformation, strategic expansion of addressable market, and an acute focus on building customer lifetime value. Then I'll turn it over to Katrina to give a more detailed view of our financials and outlook for the rest of the year. We're happy with the strong top and bottom line results we delivered this quarter. We grew comparable sales by 12% versus 2019 and delivered the highest Q2 sales in over a decade. Even after walking away from 8% of unproductive sales from the divestiture of the two smaller brands and the strategic store closures at our North American market. To the entire team, thank you for your commitment to our customers and our Company every day. Our customers have great summer with optimism, hungry for mood-boosting clothes as vacations and reunions became reality. We saw a celebration of an American style of ‘90s nostalgia and the resurgence of denim. All of these sits in a sweet spot across our purpose-led billion-dollar lifestyle brands Staying close with our customer and keenly observing their cues allowed us to react quickly to the shifts in trends. While there’s still a favorable consumer environment, we were pleased to maintain our momentum and believe this is a strong indication that our strategy is working. Starting with the power of our brands. Over the last several quarters, we've mentioned an increasing investment in marketing and brand amplifying partnerships. Our investments at about 6% of sales for…

Thank you. [Operator Instructions]. Our first question comes from the line of Matthew Boss of JPMorgan.

Great. Thanks, and congrats on a really strong quarter.

Thank you.

So maybe two-part question. First, Sonia, at Old Navy, I guess as we think about the 18% comp growth relative to 2019, as well as 20% growth more in the front half, I guess, how do you rank drivers of the top line inflection you're seeing? Any thoughts on back-to-school so far? And then Katrina, on your updated 30% revenue guidance for the year, I think it implies double-digit back half net sales growth relative to 2019 and that's versus 6% in the front half. So just any drivers and your confidence in that embedded revenue growth acceleration in the back half of the year would be great?

Okay, Matt. Nice to hear from you. So, I'll start with the back-to-school component first around Old Navy. And as you know, for American families, this back-to-school season will be the first in over a year and Old Navy is prepared as is Gap brand. And together, they hold 9% of kids and baby market share, so a position of strength. And as we think about that, as we think about their BODEQUALITY launch, which just happened, offering the entire women's assortment from doubles 0 to size 30 in stores and online at the same price. And one of the best, biggest launches in the brand's history, those two drivers of growth are something that we're confident in. And coupled with the science that Old Navy is building into its operating model, right, the inventory management transformations they're driving as an example, which is aligned for a greater position of matching a supply demand in their stores and in their DCs. So, three great drivers, and I think we feel quite confident in our outlook and the momentum Old Navy have. Katrina O’Connell: Yes. When it comes to the Company and the acceleration you're referring to in revenue in the back half, I think, what's exciting to us and what you heard in some of our prepared remarks is that our strategy really is about continuing to take market share in the core categories in which we dominate. So, whether that's denim or active or kids and baby. But then also continued to supplement those core categories with new addressable markets like the BODEQUALITY launch, which will drive incremental value in the back half, it will maybe, or the Athleta Canada entry, which will drive incremental value for Athleta. Then combined with new lifetime value levers like loyalty launch, and then all supplemented by an incremental marketing spend that continues to drive profitable sales for us. So, it's really this layering effect of initiatives and capabilities against our great brand strength that's driving that level of growth in the back half.

Congrats again. Katrina O’Connell: Thanks, Matt.

And we will go to our next question from Ike Boruchow of Wells Fargo.

Hey, Katrina and Sonia, I guess I would ask about Gap brand specifically on the Yeezy collaboration. I mean, that was pretty interesting that 75% of the preorders for non-Gap customers, I'd love to hear a little bit more about that. And then I mean, Sonia, I think on the last conference call, you said you’d have more to share with us within the few months. So, it's been a few months and you've got a little bit more in front of you. Can you help us out with timing or just anything else along the launch would be great?

Yes. Sure, Ike. So, as we spoke last quarter, we said with the launch in Q2 and we launched Yeezy Gap with the beginning of an iconic new products around jacket. And we have preorders sold it in North America, in Tokyo, and in Europe, and it's kind of a great response. We've had a much younger customers. We've had 75% of those customers being new to the Gap brand. And so, we're excited to be off the gate. And what I would say is this is a strategic partnership. It's a long-term partnership. And when we think about the -- what we -- where we expect it to be now, we're pleased with the customer responses validating this partnership. We're pleased with the product and the product of pipeline that we have coming. And so more to come. And I think that the coolest of it will mean we don't really reveal that much in our earnings call versus out there on Twitter or something, but more to come in the coming months and years. Katrina O’Connell: Yeah, and I think we would say that it's following a creative process versus a more traditional process. And so that will lead to incremental excitement as the -- as this all builds. They'd also leads to sort of a different path. And so again, the round jacket launch and the customer acquisition we're seeing there is really giving us great confidence in the long-term potential of this partnership.

Great, thanks.

And we'll go next to Adrienne Yih of Barclays.

Okay. Sonia and Katrina, I have to say, I don't think I've ever seen a speed of transformation like the one you've set in motion. Under 18 months, right, if I did my math correctly. So, congrats.

Thanks, Adrienne.

You're welcome. So, I guess my first question is going to be the comment on all three brands being less promotional. And I want to just get a feel for where is the high watermark on each of Old Navy, Banana, and Gap, it seems like Banana and Gap are just getting underway and probably have a long way to go. And then Katrina, can you just help us quantify either the – well, actually both if you can help us quantify AUC growth and AUR growth in the second quarter, and what we should expect for those in the back half? Thank you very much.

Let me start and then kick it over to Katrina. In terms of pricing power, we’re seeing the margin expansion, as you mentioned, but we have a long runway here. If we look at each brand and their competitive set, we think that we have multiple years of price realization ahead of us. The first order bit was getting the art right, the brand positioning, the product, the marketing, the store experience, right, the fundamentals and the online experience, and we're making momentum there. But I would say that as we invest more in marketing, as we invest more in the technology to drive yields, such as examples like inventory management or order logic, or minimizing return via the acquisition we announced today, these are all multiple drivers of growth. And then layer on top of that, our new loyalty program, which we all know, is a proven mechanism to drive price and customer value. So, we think we've got multiple prongs of price realization ahead of us. And I'll turn it over to Katrina to pick up the rest. Katrina O’Connell: Yes. I think that's right. We continue to have confidence that we'll grow our AURs in the back half of this year based on everything Sonia just said, whether it's marketing that's driving significant brand health, or whether it's the product categories in which we compete, or some of the new capabilities we're launching at Old Navy that we'll deploy next year at Gap and Banana around yield optimization. All of that gives us great confidence in the AUR expansion in the back half. I'm not going to comment on AUC other than to say our outlook already contemplates any potential increases in AUC that would come from the incremental airfreight that we've put in. And as Sonia mentioned, and I mentioned, we are spending money on airfreight to compete in the back half, so that we have the right inventory here to be able to continue our market share grab in the back half of the year. And so, that's all contemplated in the raised guidance we gave today. And so, we feel quite confident that our strategically advantaged supply chain is giving us the opportunity to compete –well, combined with then the AUR and price elasticity that we have in the back-half.

Fantastic. Best of luck. Katrina O’Connell: Thank you.

And our next question comes from Brooke Roach of Goldman Sachs.

Thank you. Good afternoon, and thanks so much for taking the question. I wanted to follow-up a little bit on some of the industry-wide supply chain and product availability pressures. There was a lot that was covered on the call so far today, but I just wanted to understand maybe in a little bit more detail how confident you are that you'll be able to source the merchandise need for a holiday and into spring. What level of pressures are embedded in your outlook from these disruptions? And whether or not there’s any pockets of inventory that may be tougher to source that your customer is looking for? Thank you.

Yeah, happy to answer that. And you may be aware that my background is in supply chain and manufacturing. And so, as we have navigated the last few months and some of the headwinds, here are our advantages. We have big powerful relationships with our manufacturers across multiple countries of origin. So, if there's a country like Vietnam, which we've all read about, having some COVID concerns, we're able to work with these partners across multiple countries of their manufacturing to shift as needed. Next, we have advantaged transportation relationships. We booked advantage, cost advantage air capacity six months ago. So, we're not paying spot rates. We're being strategic here. We have vessel capacity, that is fast and giving us speed advantage. So you couple all of these nodes in the supply chain together, and you then apply that against our billion units a year and this is where scale matters. So we will be first out of the gate with some of our vendors and also, we will pay the least amount for the advantaged speed that we are investing in. So we feel good about navigating what is a very volatile environment certainly and changes over time. But we have real -- near real-time visibility to what's coming and that’s all baked into our forecast.

And we will go next to Kimberly Greenberger of Morgan Stanley.

Okay, great. Thank you so much. I wanted to ask if you have any outlook in the back half of the year by brand? How we should think about the revenue breakdown? And just on the supply chain question, you talked about a sizable increase in airfreight in the back half of the year. I just wanted to know if you had any color on magnitude there. And if you could just remind us what percentage of your inventory you have historically sourced from Vietnam that you would be looking to sort of reallocate to other countries, that would be great? Thank you so much. Katrina O’Connell: Sure. Kimberly. So, when we think about the second half revenue, we don't actually break that out by brand. But as we've said, we have strength at Old Navy driven by the sizable kids and baby denim and active businesses that we have combined with BODEQUALITY launching. And so, as you can imagine, as we talked about some of the incremental volume that’s coming from Old Navy with the BODEQUALITY launch. And that Athleta continues its momentum and also is entering with online in Canada in the back half, as well as having a Simone Biles relationship really begin to take traction with the girls' customer there. So that's how I think about those two brands. And then at the Banana Republic, we really do expect that with the fall season, we will begin to see their new marketing and execution on their website and stores with products start to take hold fall into a holiday. And at Gap, I think you're seeing at the core, Gap is very strong in the North American market. I think we gave you some color on how to think about the UK and Ireland stores, and the revenue that we'll see lost there, but then also the better profit impact going forward, 2022, what that'll be. So - and there are lots of pieces to the puzzle, but that's how to think about the revenue by brand. As far as the air costs, we haven't quantified that. But it is significant. And we are obviously -- as Sonia said, we've actually taken a bunch of capacity in the market about six months ago. So, we're actually evaluating daily, weekly, hourly, what of that capacity to use, and when. So, it's really evolving and all the possible scenarios are really contemplated in the updated raised guidance that we gave you today. And then I think you have a question on inventories to remind me.

Vietnam, sorry. Sorry was just which piece -- what percentage of inventory do tours from Vietnam historically either last year or the year before that you would look to relocate to another country? Katrina O’Connell: Vietnam is a topflight sourcing country for us, it's an important country and I'd say that as we think about countries of origin, we are able to get manufacturing out of Vietnam and use accelerated transportation to make up any flow that's coming out of the factories as we deal with factory closures and temporary day’s loss, for example. We also have strategic partnerships that have product-based in Vietnam and other parts of Southeast Asia, India, and Latin America, et cetera. So, the flexibility to move across countries origin for our big billion-dollar relationships that we have with our manufacturers is what's giving us the agility to navigate the COVID impact as it has its impact around the world, including Vietnam. Hopefully, that's helpful.

Yes. Thank you.

And ladies and gentlemen, that does conclude today's question-answer session and our conference for today. Appreciate everyone's participation. You may now disconnect.

Thank you all for joining us today and we look forward to speaking with you at the end of the third quarter.