Good afternoon, ladies and gentlemen. My name is Krista, and I'll be your conference operator today. I would like to welcome everyone to [Technical Difficulty] Incorporated Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] I would now like to introduce your host, Emily Gacka, Director of Investor Relations. Emily please go ahead.

Good afternoon, everyone, and welcome to Gap Inc.'s Fourth Quarter Fiscal 2023 Earnings Conference Call. Before we begin, I'd like to remind you that the information made available on this conference call contains forward-looking statements that are subject to risks that could cause our actual results to be materially different. 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 the cautionary statements contained in our latest earnings release. The risk factors described in the company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2023, 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, March 7, 2024, and we assume no obligation to publicly update or revise our forward-looking statements. Joining me on the call today are Chief Executive Officer, Richard Dickson, and Chief Financial Officer, Katrina O'Connell. With that, I will turn the call over to Richard.

Thank you for joining our call today, where I'll provide an update on our performance and progress in the context of our four strategic priorities. Then I'll pass the call to Katrina to walk you through our detailed financial results as well as our 2024 outlook before we take questions. As a reminder, our four strategic priorities are, first, maintaining and delivering financial and operational rigor; second, the reinvigoration of our brands; third, strengthening our platform; and fourth, energizing our culture. Before I start, I'd like to highlight three recent additions to our leadership team, each of whom will contribute meaningfully to the ongoing execution of our strategic priorities. Eric Chan has joined us as Chief Business and Strategy Officer, Amy Thompson as Chief People Officer, and Zac Posen as Creative Director of Gap, Inc., and Chief Creative Officer of Old Navy. I've been purposeful and thinking about the talent and skill these executives bring and how they complement our existing institutional knowledge. These new leaders will play critical roles in unlocking our full potential and solidifying our foundation as we redefine Gap, Inc., for a new era. One, where our financial and operational rigor is a cornerstone of strength bolstered by best-in-class talent and a culture of creativity, all paving the way for brand reinvigoration and greater cultural relevance. We are pleased with the results of the quarter as we exceed expectations on several key metrics driven by our strategic priorities. Maintaining and delivering financial and operational rigor strengthened our financial footing in 2023, showing that we can drive more efficiency and productivity, enabling us to focus on brand reinvigoration. We've made a lot of progress, delivering cost-savings and gross margin expansion, and this work helped us deliver meaningful improvement in adjusted operating margin of 410 basis points for…

Thank you, Richard, and thanks, everyone, for joining us this afternoon. We're pleased to report fourth quarter and full-year 2023 results ahead of our expectations with market share gains. We remain focused on the discipline we've created around margin recovery, expense actions, inventory management, and maintaining a strong balance sheet. As Richard noted, our financial and operational rigor continues to be foundational as we turn our attention to the reinvigoration of our brands in 2024. Before we begin, I'll note that all results reported today are inclusive of the 53rd week, except for comparable sales metrics. Some of the key highlights from fourth quarter and fiscal 2023 include the following. Fourth quarter comparable sales were flat and net sales were up 1%, ahead of our expectations driven by Old Navy and Gap brand sales results during the important holiday season. And while full-year 2023 comparable sales were down 2% and net sales declined 5% year-over-year, this performance was in-line with the outlook we provided at the beginning of the year, as our financial and operational rigor begins to deliver more consistent performance. Old Navy drove a positive 2% comparable sales in the quarter, building increased confidence in consistent delivery of net sales growth. For the year, Old Navy comparable sales were down 1%, with positive comp performance in the second-half of the year and market share gains in all four quarters. Gap brand drove 4% quarterly comparable sales growth with a positive 1% comp for the year, outpacing the market. We delivered 530 basis points of gross margin expansion in Q4 and 380 basis points of expansion for the year versus last year's adjusted gross margin, resulting from trend-right product, which when combined with well-managed inventories led to improved promotional activity. Margins also benefited from lower commodity costs. We reduced…

[Operator Instructions] Our first question comes from the line of Adrienne Yih from Barclays. Please go ahead.

Great, thank you very much, good afternoon, and congratulations to everybody on the Gap team. Richard, my first question is, the hiring of Zac Posen as Chief Creative of Gap Inc., but also Chief Creative of Old Navy, the number one, sort of where -- his focus obviously is going to be on Old Navy, but how are you expecting him to be used more broadly across Gap, Inc. And then historically, Gap has had designers in the fold before, and we always say you design for the one in merchandise for the masses, so I just want to get your philosophy on how you kind of expect to keep the guardrails on that. And then, Katrina, if you could just help us with the $5.1 billion OpEx, it seems very flattish, but you had mentioned that there was -- there were opportunities. It seems a little bit high, I guess is the way I would put it, so any color there would be great. Thank you very much.

Sure, thanks, Adrienne. I appreciate the question, and we're very excited to welcome Zac to the company, and in particular, to our largest brand, Old Navy, where he is going to be serving as Chief Creative Officer. Zac is one of America's most celebrated designers. His creative expertise, his cultural clarity, has consistently evolved American fashion, making him really a great fit for the company as we engage our culture and look to reinvigorate our story brands. Zac's role as Chief Creative Officer at Old Navy is really designed to harmonize, orchestrate, and dial up the storytelling across product and marketing. Looking at how we create brand relevance and charade experiences that ultimately celebrate the brand's ownable attributes, fun, fashion, and value for the whole family. Now, as Zac gets more immersed in the business, his influence will be really well considered to enhance the continuity of the brand's reinvigoration which we've already started to see show up on the scoreboard, and his leadership across the portfolio will add a new dimension of relevance, and I'm really looking forward to Zac on the team and having him get immersed in our portfolio at our brands.

Fantastic.

And then, Adrienne, let me take on the SG&A question. It's a great one, and I think you'd agree that we're committed to maintaining financial and operational rigor, which has really strengthened our financial footing. 2023 reflected the benefits of the ongoing work, particularly in terms of margins, expenses, inventory, cash flow, and we just delivered a year with SG&A reductions of approximately $300 million. The outlook we provided today does reflect another $70 million of reductions, that's really driven by the remaining $150 million reduction from last year's strategic actions, partially offset by inflationary pressures from wages and other headwinds. I believe we can make our cost structure more efficient and drive operating margin expansion, but we have work to do to get back to historical levels. So our outlook today reflects our current point-of-view, but we'll continue to assess the efficiency of our investments and look for opportunities for reduction or redeployment, where it makes sense, so more to come as we move through the year.

Fantastic. Best of luck. Thank you.

Your next question comes from the line of Bob Drbul from Guggenheim Securities. Please go ahead.

Hi, good afternoon. Richard, I was wondering if you could spend some more time on the marketing initiatives that are underway. I've seen some changes within Athleta but I've also seen the Gap campaign, has been really highly visible, so I guess, if you could just talk about how you're approaching it, and I guess, the level of expense that you're there and sort of the commitment to sort of reinvesting in the marketing, I think that will be pretty helpful for us. Thanks.

Sure. Yes. Bob, thank you for the question. Look, marketing is a much more complex function today than it was in the past and our brands need to show up where consumers are, but they need to show up in relevant ways, and the media mix to create relevant demand creation has changed fastly and we're approaching it very differently than in the past. There really is an art and science to creating demand today and Gap Inc.'s brands have been behind, but we are working on delivering more efficiency with our marketing and media dollars to have more specific and significant impact. And what I would say is, while we don't share marketing spend by brand, it's really not about spending more, it's about spending more efficiently. And I think you can take the Gap Linen campaign, as you mentioned, as an example. Gap is probably furthest along in this new approach -- using a holistic approach, social, influencers, streaming, linear throughout all the way through our stores, site to amplify this big idea. And I think as you'll see, you need to be driving a message consistently from the top to the bottom of the marketing funnel, and historically, we've not done a good job of keeping the message consistent throughout the funnel, and this is a great example of our new marketing methodology. Now, on Athleta, which you mentioned specifically, which again is another great example, we have a really significant opportunity with this important brand, the Power of She, is a compelling brand platform. And we know the Athleta brand resonates with consumers, but our missteps in executing product, marketing, experience has ultimately weighed heavily on the performance of the brand in recent years. Chris, as you know, Blakeslee joined us in 2023, leading a team…

Great, thank you very much.

Your next question comes from the line of Ike Boruchow from Wells Fargo. Please go ahead.

Hey, everyone. Congrats on the quarter. Two questions. Richard, maybe first for you, I hate to put you in a tough spot, but there's -- let's leave Athleta and Banana alone, ongoing outperformance I think was words for the guidance for Old Navy and Gap. If you have to look at both of those brands, which one do you feel like you have your arms around the best in terms of branding, marketing, and sustainable -- sustainability of positive comps? And then just the follow-up question would be for Katrina. I think based on your guidance, you around 4.5%, 5% margin, if we kind of go back pre-COVID, you were kind of consistently in the high-single-digits. How are we thinking about multi-year, the building and the foundation that you guys are doing if you can sustain low-single-digit growth? How should we think about the ultimate margin structure of the company over time?

Thanks, Ike. Well, first off, I'd say my arms are everywhere in the context of what we're trying to achieve here. And I think, again, speaking for the quarter results, we exceeded expectations on both top- and bottom-line, gaining market shares and the strength was really driven by the two largest brands in our portfolio, Old Navy and Gap. And more specifically, Old Navy, it's the largest brand in our portfolio and we've been working on re-asserting the brand's authority as the number two apparel brand in the country. We have a strong retail presence. We have over 1,200 stores and an incredible online presence, which I would encourage you to take a look at today in the context of its clarity and new relevant persona. We did have a strong quarter. Our sales were up 6% with comps up 2%. We gained share in all segments, but we did particularly well in women's, which we dialed up from a marketing perspective, and I will say the team has done a great job driving the financial and operational rigor, and Old Navy is really starting to see early signs of that brand reinvigoration. In particular, we know Old Navy has a reference reinforcing style authority, but with more clarity on price and quality, both in stores and online, and again, we're very encouraged with those early results, and the consistency that we expect to have throughout the year in 2024 as we build upon that discipline. I talked about Gap in the previous question, but similar. We've had a great quarter with Gap and year. We're very happy with the positive comps and we've been working to reignite Gap, and drawing on what made this brand so special in the first place. And ultimately, I think this campaign that you're seeing in market today, again, go online, take a look, I think it's a great example of the playbook in action and Gap having a voice and culture again, taking an idea in our storytelling and amplify in a way that only Gap can.

And then, Ike, to talk more specifically to the margin structure, I would say, I do see a path to delivering operating margin expansion in the long term. We have work to do to get back to historical levels. I think, first and foremost, this business leverages nicely when we get the top-line moving and it hasn't been growing regularly, and that's really what the brand reinvigoration work that Richard has been referencing is all about, getting our business back to relevance and revenue and driving the top-line, that unto itself will drive operating merchant expansion. And in the meantime, we've been through several years of transformation, partnering international market, closing our unprofitable stores, divesting of smaller brands, all that reduced the fixed cost base. And then recently, we've been doing other cost actions, all of which -- that discipline has taken out about $550 million of cost and that led to this cost structure that leverages so nicely on sales growth. And we just talked about it, we'll consistently evaluate the cost structure to identify additional opportunities. So, again, to sort of end where I started, there is a path to delivering operating margin expansion in long term as we get back to delivering consistent sales growth.

Thanks so much.

Thanks, Ike.

Your next question comes from the line of Matthew Boss from J.P. Morgan. Please go ahead.

Thanks, and congrats on a nice quarter.

Thank you.

So, Richard, could you elaborate on the market share gains that you cited that you're seeing at Old Navy and the Gap if you break down maybe by some of the destination categories for each of those brands? And any change in momentum that you're seeing at Old Navy or Gap as we think about early spring and some of the maybe early trends? And then, Katrina, so you're coming off 500 basis points of merchandise margin expansion, inventories are down mid-teens, I guess how best to think about the magnitude of merchandise margin opportunity in 2024 just considering some of the product cost tailwinds and maybe your view on the promotional landscape?

Absolutely. Matt, thanks for the question. As mentioned, Gap Inc., gained market share in the quarter year-over-year, which we were very pleased with and that is on the backdrop of a declining overall industry, so even more credit to the strength of these two particular brands at this particular time. It was driven, of course, by Old Navy and Gap as mentioned, and frankly, what we've seen in particular is, in Gap Inc., we gained share in literally all segments. The stores gained share driven by Old Navy and Gap and also outerwear, sleep, pants, wovens, tops also gained, kids and baby, as fair to mention, is a really important segment of our business. The Old Navy is the number one kids and baby brand in the U.S. Gap Inc owns 9% of the total market. We have proven capabilities and brands that resonate in this category. And so over time, it's also an opportunity for us to accelerate and become even more important of a player in this segment. And as you'll see, and we evolve our dialogue going forward, we have opportunities in several key categories of strength, Denim, Active, Kids and baby. These will all be really good conversations for us to have as we move forward with our reinvigoration plans.

And then on gross margin, I just provided guidance for the full year of at least 50 basis points of margin expansion for the full year and at least 100 basis points of expansion for Q1. So let me talk to you a little bit about that. I think as you noted, the rigor we utilized in 2023 drove 380 basis points of expansion year-over-year and as we recaptured a lot of inflation in the back half of the year and we had stronger assortments with the tighter inventories that we had overall, we're really maintaining that rigor and committed to that as we head into 2024. I think you saw that we ended with 16% less inventory year-over-year. We expect similar inventories coming out of Q1. And so that inventory rigor will allow us to lap the -- about 200 basis points of improvement from less promotions last year, this year as we head into the year. So commodity cost tailwinds in the first-half this year will become largely neutral in the back half. And we are maintaining the rigor so that we can continue to lap last year's outsized promotion improvement.

Thanks, Matt.

Your next question comes from the line of Michael Binetti from Evercore ISI. Please go ahead.

Congrats on a great quarter. I'm just -- I guess, in just following a little bit of the math here. You've got the merch margins up nicely to 2019 in the quarter, but I don't know that all the brands are back above 2019 margins. So I know you were asked about merch margins a little while ago. I don't think all the brands are above. Can you speak through a brand lens where you see the opportunity most on merchandise margin from here and how you're attacking that opportunity? The plan you gave us today? And then I think if I heard you right, you said that, ROD -- you mentioned that ROD would leverage -- do you think ROD leverage is excluding the 53rd week this year and maybe the cadence of ROD through the year, please?

Sure. So I think if I think about the performance for 2024, our outlook includes the fact that our brands are in sort of different places as it relates to brand reinvigoration. And similar to the performance we just put up for 2023, we are seeing early proof points of the brand reinvigoration in Old Navy and Gap. Our two largest brands, which really gives us more confidence in the brand's ability to be delivering consistent performance going forward. And so, while we don't guide by brand, we would expect Old Navy and Gap to deliver positive sales in the year. We continue to reset Athleta. I think we talked about that. And as we lap the brand's missteps made in the prior year, that will weigh on the revenue in the front half of the year. But we're encouraged, as we talked about, by the underlying progress in some of the early changes and longer term, we see lots of growth potential at that brand. And then lastly, the recovery of Banana will take more time as the brand works on better execution of the fundamentals. But we don't disclose margins by brand, we're just encouraged by the outlook we provided today of overall operating income growth. And we're just going to continue to use rigor in the middle of the P&L. That will result in the low to mid-teens operating income growth that we gave today on roughly flat sales growth. As it relates to ROD, our principle for ROD generally on the year is that ROD leverages on flat to slightly positive sales. So when you think about excluding the 53rd week, ROD is very slightly deleveraging on the year, and that's just some dynamics related to the 53rd week. But that's how we think about ROD.

Thanks lot.

Your next question comes from the line of Lorraine Hutchinson from Bank of America. Please go ahead.

Thank you. Good afternoon. I wanted to follow up on Bob's question about marketing. Can you quantify how much you spent on marketing in 2023? And do you have aspirations to reduce this expense going forward or just deploy -- redeploy it at current levels?

Yes. We don't disclose how we spend or what we spend on in the context of marketing. We invest in advertising over time. And our ad spend has grown to support our brands as a result of elevated costs. But in general, ultimately, our mission is to drive more effective and more efficient use of our dollars. Marketing dollars are continuing to come down year-over-year and that is a direct function of in more innovative medium metrics that is sort of driving a more innovative approach to how we market. We are continuing to evaluate our marketing comprehensively as part of the brand reinvigoration work as well as part of media efficiency work, whether that results in lower spend in 2024 or better effectiveness of the current spend, we're going to continue to see how that plays out. But regardless, we have plenty of marketing investments, do not need to be spending any more and we're going to continue to look for opportunities to be more efficient and save where appropriate.

And Lorraine to be helpful. As Richard said, marketing dollars were down year-over-year in 2023. On our lower sales volume, marketing was about 5.9% of sales, which is below the prior year's 6.7%. So as we have slowly been pulling marketing down, as Richard said, we really are more focused on effectiveness and efficiency, and we'll see how that plays out in 2024.

Thank you.

Thanks, Lorraine.

And your next question comes from the line of Brooke Roach from Goldman Sachs. Please go ahead.

Good afternoon, and thank you for taking our question. I was hoping you could elaborate a bit more on the Athleta business. It sounds like some nice underlying proof points in some of the changes have been delivered in the fourth quarter, but you're speaking to a tough first-half on compares. Can you talk a little bit about the outlook that you see on any key line items that we should be looking out for in the second-half across new product initiatives, marketing, and merchandise? And whether or not the underlying outlook provided today assumes an inflection back to growth this year for the brand?

Yea. Thanks, Brooke, for the question. And Athleta is a really important brand in our portfolio. We believe that it has significant long-term potential. The Power of She, as I talked about, is just an incredibly compelling brand platform, and we know the brand resonates with consumers. Our missteps are very public. We've executed poorly in product, marketing, and experience and that's weighed on the performance of the brand in recent years. But resetting the brand will take time. We expect the tougher promotional volume comparisons to improve by the second-half of 2024. The team is focused incredibly well on executing the brand reinvigoration playbook. They're leveraging the brand purpose, identity with great new products, exciting storytelling. It's supported by compelling marketing and really executed with excellence. I would encourage you to take a look at our sites, take a look at the social dialogue that we currently have on Athleta, even our stores that we started the new year with a very clean palette in our stores, and we've seen early successes in some of the new arrivals. And again, encouraged by the customers' early reaction. I'm really liking where the team is going with the new drop strategy, innovation, color, and new customer activations and we'll, of course, provide updates as we move through the year and assess the brand's continued progress in executing the playbook. But suffice it to say, we are very excited about the tremendous potential of Athleta.

Great. Thanks. And just one follow-up for Katrina. Following the strong success in inventory management you've seen this year, can you provide an update on how you're planning inventory for this year and your outlook for improved inventory turns going forward?

Sure. So for inventory, as we talked about, we ended with inventories down 16% on a year-over-year basis, and we expect end of Q1 inventories to be about similar. I would say as we start to lap the significant declines in inventory by the time we get to the end of Q2, we'll start to see a more normalized year-over-year inventory dynamic, where inventories are down below sales growth, but still lean. We're going to maintain the rigor we have around inventories. And I think we're at our best. We've learned when we are reading and reacting to the consumer and chasing into trends. So that's sort of how we're thinking about inventory for the balance of the year.

Thanks so much. I'll pass it on.

Thank you.

Our last question will come from Alex Straton from Morgan Stanley. Please go ahead.

Perfect. Thanks all for taking the question. Congrats on a nice quarter. Just on your comments for this continuation of the trend that will maybe in Gap on the top line. I'm just trying to understand what that means as it relates to sales growth? Should Gap continue to bleed or what's the right size of that business over time? And then can Old Navy return to growth? And then I just have a quick follow-up. Thank you.

Yes. Look, I think, as we've said, our brands are all in different stages of reinvigoration. And ultimately, as we see the performance on Old Navy and Gap, in particular, we're incredibly encouraged. I mean, as you've seen with Gap, the continuation of our reignition is working well. Again, we had a great quarter in Gap comp up 4%, Old Navy up 2%, as we described. These are not necessarily overnight fixes. It will take time. But as a high-performing company, we want to do what we say we're going to do, and that is also setting up expectations that we believe that we can meet. We're, of course, aspiring always to outperform and we believe that our outlook really reflects that each one of our brands is in a different point of reinvigoration. Again, very encouraged with the comps on Old Navy and Gap. And their early work on reinvigoration, which, again, is supported by financial and operational discipline is really showing up on the scoreboard. I have noted Banana Republic has more foundational work to do to recover. The brand is a great brand. It's got great potential. The new aesthetic is resonating. But the product architecture, pricing, in-stock really, the fundamentals need continued work and effort, and the brand will take some time to re-establish. And as mentioned, Athleta is making good underlying progress, but tougher comparisons from last year, as the brand is lapping significant promotional volume and it's weighing on the revenue performance. Now we're going to continue to do this probably through the first-half of 2024, and as the headwinds from the promotions last year abate in the second-half, we're energized by the potential of the brand and its brand reinvigoration work and the ability to see that brand show up better in performance.

That's helpful. Thanks a lot. Maybe Katrina, one for you. Just on the guidance for the year, it looks like you have margin improvement following the first quarter. Can you just talk about what enables that?

Yes. I would say broadly, as I think about margins for 2024, we have commodity benefits that come in the first-half of the year. Those become largely neutral. And then really, we're just anniversarying the benefits from last year in the significant improvement that we saw in promotions. So, we'll see where everything lands, but the guidance, as you say, was 50 -- at least 50 basis points of expansion versus last year for the year and at least 100 basis points of expansion for first quarter.

Thanks a lot.

Thank you.

Thank you.

We've reached the end of the question-and-answer session. That does conclude today's conference call. Thank you for your participation and you may now disconnect.