Good afternoon, ladies and gentlemen. I would like to welcome everyone to The Gap, Inc. Fourth Quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. For those analysts who wish to participate in the question and answer session after the call, as a reminder, please limit your questions to one per participant. If anyone should require assistance during the call, please press the star key followed by the zero key on your touch-tone phone. I would now like to introduce your host, Whitney Notaro, head of investor relations.

Good afternoon, everyone. Welcome to The Gap, Inc. Fourth Quarter Fiscal 2024 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, 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 19, 2024, 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 6, 2025, and we assume no obligation to publicly update or revise our forward-looking statement. Our latest earnings release and the accompanying materials available on gapinc.com also include descriptions and reconciliations of any financial measures not consistent with generally accepted accounting principles. Joining me today on the call are Chief Executive Officer Richard Dickson and Chief Financial Officer Katrina O'Connell. With that, I'll turn over the call to Richard.

Good afternoon, and thank you for joining us today. I'm excited to share with you our strong fourth quarter results, which rounded out an exceptional year for The Gap, Inc. We continued to perform while we transform, delivering another quarter that exceeded financial expectations and underscored the meaningful progress we're driving across our strategic priorities. Operational and financial rigor is the fabric of how we work and has delivered solid metrics that Katrina and I will discuss during this call. This discipline has enabled us to execute effectively against our brand reinvigoration playbook and at the same time, strengthen our platform by building and sharpening our operational capabilities with highlights on supply chain and technology. We continue to energize our culture, empower our global teams, and attract great talent. I do want to begin by taking a moment to thank our global team for their partnership and collaboration this past year. Their relentless dedication to our transformation has been instrumental in driving the progress that we've made. Let me share some highlights on the progress we achieved in 2024. The Gap, Inc. delivered positive comps in all four quarters, with all four of our brands comping flat to positive for the year, demonstrating consistency and strength across the portfolio. The Gap, Inc. gained market share for the eighth consecutive quarter, reflecting that our brands are resonating with consumers. We achieved one of the highest gross margins in the last twenty years, a clear result of our focus on financial and operational rigor. We increased operating income by more than $500 million and operating margin by 330 basis points versus last year's adjusted while we continue to drive efficiencies in our cost structure. We delivered a full-year EPS of $2.20, the highest since 2018, demonstrating our earnings power as we drive…

Thank you, Richard, and thanks everyone for joining us this afternoon. Our strong finish to the year reinforces the power of our portfolio of iconic American brands that shape culture and our confidence that our transformation is taking hold. The meaningful progress we've made on our strategic priorities is showing up in the results, with a return to top-line sales growth for the year resulting in share gains and all brands showing signs of reinvigoration. The discipline we've developed has enabled significant margin expansion and earnings growth, and our rigor in expense and inventory management drove substantial operating and free cash flow generation, resulting in a strong balance sheet. The reinvigoration of our brands combined with our financial and operational rigor is enabling us to perform while we transform, consistently delivering on our commitments as we continue to strengthen our performance. Some key highlights from fiscal 2024 include the following. It's exciting to see the brand reinvigoration driving results, with The Gap, Inc. comparable sales up 3%, and all four of our brands comping flat to positive for the year, which is notable as we execute on our reinvigoration playbook. This was The Gap, Inc.'s second consecutive year of market share gains driven by wins across our brand portfolio. Gross margin in fiscal 2024 expanded 250 basis points versus last year. This progress reflects both the increased relevance of our product and brands and our disciplined inventory management. We tightly managed SG&A dollars below the prior year and in line with our beginning-of-year outlook. With our focus on expense management and financial rigor, we realized efficiencies in our cost structure that more than offset variable costs from higher sales as well as wage inflation. This resulted in operating income of $1.1 billion, growing 83% compared to last year's adjusted operating…

Thank you.

As a reminder, for those analysts who wish to participate in the question and answer session, please limit yourself to one question per participant. Our first question will come from Alex Straton, Morgan Stanley. Great. Thanks for taking my question and congrats on another great quarter here. I have one for Richard and then a quick one for Katrina. For Richard, just the Gap banner just delivered monster fourth-quarter comps, highest in a number of years. Your initial comments were super helpful, but can you dig in further on what exactly is driving that momentum? The new customer you're recruiting, and then perhaps how big that banner could grow to be? And a quick one for Katrina just on the full-year operating margin expansion you're guiding to. Sounds like that's pretty evenly split between gross margin and SG&A. Or let me know if I'm misunderstanding that and one piece is edging out the other. Thanks a lot.

Alex, thank you for the question. Just laddering up. Obviously, Q4 we delivered a really another exceptional quarter exceeding financial expectations, and ultimately continuing to perform while we transform. Comps, as we shared, are up 3% for the quarter. It's the fourth consecutive quarter of positive comps. We gained market share for the eighth consecutive quarter, and it really indicates that collectively, our brands are really resonating with consumers. It rounds out an exceptional year for The Gap, Inc. All four brands gained market share in the year, really demonstrating the strength in the industry. As you call out, Gap brand had what you call a monster performance, which we really appreciate. Gap is back in the cultural conversation, and it's truly a testament to the Gap team who's been executing the brand playbook with excellence. This is a great example, I'd say, of how the playbook can really drive relevance and revenue. Comps accelerated to 7%. In the fourth quarter, we achieved our seventh consecutive quarter of market share gains. Climbed the ranks also in the apparel market this year. Gap ranks now as number eleven as the largest brand in the US, and we intend this brand to get back into the top ten. I would say the strong performance in Q4 was really fueled by innovation, product newness, we had extraordinarily compelling marketing, and we took a social-first approach. This strategic intent that we've been sharing around driving the women's business is truly showing up in the results. We've got continued momentum in men's, and we're also seeing improvement in kids and baby. The brand campaigns and the collaborations that we have been driving are attracting a new generation to Gap but at the same time, really importantly, is in reinforcing the brand to those who loved us for years. The latest release that we have right now with Parker Posey is really resonating. And it's a unique creative format. I would say that's a great example of bridging the generation gap. We know it's working. Organic Google searches have been up 6% on the year. Holiday, we actually saw a 25% increase in new customer visits online. And ultimately, what I can tell you is we are really looking forward to continuing the trend product amplified by compelling storytelling, enhancing the customer experience, as Gap continues to advance. I couldn't be more excited about the future of Gap, and it's more of a question of how high is high.

And then, Alex, as it relates to the operating margin guidance, I think the way you're interpreting it is pretty correct. We do see sales increasing 1 to 2%. And as you said, 8 to 10% operating income growth, which is building on the significant progress we made on margins with slight expansion in 2025. And then the dynamic we described around the SG&A where we're finding $150 million of savings and then purposely reinvesting a portion are really the two dynamics that we're looking at. And when combined, do get you to the 8 to 10% operating income growth.

Thanks so much. Good luck.

Thanks, Alex.

Our next question comes from Lorraine Hutchinson, Bank of America.

Thank you. Good afternoon.

Katrina, you've managed SG&A very closely in recent years. Is there an opportunity for further expense cuts beyond the $150 million that you discussed? And what are the key buckets that you're focused on?

Yeah. Thanks, Lorraine. I mean, we have rigorously managed the cost structure over the last few years as you said, including this past year. We delivered the $5.1 billion in SG&A, which was $100 million below the prior year and leveraged. And that showed that the team was able to find efficiencies throughout the year to offset costs that were associated with delivering higher sales, the inflation as well as higher incentive comp accruals. And so we have the discipline now in the business, and we remain committed to that. As Richard said, in 2025, this continuous improvement as we become a high-performing company is focused on really eliminating low-value work. As we aspire to really redeploy that into higher-value projects. So the $150 million that we're going after in 2025 is across technology, marketing, overhead, and stores expenses. And as we think about reinvestments, Richard spoke about some of those examples in his speech, we're leveraging AI to create more elevated experiences for our customers with things like personalization. We're looking at empowering our design and development processes. We're modernizing our supply chain, and we're looking at productivity and strengthening our employee experience. So those are a few of the things we're investing in. We will continue this discipline around SG&A. And if we see beyond $150 million, we'll certainly go after it. But that's our first view as far as what we have line of sight to right now.

Thank you.

Your next question comes from Matthew Boss, JPMorgan.

Thanks and congrats on a great quarter. So Richard, on the inflection to continuous improvement, that you cited, I guess, what inning do you see your work on the Gap in Old Navy as we think about today, could you speak to new customer acquisition and category market share gains that you're seeing as we head into 2025? And then, Katrina, just relative to the 2025, top and bottom line guidance, I guess, could you speak to continued drivers of operating income dollar growth multiyear if the portfolio is able to post consistent low single-digit top-line growth.

Okay, Matt. We're gonna try and tackle that one. I appreciate the question. You know, the efforts that we've been making executing our playbook, essentially reinvigorating our brands is working. And as you call out, its evidence is really market share. You know, we talked about gaining market share for the eighth consecutive quarter. It really is indicating that our brands are really resonating with consumers. And so we are building stronger brand identities. It's been supported by trend-right products, we're amplifying these products with more compelling storytelling with a media mix model that's social-first, and it is translating into cultural relevance. Now I would say that each brand is at a different stage of progress, but the progress we're making is real. And we're driving to become a high-performing house of iconic brands that shape culture. So the continuous improvement of that is sequential. We could talk about Old Navy. Obviously, you know, the largest brand in our portfolio, it finished the year with strong results, comping the comp. In the fourth quarter up 3% and delivering eight consecutive quarters of market share gains. Categorically, we've been focused on active and denim, where we've been really pursuing a leadership position and it's showing up in the results. I think I mentioned on the last call our pursuit inactive, and the brand grew to be the number five player in the category. And it was the only brand among the top five to gain share. I mentioned denim. Another winning category. In 2024, we gained share in denim. We're now the fourth largest adult denim brand in the US. So the continued strength in the brand's financial and operational rigor is really enabling us to dial up the merchandising narratives, style quotient, quality, that our customers expect and the brand is really presenting better. I talked about Gap specifically. So don't think we need to belabor that point, but we couldn't be more excited about where we're headed for Gap. And similarly, their share gains and cultural relevance that's really resonating. I mentioned the attraction with new consumers, Google search up, 25% increase in new customer visits. We also have Banana Republic that showed great progress in the quarter with 4% comp continue to work on that brand. Focusing on leaning into classics, as we've shared more precise assortments, been working on fit and ultimately there, it's about rebuilding trust. And lastly, resetting Athleta is still top of mind very ambitious with Athleta. Despite having a challenging quarter, we delivered a flat comp for the year. So we have seen improvements across several key metrics, and we also gained share. So all in all, I would say, I'm feeling really optimistic and proud of the team's results. We are moving into a continuous improvement model and we expect and anticipate another exciting 2025.

And then, Matt, as it relates to sort of operating margin long term, we're very proud of the progress we made this year. We reported the operating margin for this year of 7.4%. As we said, it's a 330 basis point improvement. And we expect to make more progress in 2025 with 8 to 10% operating income growth. And we do continue to aspire to return to more historic levels over time. As it's specific to the P&L, we've made a lot of progress in the cost structure has leverages on any positive sales. And SG&A leverages on slightly positive sales. So as we return the model to sales growth, we do expect to continue to see operating income growth over the long term.

It's great color. Congrats again.

Thanks, Matt.

As a reminder, please limit yourself to one question per participant. And our next question is from Brooke Roach, Goldman Sachs.

Good afternoon, and thank you for taking our question. Richard, I was hoping you could elaborate on the plans to strengthen the Athleta brand. What are the most important initiatives you're focused on this year? And how are you thinking about bridging that brand back to sustainable comp growth similar to the other reinvigorated brands in your portfolio? Thank you.

Brooke, I'm happy you asked the question. I think first off, it's important to recognize Athleta is the number three brand in the women's active space. It's an important brand in the industry. And it's an important brand in our portfolio. It's also important, as I mentioned, on an annual basis, Athleta delivered a flat comp for the year. That's up against a double-digit decrease from the year prior. So we've seen improvements across several key metrics, and most notably, we gained market share. The progress we've been making around the brand's identity, we launched new activations, we've been reentering the cultural conversation, it is reinforcing our confidence in the long-term opportunity. And we do acknowledge that we have continued work to do to continue to reset the brand. In the quarter, we didn't meet our expectations. And specifically, need to do more to excite our core customer during the holiday period. Now we did use promotions at that time as a lever to engage the customer during the quarter. The good news is that we successfully managed our inventory and we're starting the year with better inventory composition in comparison to the same time last year. We have seen the drops that we've had in our color drops, our fashion drops. They've attracted new customers. We've done a great job reactivating customers. But ultimately, we lacked the depth of product interest for our core customer. And now we're gonna find that right balance as we move into a focus for 2025. I will reiterate, our ambitions remain high for this brand. We love the category. It's the largest category in the industry. We have more work to do.

Thanks so much. I'll pass it on.

Thanks, Brooke.

Next up is Adrienne Yih from Barclays.

Great. Thank you very much. Let me add my congratulations. What a great way to end the year. Richard, about a year ago, you hired Zac Posen. Just over a year ago, I think, you know, to be creative director of Old Navy and Gap. And lo and behold, those two businesses are kind of turning ahead of plan. So what is it that he was able to do in such a short period of time? What is it that he's able to do kind of building on that continuous improvement philosophy? And then, Katrina, if you could just help us kind of with the brands, we're sitting at, you know, 40% gross margins, you know, super high and has having recovered. Can you help us give some color and context in terms of which where the brands are in that merch margin journey which of them are kind of closer to peak then where the opportunity really lies with a couple, you know, maybe Athleta and Banana. Specifically. Thank you.

Alright. Adrienne, thank you for the question. Zac is lapping his first year with us and has been an incredible addition overall to the company. And we're really pleased, thus far with the progress that we're making on several fronts. But ultimately just thrilled with, obviously, his contribution. He's been bringing significant impact on many creative aspects, and I would say it's both inside the company and beyond. Truly elevating the creative conversation across our brands, uniting us with a design-led thought process, and igniting the creative spirit of the company. We've been curating cultural moments where our brands and products have been really taking center stage. And, of course, we've been attracting talent to our portfolio. Besides what you've already seen, I would say, and, of course, most recently, by the way, with Timmy Timothy Chalamet wearing Gap Studios' really first custom men's look at the Academy Awards event. Zac's focus, I would say, and attention to detail on fit is really showing up across our brands with some exciting work on product there's a lot more to share. I would also mention that we have an extraordinary group of talented creative designers across the company. And the work that they have been collectively doing to reinvigorate our brands is really impressive. And, obviously, we're really excited to continue in 2025 igniting the creative spirit and, of course, with Zac at the helm.

And then, Adrienne, on margin, you say, I mean, we're very proud of the significant gross margin gains that we've made. We were up 250 basis points year over year. And then, you know, as you noted, these are historically high levels. Our brands are resonating. And we continue to gain relevance and market share, which we think gives us pricing power in the market. And then you combine that with the rigor that we've developed around inventory management, we still have confidence that we can build upon the progress we've made, in margins as we move forward. The color, I would say, by brand, is that our AURs are up meaningfully higher than pre-pandemic levels. And that's true across all of our banners with the exception of Athleta.

Thank you very much. Best of luck. Great job.

Thank you, Adrienne.

Just a reminder, everyone, please limit yourself to one question. We'll go next to Dana Telsey, Telsey Group.

Hi. Good afternoon, everyone, and very nice to see the great progress. As you look at the store's channel and the online channel, I think the online channel did a little bit better than the store's channel. What did you see there this quarter? How are you planning for the year? With some of the new formats and refreshes that you've done, what kind of productivity gains have you seen? And any more thoughts on what you see as the appropriate store base for each concept. Thank you.

Thank you, Dana. I'll start, and if Katrina wants to chime in at any moment, more than happy to have her join me on this one. First off, we approach our channel strategy from an omnichannel point of view. Clearly, that is how the consumer journey starts and stops today. And our size and scale is a strategic asset. That we continue to evaluate and optimize as we continue to optimize our retail footprint. Customers are expecting to have an omnichannel experience, especially with our brands, and we have the number two apparel e-commerce site in the country. We have been working to optimize the customer experience. We are working to integrate that experience with our stores, and we're doing so with a digital-first mindset. We do believe there are areas that we can better leverage technology and technology to ultimately reduce the customer pain points. We're continuing to evaluate and optimize our retail footprint in conjunction with the evolving consumer landscape, and we believe collectively that we have a great advantage based on our scale. You did mention as we will also The Gap, Inc. Online sales were up 4% in 2024. It represents about 38% of our total net sales. Whereas our store sales were flat. And in Q4, our online business outpaced our store sales as well as representing just over 40% of our total sales.

Yeah. Maybe the only add-on on that is that as Richard said, you know, we have a company-operated fleet of about 2,500 stores, and we're sort of always optimizing that footprint. Repositioning, opening stores in more relevant locations, and we still believe stores are really important for the customers to experience our brands and being in the right locations is critical. We are excited about some of the new experiences that we're testing across the portfolio, which is you talk about dollars per square foot, I think, over time. We believe we'll start to add value. So we've talked about Gap in Flatiron in New York City and Banana in SoHo. Both of which are good examples of how we're starting to really make progress around thinking about store experiences in a different way. And more to come as we start to evaluate the performance of those.

Thank you.

Thanks, Dana.

And the next question comes from Ike Boruchow, Wells Fargo.

Hey. Let me add my congrats. Richard, I wanted to ask you broadly about just your view of the consumer. Behaviors you kind of saw maybe not necessarily in Q4, but kind of January, February timeline. Are there things you point to that make you believe this is just a weather moment with some weaknesses or anything that gives you more concern you putting enough guardrails around your plan for the year? And just a quick follow-up for Katrina, the cash balance is high. You guys are generating a lot of cash again. You bought back a little stock for the first time in a while in Q4. Should this become a larger part of the plan? Are you guys planning further buybacks? Because your stock is very cheap, and you guys are talking about the business with a lot of momentum. So I just wanna kind of, you know, square that circle. Thanks.

Okay, Ike. Thank you for the question. You know, first off, from a macro perspective, we've all been operating in a highly dynamic backdrop for the last several years. And we're expecting the same for 2025. We always study the consumer. And we saw growth across all income cohorts in the fourth quarter. Now our share gains were led by the lower income cohort. This was with strength in the Old Navy brand. Whereas Gap brand outsized share gains were led by the strength in both the top and the middle cohorts. What's really unique about this is our portfolio brands appeal to such a wide range of consumers, which is where we see a real distinct advantage. I mean, in a declining apparel market, we've been gaining share for eight quarters in a row. I think it's really reflecting the resonance of our brands with the consumer. And our relative strength in the industry. And as we look at the future, with a stronger portfolio of brands today, that are resonating with consumers as evidenced by share gains, it's our job to just continue to focus on executing with excellence with great style, great quality, and exceptional value. And as long as we focus on that as the center, on a backdrop of what has been a declining market, we are going to be the winners in any challenging market.

And Ike, as it relates to cash, the rigor in the business is driving significant cash flow generation, which is really exciting to see. And as you say, cash at $2.6 billion, is pretty high. We laid out the capital allocation framework on the call. We are taking up capital investments by about 34%. And so that shows our confidence in investing. The board did raise the dividend for the first quarter by about 10% as we align our principle of growing the dividend as net income grows. And then you're right. We got back into the market in the fourth quarter and purchased $75 million worth of stock. As I said on the call, we do have about $400 million remaining under our authorization. And we'll remain opportunistic as we look to balance value creation with our objective of offsetting dilution over time.

Great. Good luck.

Thanks, Ike.

And ladies and gentlemen, that does conclude our question and answer session. That does also conclude our conference for today. You may now disconnect.