Good afternoon, ladies and gentlemen. I would like to welcome everyone to The Gap, Inc. Second Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to introduce your host, Whitney Notaro, Head of Investor Relations.

Good afternoon, everyone. Welcome to Gap Inc.'s Second Quarter Fiscal 2025 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 18, 2025, 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 28, 2025, and we assume no obligation to publicly update or revise our forward-looking statements. Our latest earnings release and the accompanying materials available on gapinc.com also include descriptions and reconciliations of financial measures not consistent with Generally Accepted Accounting Principles. Joining me on the call today are Chief Executive Officer, Richard Dickson; and Chief Financial Officer, Katrina O'Connell. With that, I'll turn the call over to Richard.

Thanks, Whitney, and good afternoon, everyone. We are pleased to report second quarter results that over-delivered on our profit expectations and achieved our top line goals, once again demonstrating our ability to do what we said we were going to do. In my first remarks to you as CEO, 2 years ago, I shared my vision for leading Gap Inc. into an exciting new chapter, one that honors our legacy while boldly shaping an extraordinary future. From the start, I saw the immense potential of our brand portfolio and recognized the need to reposition the company for sustainable profitable growth. Over the past 2 years, we've sharpened our strategic priorities, brought greater clarity to our organization and empowered our people in ways that are attracting world-class talent and partners. We've made meaningful financial progress, laying the groundwork for long-term success. We still have plenty of work to do because transformation of this scale takes time. However, it's clear we are now operating from a position of strength, one that's proving essential as we navigate an increasingly dynamic and complex environment. Our strategic priorities define the framework that has enabled us to perform while we've been transforming over the last 2 years. First, maintaining financial and operational rigor. This has become fundamental to how we operate and has driven significant gross margin expansion of 360 basis points to 41.2% in the second quarter versus the same period 2 years ago. In fiscal 2024, we delivered EPS of $2.20, our strongest performance in 6 years, and ended the year with cash balances of $2.6 billion, the highest in 15 years. Second, reinvigorating our brands. Our playbook continues to deliver, strengthening the foundation of our brands and proving they can matter more. With the sixth consecutive quarter of positive comp sales for Gap…

Thank you, Richard, and thanks, everyone, for joining us this afternoon. Our rigorous execution in the second quarter delivered solid results, surpassing our profit expectations and achieving our top line goals. The meaningful progress we're making across our strategic priorities continues to drive the business forward. The revitalization of our brands, coupled with our unwavering financial and operational discipline, is enabling us to perform while we transform, consistently delivering on our commitments and fortifying the foundation of our business. These results reinforce our confidence in the core strengths of our reinvigoration playbook, allowing us to reaffirm our net sales outlook for fiscal 2025. That said, as trade policy evolves, we remain mindful of the impact of tariffs on our financial outlook for the remainder of the year. In a moment, I'll share more details on our guidance, which reflects both the strength of our execution and continued brand momentum as well as our view on the headwinds from the latest trade policy. In the second quarter, we continued to do what we said we were going to do, delivering flat net sales as we lap last year's credit card benefit, with comparable sales up 1% as our reinvigoration efforts drive results. It was exciting to see continued strength at Old Navy and Gap with emerging growth at Banana Republic, all of which helped us navigate the quarter despite choppiness at Athleta, where we welcome new leadership. As expected, gross margin contracted versus last year due to the lapping of last year's credit card benefit. And while we had some weakness at Athleta in support of the brand's reset, we utilized rigorous cost management to successfully deliver our profit expectations. This resulted in an operating margin of 7.8% for the quarter and earnings per share of $0.57, up 6% versus last…

[Operator Instructions] We'll take the first question today from Alex Straton from Morgan Stanley.

Congrats on a nice quarter. Maybe for Katrina, you're lowering the full year EBIT and EPS guidance despite the 2Q outperformance, obviously implying a worse back half outlook. Is that just mostly worse tariffs? Or has anything else really changed for you all? And then related to that, many peers seem pretty optimistic on their ability to offset incremental tariffs with very few actually trimming guidance. I'm just wondering if there's anything different for you all as you think about the tariff dynamics.

Thanks, Alex. I really appreciate the question. I think as you say, we did deliver a very solid second quarter. We surpassed our profit expectations, as you said, and we achieved our top line goals. So we really see that our strategy is working, and it's showing up in our results. The outlook we provided today reflects that strength of execution and our brand momentum but it also updates based on the headwinds from the latest trade policies you just said. So because our playbook is working, our brands are resonating, really gives us the confidence to reaffirm the net sales outlook of up 1% to 2% year-over-year. So that has not changed. We also remain committed to the cost discipline that we've been demonstrating, and that's also reflected in the outlook of slight leverage in SG&A, which is also not different. As you say, the biggest update today is that we are now putting in $150 million to $175 million worth of tariff impact which equates to about 100 to 110 basis points of operating margin. I noted on the call that without the tariffs, we would actually be expanding both gross margin and operating margin for the full year, in line with our original expectations, which I think is notable. I'm proud that the team has made really good progress in their mitigation efforts to date. We're remaining focused on sustaining the momentum and the market share gains that we've gotten through our reinvigoration playbook while we pursue our mitigation plans. I'd also say what's notable is that we don't currently expect that the annualization of tariffs in 2026 will cause further operating income declines year-over-year. And we expect to mitigate the full impact of tariffs over time, which we believe represents actual opportunity for operating margin improvement over the longer term.

And maybe just -- I just had one quick follow-up. Just maybe bridging it to the long term, Katrina or maybe even for Richard. Is double-digit margin kind of still potentially in the cards over time? Or how do you think about that considering it's so strong underlying.

Yes. I think as we think about the long-term operating margin, we're really proud that we are successfully delivering on our profit expectations. And as you say, while we have an impact this year based on tariffs and since we don't expect the annualization of tariffs in 2026 to cause further declines, we think it gives us the confidence that we can drive towards becoming a high-performing company that generates sustainable profitable growth. And as I said, we do expect to mitigate the full tariff impact over time. So that does -- combined with our strategies in our playbook, which are working, provide, we believe, operating margin improvement opportunities over the long term.

The next question today comes from Marni Shapiro from The Retail Tracker.

Congratulations on some really great improvements. I have 2 questions for you, one quicker, one a bigger question. On Old Navy, the stores have never looked better. And I know the product has improved, but really, a lot of it to me feels like the merchandising and the marketing has changed. I guess have you been spending in stores? And I'm assuming -- that's assumed in the guidance in the back half. But is it more costly what you're doing in the stores these days? Or is it really just the merchandising? And then I have a quick Gap question after that.

Okay. Yes. Thank you, Marni. And we agree. Look, Old Navy delivered another strong quarter, comps up 2%, and that's on top of last year's 5% comp. And these results are really reflecting that our operating teams are just functioning with greater discipline and delivering sustainable growth, and this is quarter after quarter. As you've seen in our stores, which we appreciate you going into and recognizing the progress, what you'll also see is category shops and emphasis on categories like denim and active where we've been strategically focused and are executing really well, and it's clearly showing up in the results. As you see in the denim shops, it's been a standout category for us. We posted the highest-volume second quarter in brand history. In active, it continues to be fueled by our marketing campaign that we initiated with Lindsay Lohan, the first one we've done in years, driving innovation in product with StudioSmooth and Bounce Fleece. And so overall, what you see is our playbook is being executed incredibly well. We are not spending more in stores or in marketing. In fact, we're getting much more efficient and effective. So the merchandising and the edit and the way that we've executed our playbook is really starting to show up in multiple places in stores, online and in our storytelling. And as we continue to execute, we continue to believe there's great value creation ahead.

That's great. And then just on Gap, first of all, I appreciate and thank you so much to the IR team for putting us on hold to Milkshake. The AUR at Gap being up. Listen, you guys have had some unbelievable collaborations from Malbon. We can go through the list, and they tend to carry a higher AUR. If I pull that product out, is your AUR up in the balance of Gap? Is it causing a halo so that when somebody comes in and they see something like the Malbon collaboration, does it halo the rest of the store so that the customer comes in and feels like, "Okay. Well, yes, I'm going to spend full price at Gap now, and yes, it is the right place at Gap." Can you just walk me through that? Or is it these are what's driving it? And otherwise, AUR is flat?

Yes. Well, first off, to be very direct, the AUR is up, and it would be up without the collaborations. So what's really driving Gap's momentum is the execution against our playbook. As you see it, we're continuing to deliver strong and consistent results. This is building momentum, and it's getting bigger and better every time. And it is regaining its place in the cultural conversation. This quarter, delivering another comp increase of 4% on top of last year's 3% comp. That's the seventh consecutive quarter of positive comps. And the consistency is setting new records for the brand, and it's also reinforcing our confidence that there is great value creation and growth trajectory ahead. The performance is really, Marni, driven by great product, big product ideas exemplified by great relevant storytelling and consistent execution. It is our playbook. The latest example is Better in Denim. This campaign, which launched last week, starring Katseye has driven record breaking response for the brand. Early reads, this is striking range and probably being one of the most iconic brand campaigns certainly that we've done but that is out there. People aren't just watching but they're actively joining and suggesting that this is actually a cultural takeover. These are great proof points and elements that, again, the playbook is working. As you mentioned, the collaborations that we've done, Malbon, BEIS this is the 11th and 12th collaboration that we've done in the last couple of years. They continue to drive engagement and excitement for the brand. And so in relation to how the brand is doing, it's a multiple component execution that's driving great product, great execution and ultimately, the great results that you start to see. So we're very confident there's a lot more exciting news to come on Gap. But ultimately, with the consistency that we're able to deliver, the value creation for the brand ahead is very exciting.

The next question is Brooke Roach from Goldman Sachs.

Richard, what gives you confidence in cycling tougher compares into the holiday season for Gap brand? And are there any specific actions that you're taking to drive and improve 2-year stack trend in the back half?

Thank you, Brooke, for the question. I mean, look, I think what gives me confidence going to the holiday for Gap is, as I mentioned just before with Marni's question, we are delivering consistently. We continue to do what we say we're going to do. This is the seventh consecutive quarter of positive comps for the brand. And it's not just little hurdles, up 4% on top of last year's 3% for this brand is really impressive. And so again, as we execute against our playbook, taking big product ideas, culturally relevant storytelling and consistent execution, relentlessly repeated, is a methodology that we're getting stronger and better at. I mentioned Better in Denim as a campaign that's obviously been delivering for us. But just to give you some stats, 20 million views in the first 3 days. 400 million total views and 8 billion total impressions. Better in Denim is the #1 search on TikTok. These aren't small facts or small stats. This is proving that Gap is a powerful pop culture brand. So when I look at the back half with the continuation of the execution of the playbook and the team that's delivering, I get more confident that not only is the back half going to deliver, but we've got great value creation and growth over time. The improved 2-year stack and the trend is literally just reinforcing that this brand has great continuation and potential as we move forward.

Matthew Boss from JPMorgan has the next question.

So Richard, if you break down the portfolio, could you elaborate on drivers of the revenue acceleration to 2% growth that's embedded in the third quarter forecast relative to flat this quarter? Maybe just speak to trends that you've seen in August for early back-to-school. And then Katrina, just to clarify your comments on tariffs not causing further operating income declines next year. So relative to the roughly 7% operating margin outlook this year, are there any constraints to annual operating margin expansion at low single-digit revenues as we think about next year?

Okay. Thanks, Matthew. I'll address the first one and then Katrina can come back and address the second one. So we really rooted our brands with a singular focus. And so if I look at each brand, the objective of Gap has been to reignite Gap. And Gap is furthest along in our playbook, but I think everybody could agree Gap is getting its vibe back. There was a moment in time a couple of years ago where we were looking at it more as a clothing retailer, highly promotional, lost, to some extent, it's merchandising conviction. And today, you're looking at a very different platform brand that is much more of a pop culture brand that tells relevant stories with trend-right product and is shaping culture. And the performance, again, fourth quarter comp in Q2 -- sorry, 4% comp in Q2 is another proof point that this is actually working in our favor. And again, 7 consecutive quarters of growth. As we move forward, it gives me the confidence that we can continue that. On Old Navy, we talk about reasserting. This brand has delivered, again, consistently in terms of its productivity. But we've been refreshing the way we show up in everything that we do from product to experience, online and in our stores. We've shared that we've been pursuing category leadership in categories such as denim, active, kids and baby. And you see the continued accelerated growth in those categories, resulting in plus 2% comp in the second quarter. And that also is consistent in the context of its deliverable. So moving into the back half, knowing that, that playbook is starting to really show up, I'm very confident in the Old Navy's team to execute against that plan. Banana Republic. We used the word reestablish. And…

And then I think, Matt, as it relates to back-to-school, third quarter is off to a strong start. In Q2, May and June were sort of slow because of the weather being so cool. But we really did start to see July accelerate with more seasonal weather and the drop of our back-to-school product. And August has really continued that momentum as we head into third quarter with customers responding well to our back-to-school assortments, I would say, especially at Gap and Old Navy. So that's the back-to-school piece. As it relates to any constraints on operating margin for 2026, I think the simple answer is we'll give you a more holistic view of 2026 when we provide guidance. But for tariffs, while we did have an impact this year that we're previewing of 100 to 110 basis points that, as you say, sets us up for about a 6.7% to 7% operating margin this year. The teams have worked quickly and aggressively to come up with mitigation efforts that we think are balanced across the variety of things that we've previewed that now will keep us from seeing further degradation related to tariffs next year.

The next question is from Lorraine Hutchinson from Bank of America.

Katrina, how has your assumptions changed on pricing specifically? Is that, that's allowing you to mitigate the tariff pressure well better than you originally expected? And then why won't the second half pressure ramp into next year?

Lorraine, you're breaking up. So I heard the first question. I'm going to answer that, and then I might have you restate the second question. So as it relates to pricing, we approach pricing as we always do. We consider the various inputs while we really maintain the overall value proposition for our consumers. Targeted pricing is one of the levers that we're using to mitigate tariffs. We take a portfolio approach to pricing, and we're really focused on maintaining the overall value proposition. We're using discipline. We've got insights. And we've got a clear view of elasticity across our geographies, brands down to the category level. I think importantly, I don't know that anything has changed in our approach to pricing. We tend to try and use it strategically while trying to maintain the momentum that our playbook has been driving. I'm hoping you can repeat the second one. I didn't hear it with the connection. We may have lost Lorraine.

I was just wondering why would the second half pressure not ramp into next year.

Oh, why are we not offsetting the second half pressure next year? Is that your question?

Why wouldn't that pressure continue in the first half of next year?

Sorry. Because we have taken the opportunity now that we have much more clarity on the timing and on the scale. The teams have been able to take a pretty balanced approach to really figuring out how to mitigate more fully the pressures next year. I think this year, when you think about the timing of the August tariff announcement, we made really good progress on the April tranche. But then August came and that was very difficult to get after given the timing. So now as we look at 2026, we're just really sitting down and being very proactive in how we can pull all the levers at our disposal to offset the tariffs going forward.

Up next, we'll hear from Dana Telsey from Telsey Group.

Can you go through the comp drivers by brand with the traffic and ticket and what you saw? And the marketing spend certainly is very effective. Richard, I've seen the initiatives in denim and the callouts that you guys have had, and it's very impressive. How are you thinking about the marketing spend for 3Q and 4Q this year? And what's different versus last year as we go through the back half? And the improvements in Banana, also nice to see. Any thoughts there on a new leader of Banana? Or how do you see the progress there?

Dana, I'll start with the drivers. So traffic was really healthy in the quarter, reflecting the progress we're making in brand relevance. And sales were driven primarily by average unit retails up, showing strength in our big brands, Old Navy and Gap in particular, which reflected improved discounting and also where our playbook is really gaining traction. Overall, for the company, AUR was up. And that was despite the fact that Athleta needed higher discounts to clear through product given the poor customer acceptance. So then I think I'll pass it to you, Richard, on marketing.

Sure. First, I think, Dana, you can see our marketing is working. And that's a reflection of the playbook that we've been driving, which really the teams have been doing incredibly well. As you know, we've been spending less and driving more effective results. Our media mix model has been changing over time to be more reflective of where our consumers are. And our creative and assets have vastly improved and changed in the context of the past year or 1.5 years that has much more direct dialogue with the consumers in relation to our brand proposition. So I think what you're seeing is a much more robust dialogue with consumers, stronger brand creative that's much more precise, a media mix model that is engaging our consumers in a very different way and with all of that, driving revenue as you see our core brand assets improving. But what's most terrific about the execution is that we're actually spending less and being more effective. So I'm not quite sure that there isn't -- there is a silver bullet in what's different. But I can tell you in the context of our playbook and how we're executing against it with our media mix methodology and new creative assets, it's clearly making a big difference. On Banana, first off, we're really encouraged on the Banana progress -- Banana Republic progress that we've made. This quarter, a 4% comp really reflects the significant progress that the team has been driving with tighter assortments, refined product aesthetic, of course, the enhanced marketing, great storytelling and most improved service levels. I think this quarter, we made really meaningful progress in harmonizing the look and feel of both men's and women's, and we're creating greater alignment in design and merchandising. So as we move quarter out to quarter, we're seeing more clear signs that the brand is really coming together. And certainly, the performance this quarter demonstrates that. There has been a lot of work to reestablish this brand, and we continue to look for and meet some very qualified and exciting people that could ultimately lead this brand. And as soon as we have that announced, we will obviously share that with the marketplace. But big kudos to the team for executing with such discipline, delivering to that expectation. And obviously, the performance of the brand demonstrates meaningful traction as we continue that.

And we'll take our final question today from Ike Boruchow from Wells Fargo.

Just a couple on margin. First, on the gross margin. I guess, Katrina, I just wanted to unpack the down 150 merch in 2Q. If you go back to the last call, I thought you had said that you were expecting a 60 bps decline and that was largely credit card. So now it's down 150, and you're saying that's largely credit cards. So -- you also mentioned Athleta. Can you just parse out how much of the 150 is credit card versus organic merch margin decline maybe from Athleta or something else?

Sure. So as you say, we did preview that we would be down about 80 basis points year-over-year. And at the time, we had said that was mostly credit card. So credit card is somewhere in that 80 to 90 basis point range. The decline year-over-year, that is primarily that, but we also then missed our expectations based on the piece of the margin that was attributable to Athleta. The rest of our brands performed quite well in the quarter. But Athleta, we had to go pretty deep in discounting given the challenging sales performance as we really had to clear the product that didn't resonate with consumers. So that is what weighed on the overall gross margin when it comes to missing our expectations.

And everyone, that does conclude our question-and-answer session for today. That does also conclude the conference. We would like to thank you all for your participation today. You may now disconnect.