The Gap, Inc.

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, Inc. First Quarter 2020 Conference Call. Today's call is being recorded. 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 presentation, you may now press star 1 to enter the Q&A queue. 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 touchtone phone. I would now like to introduce your host, Tina Rouhani, Head of Investor Relations.

Good afternoon, everyone. Welcome to Gap Inc.' 's first quarter 2020 earnings conference call. Before we begin, I'd like to remind you that the information made available on this webcast and conference call contains forward-looking statements. For information on factors that could cause our actual results to differ materially from the forward-looking statement, as well as the description and reconciliation of non-GAAP financial measures, as noted on page two of the slide supplementing our remarks, please refer to today's earnings press release, as well as our current report on Form 8K filed on April 23, 2020, and our subsequent filings with the SEC, all of which are available on gaplink.com. These forward-looking statements are based on information as of June 4th, 2020, and we assume no obligation to publicly update or revise our forward-looking statements. Joining me on the call today are President and CEO Sonia Singles and Executive Vice President and CFO Katrina O'Connell. As mentioned, we will be using slides to supplement our remarks, which you can view by going to the Investor section of GapBank.com. With that, I'd like to turn the call over to Sonia.

Thank you, Tina, and good afternoon, everyone. I hope you're joining us today in good health and that you're taking care during these challenging times. Before we jump into the results of our first quarter, I would be remiss to not address the situation that is top of mind for everyone across the United States with people of all backgrounds and beliefs coming together to drive social change. As a company, we have an opportunity to create a world that is more inclusive, ensuring our brands serve as a force for good by being open to all, listening, and giving back to our community. While many peaceful protests have taken place across the country, in some cities, our stores have been taken advantage of, and 20 stores have sustained extensive damage. We're fortunate that all of our teams are safe, and we are working to reopen the impacted stores quickly and safely so we can serve our customers again. Now, turning to Q1. As I transitioned into the CEO role, we were making good progress with momentum entering the quarter led by Old Navy and Athletics, only to be met almost immediately with a shelter in place orders that resulted in the closure of all of our North American stores. As we monitored the situation in China and then Europe, we moved quickly to respond to the looming spread of the virus across geographies, its implications on our business and the industry. While there's no playbook to manage the fallout, the situation required a radical shift in our priorities, starting first and foremost with protecting the health and safety of our employees and customers. While our online business continued to thrive, the store closure resulted in approximately 75% of our demands being disrupted. To help mitigate these impacts, we took swift action to preserve liquidity and strengthen our financial flexibility, including having to furlough store teams and reduce headcount across all of our global offices. Katrina will speak to you shortly about the full breadth of actions we've taken, which, while difficult, have enabled us to focus on leveraging our inherent advantages to win in a post-COVID environment. Throughout, we have moved more quickly and more united than we have in years. Our teams have been oriented to action and have delivered to the business and our customers in the face of unprecedented change and challenges. I could not be more proud of the team. Today, over 1,500 stores are open in North America, almost doubling our previously announced plan to reopen 800 by the end of May. Our team's ability to pivot quickly and lean into our strong online business resulted in an encouraging 40% online sales growth in April. While next year's sales and store sales continue to reflect material declines in May due to the store closures and demand shock, we saw over 100% growth in online sales during this past month of May. It's still early days, but we're encouraged by the trends we're seeing, specifically the strong recovery at Old Navy, America's second largest apparel brand. We attribute this to Old Navy's advantage value proposition for the entire family and strength in relevant categories such as active, fleets, and dentists. We're now operating over 2,100 stores as mini fulfillment hubs through ship from store and over 500 stores as curbside pickup locations, a capability we launched during the COVID crisis. We have welcomed tens of thousands of our employees back to work and expect to have the vast majority of our North American stores open by the end of June. As COVID-19 has accelerated the shift in consumer behavior, we're playing to our strengths. starting with our trusted brands. In a time of crisis, brands matter. Customers want to spend their hard-earned money on brands and products they trust and not risk a bad customer experience with one that's not familiar. We don't talk about this enough, but Gap Inc. has three multi-billion dollar brands in Old Navy, Gap, and Banana Republic, who have led us closely on the horizon. And Old Navy, Banana Republic, and Gap brands rank among only nine specialty brands that exceed $2 billion in sales in the U.S. Our brands are among the most well-known and trusted in retail apparel, with Old Navy, Bananapel, and Gap all exceeding 75% brand awareness. And there are numerous examples, particularly during this pandemic, of how that mattered and how this is true. Old Navy provided access to critical categories and much-needed levity in the crisis, with Digital Sunshine as a unique asset in its social and web marketing. resulting in meaningful online acceleration. Athleta achieved all-time high engagement metrics through wellness storytelling and virtual community activation, with a focus on at-home workouts and cozy product content. Banana Public served up styling sessions on its digital channel, offering customers new ways to wear their favorite styles while working from home. And Gap launched Gap Team with positive results. This brand new, highly edited, and sustainably designed assortment is the first new age segment to the brand since 1990. Simply put, as the largest U.S. specialty clothing company is measured by revenue, each of our brands has a unique opportunity to meet customers' needs now and as we reopen stores. Our brands matter. Second, our direct customer relationships. Our brands are leveraging their direct connection with 60 million customers to make customer fuel decisions and deliver must-have products with attributes that matter most to them. We're in daily communication with our customers about how we're taking care of our teams and communities, and we're providing clarity and confidence in the shopping experience they're returning to, however they choose to safely interact with us. Importantly, our stores remain integral to the experience we offer. With approximately 70% of our stores located in strip, outlets, and off-mall real estate locations, we expect customers to gravitate towards these locations as they consider health and safety, an opportunity for us going forward. Third, our expansive e-commerce business and omni capabilities. During the widespread shelter-in-place orders, we leaned on the strength of our online presence. which is the second largest apparel e-commerce site in North America at $4 billion in annual revenue pre-COVID. During the crisis, we've doubled the way customers can shop with us by expanding our buy-on-line pickup and store capability to include curbside pickup, as well as a new virtual concierge that Asleta has begun testing, offering customers the chance to have one-on-one interactions with a store associate in the comfort of their own homes. Before the pandemic hit the U.S., 25% of sales came from e-commerce. We've seen a meaningful acceleration in online as customers choose our suite of Omni capabilities as a preferred way to shop. The interaction between stores and online continues to grow. During the quarter, we saw a 40% increase in customers migrating from retail only to multi-channel versus last year, and we all know how valuable the multi-channel customer is. Fourth, product that is relevant and resilient. The casualization of American style particularly accelerated during COVID and has played to our product strength. With our scale, active, and lounge business, which generated $2.7 billion in sales last year, and a kids and baby business at nearly $4 billion, Gap Inc. is a leader in branded children's apparel, a staple-like category that is largely insulated from volatility in retail. In Q1, we saw a disproportionate sale coming from active, sleep, sleep, and kids and baby categories. Fifth, our advanced supply chain and agile operations. Our expansive supply chain and deep relationships with suppliers enabled us to affect well over $2 billion of inventory purchases as we looked to quickly match our inventory supply with an uncertain demand outlook. Our supply chain responsive capabilities, particularly developed at Old Navy, will help us chase into the recovery we hope to see as doors open and as the customer demands become clearer. We were also able to deliver millions of PPE to frontline healthcare workers when they needed it the most, at the early onset of the virus, as well as the charity organizations like the Boys and Girls Club of America. We've since pivoted factory capacity and excess fabric to produce millions more washable fabric masks for customers. In May, we sold more than 3 million masks on pre-order across our brand. We completed the expansion of our Ohio Distribution Center, work that began in 2019. The new facility is designed to be the company's highest capacity fulfillment facility with integrated automation and robotics. This launch was virtuously timed as we expect online penetration to continue to climb, and this provides capacity with improved labor productivity. And lastly, and certainly not least, our competitive teams that lead with our values. Our brands and teams are a force for good as we relentlessly strive to better serve our customers and communities and to set the gold standard for safe shopping in this current environment. We have seen many examples of our brands acting as a force for good over the past 10 weeks. Starting with a small cross-functional team that, with audacity, chased into mass production to deliver PPE to frontline healthcare workers and now for customers. To our dedicated store teams who have weathered through the highs and lows with us and have served in a rapid, responsible reopening of our stores, demonstrating tremendous care for our customers and each other. We've donated over $50 million of new clothing to needy American families via Old Navy and to help underprivileged get back to work via Banana Republic. And most recently, our brands came together to donate more than a quarter of a million dollars to the NAACP and embrace race organizations to stand with our customers and employees in the fight against racial injustice. I want to take this moment to thank the teams that are listening. This gaping community of employees has just risen to the challenge with the occasion and led with art. A very big thank you for me to all of you that are listening. Really, it was a massive team effort. As much as we expected to drive value for our strengths, our future success is dependent on addressing areas of significant opportunity. For example, in our specialty brands where past performance has not met expectations. We believe each brand must earn its right for investment and are focused on doing this through two key actions. For a brand to break through the noise in the marketplace, we must be resolute about delivering brand clarity, quality products, and consistent execution with every expression. Frankly, we have not done this well at Gap or Banana Republic. Creative confidence is something we are focused on emotionally. We will also continue the rationalization of our fleet, as well as identifying asset-like ways to amplify and expand the reach of our brands. And we've made progress in just a few short months, even amongst the crisis. Some examples. We began the systemic change for structure for success. To begin, we actioned a 15% headcount reduction across the company, indexing towards GAAP brands with a 25% reduction. This is a first step in driving an organization focused on value creation through profitable growth. We are acutely focused on delivering consistent on-brand products and marketing. We believe that Gap Brand is better than recent business results. During the crisis, Gap has benefited from its high brand awareness and deep emotional customer connection. However, years of inconsistent execution have depleted brand health, which we're actively working to correct. and product filters that translate to a narrower and deeper assortment that delivers to the customer. At Banana Republic, the leadership team is taking aggressive action to adjust its products, offering a pivot in the brand positioning to address the evolving customer needs. In this crisis, with the unforeseen shift to consumers working from home, Banana Republic Banana Republic's workwear category, such as suiting and dresses, underperformed, which coincided with less available inventory of casual categories like knits and shorts. This affected online demand, resulting in less benefits than our other brands. With respect to extending the power of our brands, we recently announced a licensing deal with IMG, allowing us to increase consumer access to Gap, Banana Republic, and Jane & Jack through brand partnership and collaboration. including global opportunities with kids and baby gear, furniture, home textile, and decor. This is a great example of an asset-light, capital-light opportunity that delivers value for the customer and plays to the power of our brands. Additionally, we believe we can further amplify our brands. We're optimistic about the opportunity for creative partnerships to increase gas relevance and tap into the cultural zeitgeist. Lastly, we remain committed to our prior fleet rationalization targets, as our goal is to operate a smaller, healthier gas brand positioned to compete. Katrina will share more on how we're thinking about this, as well as the important progress we've made in strategically re-evaluating our real estate and rest structures. So with that, I'm going to pass it off to Katrina to provide details on our financial performance for the quarter, and I'll then come back to share additional thoughts on how we're looking at Q2. Katrina?