The Gap, Inc.

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, Emily Gaca, Director of Investor Relations.

Good afternoon, everyone. Welcome to GAAP Inc.' 's third 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 a 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 press 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, November 16, 2023, 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 Dixon and Chief Financial Officer Katrina O'Connell. With that, I'll turn the call over to Richard.

Thank you for joining our third quarter earnings call. In the nearly three months since I joined Gap Inc. as CEO, I've hit the ground running, immersing myself in the business, assessing brands and functions, and meeting people in every corner of the company. I've met many of our customers and employees, visiting stores across the country. I've also met with many of you, our shareholders, to hear your views and understand your perspectives. And all of this has been incredibly insightful. Today, I'll share my initial observations and priorities. Then I'll hand it off to Katrina, who will walk you through more detailed financial results before we take questions. The four areas I'll discuss today are one, maintaining and delivering operational and financial rigor. Two, the reinvigoration of our brands. Three, the strength and continued evolution of our operating platform. And four, reviving our culture. Let's start with maintaining operational and financial rigor. As you know, this has been a core priority, and we've made significant progress, which has strengthened our financial footing. Examples of this work include actioning over $550 million in expected annualized cost savings, realizing margin expansion through lower air costs, improved discounting, and more effective sourcing strategies combined with recovery of commodity costs, and we've reduced our inventory by nearly $800 million versus last year's peak. Our efforts to date have resulted in better working capital and a stronger balance sheet. and this discipline of controlling the controllables will continue to be a priority for us as we aim to increase the consistency of our performance both near and long term. Our focus on operational and financial rigor benefited our third quarter results, particularly in terms of improved margins, expenses, and cash flow. And I'll briefly review highlights for the quarter. Revenue was down 7 percent versus last year, with comp sales down 2 percent, ahead of expectations. We grew market share both overall and at Old Navy and Gap Brand. We expanded adjusted gross margin by 260 basis points, driven in part by improved promotional activity enabled by leaner inventory and better assortments. We maintain well-controlled expenses, resulting in an improved adjusted operating margin at 6.8%. And we ended the quarter with a strong cash balance of $1.4 billion, generating free cash flow of over 500 million year-to-date. Old Navy delivered a positive 1% comp for the quarter, with momentum in women's, driven in part by our active business, combined with strength in kids and baby during the back-to-school seasons. Gap brand saw strength in women's and baby. Comp sales for Gap were down 1% in the quarter despite anniversary in the final quarter of easy sales last year. Banana Republic comps were down 8% for the quarter as the brand undergoes deliberate and ongoing repositioning. Athleta's performance in the quarter was disappointing with comps down 19% as we lap a period of heavy discounting last year. I will provide a more detailed update on our brands in a few minutes. Looking out to the full year, as we enter the fourth quarter, we have a balanced view of the holiday season. Inventories are well controlled and our financial position is strong. However, we remain mindful of the uncertain consumer environment. We know that great brands can win regardless of the environment and execution is everything. I'm working with our teams to react and respond in real time to consumer and competitive dynamics, ensuring our brands break through this season with relevant campaigns and touch points that matter. With the progress we achieved in the third quarter and our measured expectations for the holiday season, we are comfortable reaffirming our full-year revenue outlook and expect strong progress in our margin recovery. Katrina will provide more detail on the outlook in a moment. Let's turn to brand reinvigoration. Brand reinvigoration is about driving both relevance and revenue. Now it's early days and our playbook is still in development, but I'll give you some insight into how we're thinking and where we're headed brand by brand. Old Navy, Gap, Banana Republic, and Athleta are all brands with incredible heritage. Brand reinvigoration will build on that heritage and will include a number of priorities. We need to strengthen our portfolio of brands with crisp identities and purpose. We need to create trend-right product assortments with a clear point of view to deliver beyond just needs to also deliver on wants. We must consistently deliver merchandising presentations and product storytelling that excites our customers. We have to create a better, more engaging omni-channel experience with a clear and compelling pricing strategy. We have to communicate through innovative marketing to regain a powerful ongoing voice in the cultural conversation. And we need to do this while consistently executing with excellence at every touch point and interaction. I've seen areas where our brands do this well, but I've also seen opportunities where they can do significantly better. It's not enough to get it right in one or two of these areas. Effective brand reinvigoration is about getting it right holistically and consistently. Execution will differ brand by brand, but that's a good overview of how we're thinking. And with that backdrop, let's take a look at where our brands are today, some of the meaningful progress we're making, and also the work ahead. Beginning with Old Navy. the number two apparel brand in the U.S. and the largest brand in our portfolio. Old Navy is a family destination with 94 percent U.S. brand awareness, according to YouGov, a multibillion-dollar e-commerce business, and an impressive retail footprint that includes more than 1,200 locations with 240 million customers entering our stores in the last year. We have a loyal following and a great brand heritage rooted in fun, fashion, and value for the whole family. Old Navy has a strong and distinctive brand positioning in the value space. However, the execution of that positioning is a significant opportunity. We need to be more deliberate and consistent about how we express the brand through bold and breakthrough narratives, something the brand is known for. We also have to improve our product assortments, balancing essentials with exciting new trends. and a pricing strategy that clearly communicates jaw-dropping value. All of this to remind customers why they love Old Navy and give them compelling reasons to love us even more. As we begin to execute the work around these initiatives, we were encouraged to see signs of progress in the third quarter. We created stronger product storytelling through a dedicated women's marketing campaign featuring on-trend product. We also improved site execution and online marketing with compelling creative and value messaging, all of which drove positive momentum and share gains in the quarter. Looking ahead to holiday, we believe the brand is ready to compete with high-quality inventory composition, offering consumers great fashion at a great value. Our efforts at Old Navy come down to unlocking and reasserting a great brand. Moving on to Gap. Gap brand, as you know, has tremendous heritage as a pop culture brand that delivers, leads trends, celebrates individuality, and self-expression. The brand enjoys 90% brand awareness among U.S. consumers, but lately, Gap has been far too quiet in the cultural conversation. We need to reignite that dialogue, offering confident, trend-right assortments, price-right, and express-through big ideas. and culturally relevant messaging. Our holiday campaign, which debuted October 23rd, is an early example of this. It demonstrates creative consistency, building on brand heritage, and championing originality with relevant individuals of style and substance. And I encourage you to check it out. A more inspiring and integrated creative narrative is also showing up online. And while we have much more work to do, it's great to see progress taking place as we work to reignite this iconic brand. Now, turning to Banana Republic. I'm encouraged by the team's vision, aesthetic direction, and enhanced focus on fabrication and quality. And our cashmere and leather product offering is translating well. While this repositioning is the right direction for the brand, there is work to do on execution. Comps are down as we continue to refine our assortment architecture, work on the brand's price value equation, and improve marketing and merchandising effectiveness. We think Banana Republic has an opportunity to thrive in the quiet luxury space and represents a unique position in our portfolio. This evolution will take time to manifest as we transition away from what was previously a highly promotional and transactional experience. Now, taking a look at Athleta, a brand with significant growth potential and the number five brand in the highly attractive U.S. women's active segment. More so than any of our other brands, Athleta has a clear and distinctive brand positioning rooted in the power of she, an authentic and highly differentiated platform that plays extremely well across performance, outdoor, and travel. As you know, The brand has gotten off track with challenged performance caused by a misfire on product, marketing that didn't resonate, and retail execution that didn't connect with customers. In the first half of this year, the team took action, marking down products and cleaning up the brand to pave the way for long-term success. We utilized the third quarter to reset the baseline of the brand by eliminating off-brand fashion products and focusing on our key categories. At the same time, we began to refresh store presentations and the brand's website to better delineate our active segment with narrative-based merchandising that pulls Athleta's focus back to its performance roots and winning platform. We are seeing early indications that customers are responding with positive NPS scores and positive sales growth in certain key products that we marketed in the new brand voice. Despite the favorable reaction to our cleaned-up brand aesthetic, lapping last year's heavy discounting is weighing on performance. We see this headwind continuing at least through the fourth quarter. That said, I'm encouraged by the brand execution of new digital dialogue, store experience, and holiday product assortment. While we are progressing each quarter, we know that a full brand reset will require a more comprehensive approach and will take more time. Moving on to the third discussion area, we are continuing to strengthen our operating platform. We will build on and leverage operational capabilities to increase efficiency and support high-performing brands. In some areas, we are in good shape, but we have more work to do. Our supply chain is a pillar of strength at Gap, Inc., where our scale gives us unique cost leverage, but we need to accelerate innovation. Our financial strategy is driving early value but we need to continue our focus on rigor and efficiency. In technology, we've made strategic investments, and now it's about optimizing those investments and driving adoption across the organization. In addition to these existing capabilities, media and marketing is another area where we can up our game. leveraging the scale of our media spend to derive greater efficiency and effectiveness overall. And let me be clear, it's not about spending more. It's about getting more value from what we spend. The fourth area I'd like to address today is culture. Culture is the bedrock of every successful company, particularly one that is creatively driven. And that's why I'm laser focused on reviving a culture of creativity at Gap Inc. one that embraces change, is obsessed with our customer, relentlessly curious, highly collaborative, and eager to imagine better, led by the industry's best talent. More than an objective, culture is an everyday pursuit, fueled by shared values and a belief system that unites us as one company. The intention is there, I see it, but we've got to better articulate it and then own it. building on our storied past to create an even more vibrant future. In summary, it's impossible to ignore the impressive scale of Gap Inc. We have four billion-dollar brands with nearly 2,600 company-operated stores and 1.4 billion visits to our websites every year. And we have 58 million known active customers who rely on us for fashion that both functions and makes them feel good. We also have an impressive team around the world, and I want to take a moment to thank everyone for welcoming me and recognize the team's commitment to delivering a solid third quarter performance. Among the insights I've gained in the last three months is a recognition that Gap Inc. has weathered a lot of disruption over the last several years. Both external macro factors as well as execution missteps in strategically well-intended initiatives have impacted the company. All that said, the opportunity is clear, and I have conviction that we can reinvigorate our portfolio of brands while we lead a creative culture that attracts, retains, and develops the best talent in the industry. I'm encouraged by the early progress we've made to date, but we have a long way to go and a lot of work to do. And I'm looking forward to sharing updates with you on our progress in the quarters ahead. Thank you. And now I'll pass it to Katrina. Katrina.