The Gap, Inc.

As a reminder, please limit your questions to one per participant. If anyone should require assistance during the call, please press star then zero on your touchtone phone. I would now like to introduce your host, Emily Gaca, 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 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 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 GAAPinc.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 Dixon and Chief Financial Officer Katrina O'Connell. With that, I'll 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 Zach Posen as Creative Director of Gap, Inc. and Chief Creative Officer of Old Navy. I've been purposeful in thinking about the talent and skills 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 gapping for a new era, one where 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 exceeded 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 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 2023. Our focus on controlling the controllables also resulted in better working capital and a stronger balance sheet at year end. This includes reducing our inventory levels by 16% year over year, building a strong cash balance of 1.9 billion, and generating over 1.1 billion in free cash flow. These proof points put us on strong financial footing as we begin 2024. Our results in the fourth quarter demonstrate strong progress, not only in terms of improved margins and well-controlled expenses, but also with more stability in net sales. Net sales grew by 1% and comps were flat, with Gap Inc. gaining market share. The sequential improvement, which is noteworthy in a declining apparel market, reflects the team's responsiveness and nimbleness as we begin our brand reinvigoration work. Old Navy comps increased 2%, and we were pleased to gain share in women's for the fourth quarter, building on the success we saw in the third quarter. We are also encouraged that we increase our foothold in two key categories, active and bottoms. As the number five player in the active space, we are excited for Old Navy to accelerate in this leading category. The all-important bottoms category creates additional opportunities because it's the gateway to the full wardrobe. Gap Brands comps were up 4% driven by strength in women's where we delivered our fifth consecutive quarter of market share gains. This result was amplified by good performances in denim and sweaters supported by new marketing campaigns. Banana Republic comps were down 4% as we conduct deliberate and ongoing work to reestablish the brand. and athletic comps were down 10% as we left a period of heavy discounting that we previewed last quarter, but improved sequentially driven by new holiday product, updated marketing, and improved in-store presentation. We expanded our company gross margin by 530 basis points ahead of expectations driven by more effective sourcing strategies and lower commodity costs combined with improved promotional activities leaner inventories, and better assortments. We also increased our operating margin by 570 basis points to 5%. Our team is demonstrating the ability to do what we say we're going to do, and in some cases, even more. However, we're not where we need to be. Our ongoing focus on financial and operational rigor will allow us to continue to elevate our performance, improve execution consistency, and set the foundation for our exciting brand reinvigoration work. Turning to our next priority, brand reinvigoration is about driving both relevance and revenue, inspired by our brand's incredible heritage. As a reminder, this strategic priority begins with strengthening the identities and purpose of each of our brands. We are striving for each brand to have trend-right product assortments rooted in customer-centric design thinking and a clear point of view that delivers on both wants and needs. From there, we need to execute several key ingredients. We must consistently deliver product storytelling that excites our customers, supported by compelling merchandise. We need to drive demand with innovative marketing to regain a powerful voice in the cultural conversation. And we must create better, more engaging, omnichannel experiences with a clear and compelling pricing strategy. And most importantly, we must execute with excellence along every touchpoint and interaction. These elements form the basis of our brand reinvigoration playbook. While specific execution will differ by brand, we are working with each of our brand teams to implement this playbook holistically and consistently. Now, I'd like to provide an update on the progress of each brand. Let's start with Old Navy. We are encouraged by the sales performance we saw in the back half of 2023 and the growth we delivered in the quarter. We are reasserting Old Navy's authority as the number two apparel brand in the U.S. We delivered on-trend products, particularly in women's, active, bottoms, and knit, which performed well in the quarter. Supported by our campaign with Natasha Lyonne, We showcased and leveraged our authority in the bottoms business and saw great response, especially to the tailor pant, the refreshed pixie pants, and the cargo. We are celebrating fashion, family, and fun through more precise marketing and storytelling. Another example of reasserting our authority is Jingle Jammies. We took our famous Jingle Jammies and created Jingle Glammies, supporting it through a compelling social media campaign where influencers pair jammies with going-out wear. This demonstrates how we take a product and make it a trend by dialing it up in a relevant way through storytelling. Old Navy is reinforcing value by communicating to customers with more clarity on price and quality, both in stores and online, highlighting the brand's value proposition. We're starting to see the strength of the brand identity evolving and coming alive through online and visual communications. The progress we are making at Old Navy gives us confidence in our ability to build consistency while we deliver against our priorities. Let's turn to Gap Brand. We are driving continuous improvement, and Gap has exciting potential as we focus on reigniting the brand dialogue. Gap was built on strong product narratives with brilliant marketing expressed through big ideas. Gap in its best days was a storyteller who could take a product and create a trend using culturally relevant marketing. During the fourth quarter, our team took Cash Soft, Gap's innovative washable fabric that feels like cashmere and turned it into a big idea through creative storytelling. supported by elevated marketing and an in-store design and digital presentation. We amplified this innovative product idea and it became a key contributor to the strengthened sweaters we saw during the quarter. Its success is an important proof point that shows we can reignite GAP with big ideas and deliver improved results. And now we're going to build on that example with relentless repetition. Our linen campaign, which launched in late February, is the big idea for spring. The campaign is running now, and I encourage you to take a look. This is a great example of the brand taking trend right product and amplifying it, turning it into a big idea expressed through compelling in-store merchandising and strong digital execution with an innovative and culturally relevant marketing campaign entitled Linen Moves, featuring musical artists Tyla and Jungle. we struck a cultural accord on Instagram and TikTok. Linen Moves was Gap Brand's highest performing video on both platforms ever, and we're just getting started. Regarding Banana Republic, we are focused on reestablishing this brand to thrive in the premium lifestyle space. As I've dug in with the Banana Republic team, I've realized that we are behind on the fundamentals, having the right product in the right place with the right price. 2024 will be about getting back to the basics, both for product and execution. This includes a focus on go-to wardrobe pieces and BR classics like sweaters, Oxfords, suit separates, and khakis, those products that Banana Republic has been known for and will be again. We're encouraged by the brand aesthetic, but it will take some time to get this right and unlock the potential of this business. Turning to Athleta, As we shared with you last quarter, the brand had missteps in prior years, and as a result, net sales for the brand remain muted in Q4 as we lap markdowns, a challenge that we will continue to face through the first half of 2024. Athleta is a brand with significant growth potential and a clear and distinct positioning rooted in the power of she. Early holiday ideas like cold weather train and our shine set sold well. These great ideas were ultimately bought too small, but they are good proof points that we are on the right track at Athleta. We're making progress in resetting this brand, returning to the core of Athleta's positioning. We started the new year with a cleaner palette, and we've seen early successes in new arrivals. Although the changes are small, we are learning and encouraged by the customer's early reactions. We're focused on resetting the brand for success, and putting Athleta back at the center of the cultural wellness conversation while reengaging the brand's performance roots. Moving to the third strategic priority, strengthening our platform. We're focused on building and sharpening our operational capabilities to improve effectiveness and efficiency, and in turn, drive cost leverage and demand generation. I recently returned from a two-week trip to Asia, during which I immersed myself in our supply chain infrastructure. I spent time listening, learning, and understanding the facets of our supply chain network, and I have gained insight into the incredible longstanding partnerships that we have built over the years. I also spent time in our Hyderabad office in India, studying our technology tools and capabilities, while encouraging This is an area that we will be focused on elevating as part of our path to becoming a high performing apparel company. We are still in the assessment phase, but my intent is to cultivate a digital first organization and mindset that uses technology to enable business strategy, enhance the customer experience, and capture future opportunities. We are also beginning to evaluate how we can better leverage our media and marketing with the goal of developing more compelling creative and more innovative media to support growth across the portfolio. I believe our platform gives us meaningful differentiation and has the potential to unlock additional value creation, and we will work to further build out our capabilities to drive efficiency and effectiveness. The fourth priority is culture. Energizing our culture will fuel creativity and connectivity while driving accountability across our organization. As I mentioned earlier, the recent appointment of Amy Thompson has bolstered our leadership team and underscored our investment in building a culture where employees show up every day with purpose and a sense of belonging. Amy is a builder of highly effective cultures that integrate purpose, vision, mission, and values throughout an end-to-end employee experience, all dedicated to driving business success. This includes igniting a growth mindset with empowered leaders and aligned incentives. I'm confident she will help us build a winning culture at Gap Inc. Today, our company is on strong financial footing. In 2024, we will continue to strengthen our fundamentals as we focus on our four strategic priorities. While there is a lot of work to do, I am energized by the progress we have made so far, and I'm inspired by the team's commitment and talent. I want to take a moment to recognize our global team for their ongoing dedication, and I look forward to continuing this work in partnership with them as we drive towards becoming a high-performing apparel company. And now I will turn the call to Katrina for a closer look at our financials and our outlook for 2024.