Gap, Inc. (The)

Q3 2021 Earnings Conference Call

11/23/2021

spk_0: good afternoon ladies and gentlemen my name is justin and i will be your conference operator today at this time i would like to welcome everyone to the gap ink for quarter two thousand twenty one earnings conference call at this time all participants are listen only mode for those analyst who wish to participate in the question answer session after the presentation you may now press store one to enter the keyword a queue as a reminder we've limit your question to one for participant if anyone should require assistance during the call please press the stark he fall by the zero key or your touched on phone i would now like to introduce your host show she lied heard of corporate finance and it i knew everyone walking to god thinks food coma twenty twenty one earnings whole the boy media and like to remind you of the information made available on the web cams and conference call
spk_1: contain forward looking statements for information on factors that could call or to results to differ materially from any forward looking statements and well of the description and reconciliation have any financial manager measures not consistent with generally accepted accounting principles please refer to page two of the slideshow on investor section of our website garbage and dot com would supplement today's remarks as well as that date earnings release the company's annual report on formed and cave filed with the security and exchange commission on march sixteen and twenty twenty one and any subsequent filings with the securities and exchange commission all of which are available on guard pink dot com these forward looking statements are based on information as of today november twenty third twenty twenty one and we assume no obligation to probably update or revise are forward looking statements joining me on the call today or chief executive officer sonia single and chief financial officer katrina o'connell with an alternate hollywood is
spk_2: idea thank you joe and good afternoon everyone thanks for joining us today the guy reflect on the last eighteen months i'm inspired by the incredible transformation our team have made in such a short time despite an ongoing pandemic related disruption tribe is that and the broader economy
spk_3: coming up record failed apartments and few to we had accelerated momentum heading into the back half before facing disruption to our supply chain driven by the two and a half month months older of art up manufacturing country vietnam as well as port congestion both of which affected our ability to fully me
spk_2: strong customer demand while we had planned into the know the patch and constraints as we entered the quarter including colin related closer than vietnam the shock to are better presented longer than anticipated as we turned into month we have been all hands on deck said dr phil said when and the resulting impact on our business collectively navigating holiday and beyond ensuring that the customer is that the furniture and every decision we make the cure or supply and meet the needs of our customers we chose airfreight over ocean battle for a significant portion of our assortment taking on extreme transitory caught or did the pointed in the short term impact on earning but we made the choice to invest in our customer comment and build loyalty that will help the team growth over the long term katrina will go into greater detail on our mitigation effort played it overall we continue to believe the scale of our supply chain of the material advantage we have deep relationships with are many factors across multiple countries of origin optimized for god speed and expertise and we have strong transportation partners offering speed advantage and industry leading rate that they're learning from this crisis will not go to waste were using them as an opportunity to accelerate digitization effort that were already under way across our product to market proper there was available in crete than the enterprise clock feed on transform it a bit initiative and they combative the current crisis with an eye on a better future of bastard for example or adding supply chain capabilities that will allow us to better entered the paid be unexpected
spk_4: we've made significant progress digitizing or operating profit the when the targeted focus on inventory management loyalty and personalization and were transforming product creation by using digital tools to unlock speed and efficiency all the for bill paid board
spk_2: and twenty twenty two and beyond did near term pressures have not distracted up for more course strategy we have an acute focus on what really matters are unique own a asset it's because of that simple consumable an executable strategy was shared in october of last year are powered by and twenty twenty three the gap big it than a stronger more resilient position today than we were entering the fifth player even in the faith of current had when i'm confident that is true or rather healthy the man for our product strong and we pricing power with average a retail contributing to the highest growth margins and over a decade we are becoming digital lead lead online failed grew forty eight percent in the quarter compared to twenty nine team representing thirty eight percent of total fails and on migration to the cloud has unlocked innovation in our tech or polio we will strategically shared an estimated one billion and failed by year end vs twenty nine nineteen i call thing unproductive stores that best thing smaller brown and partnering or european business to drive focus and profitability nearly three quarters of active customers are low key shoppers and they are spending twice as much of non loyalty customs and we have qualified are strong balance sheet by restructuring long term that allowing up to invest for growth while continuing to return cash to shareholders to our team and partners around the world thank you i've watched you navigate persevere and accelerate through the near near term challenges while executing a long term strategy the fact that the pipeline disruption com failed for up five percent on a to your basis but three of our poor grand delivering positive to your cop let failed were down one percent to twenty nineteen which include an estimated eight percent point impact you that supply chain headwind
spk_5: our strategy is on track and as working let me walk you through how are power plant came to life in two three
spk_2: starting with the power of our brand
spk_6: each mar billion dollar brands is finding new and relevant ways to expand reach and cut through to the can view that is driving and and them brand power and a decreed and been counting
spk_2: let me draw with old navy or maybe delivered eight percent filled girl burst the twenty nine nineteen a deceleration from the first half of the brand would disproportionately affected by him into a late night during the quarter or navy maintained it's number one ranking kid market share according to npd and the detained and kid and baby global trend from the first half but straw back to school performance
spk_7: bought a quality away be crucified and integration launch successfully in august the brand more than doubled his extended side customer file them launch fifteen percent of customers who shop extended by them are new to the brand and more than a third have shopped old navy before but our new
spk_2: the category
spk_8: we are things strong extended side the man across fashion category a clear signal that our customer is craving trench void lacking in the market
spk_2: moving to gap the momentum continue the gap bread particularly north america would comparable failed up thirteen percent versus twenty nineteen and that failed nearly flat the by the almost eighteen presented point of revenue we shed to strategic store closures bookmark the third consecutive quarter a positive comparable to yourself well in north america of get brand improve the core help of the business from pitre assortment and better quality product to an increase in digital penetration and lighter and brighter stores yeah reached a critical milestone in our power plan concluding a strategic review of the european market driving a more profitable business model a shuddering are you kids doors and working with local partners to amplify growth we have identified strong partners in the uk ireland fran the and italy and together are committed to thurber and growing are bad customers in europe our new easy gap icon the perfect hoodie deliver the macphail buy an item in a single day and gop dot com history with over seventy percent of easy gap customers shopping with us for the first time that partnership and unlocking the power of a new audience for gap gently put jeanette men from diverse background now but anna public with successfully launched new brand positioning focused on acceptable luxury through unique story telling and up experienced the the brand of going back to it's roots igniting the adventure and oliver the better public purported a nutshell decline of eighteen percent murtha twenty nineteen and a negative camber said to your car like gap we walked away from about ten percentage point them unprofitable revenue do the strategic store closures product march and expanded during the quarter as luxury product like marino leather cashmere and silk resulted in increase average transaction drawing higher value customers willing to pay for great quality and finally atlanta delivered an outstanding quarter with forty eight percent net failed growth first the twenty ninth him using it's unique an audible mission to empower women and girls to the power of she the brand have been best thing and new touch point that increased awareness and drove new customer acquisition one which had more than doubled birth cute three twenty nineteen about a group brand awareness of thirty three percent versus twenty seven for that last year according to god by embracing celebrity partnership the by of the now i'm feeling who took to the world stage in tokyo the bread expanded into canada with the launch of it online business and first company operates door in vancouver
spk_9: we're and frodo and customers are quickly and think have letter well their new emerged in digital community with it and well being with the active user base growing fifty percent every month and plunge we believe it platform has tremendous potential over the coming years to revolutionize are we managed by law
spk_2: double brand experience them next the power of our top form and portfolio we leverage are fine gael to drive advantage for for proper fled billion dollar brown our leading omni platform provides customer communion and engaging experience that weather indoor on mobile or through out curbside pick up or online feels good forty eight percent in a quarter compared to twenty nineteen and were maintained are ranked as number two in us apparel ecommerce fail art by double act of customer file that the sixty four million and those customers are spending more on average than they were two years ago but more important is that the health of our customer file improving compared to twenty nine he newly acquired customers are spending more with us that our existing customers would increase average transaction average in a retail and back inside we're pleased with the launch of are integrated rewards program and our ability to build customer like time die now with more than forty five million members or loyalists or to act more likely to shop across brand and three x more likely to shop across channel we feel our brand to our scale technology advantage operation we are investing capital to drive grow reduce costs and increase speed and agility to diversify the fence in arbor that we are all competing new capabilities that will unlock additional value for example we had cried draper which effect will power new ecommerce to with really that technology and we acquired fifty four or machine learning and ai acquisition with broad potential across feel inventory and consumer inside we have plan to scale the pollution and twenty twenty two to build a chord digital capability that will help our brand lower return boot to top level increase margin and deliver better customer expensive online and indoor across all for brand the power of our portfolio come to life to our leadership and key category or some all active and tweeted that the and are denim business are expected to generate revenue of four billion and two billion respectively the fear and our kids and baby business own nine percent market share across old navy gap in atlanta even of occasion and were toward category of strengthened it clear comfort and style both the thing we're defending our customer reach across every age body and occasion from value to premium to category to ban chan and new a dearth of a market we can test pilot and one brand and the leverage learning to scale across the rest for example starting our include the fighting rolet in that letter and scaling at old navy bought a quality are using old navy gap and banana republic strong presence and infrastructure in canada to enable athletic quick and theme of entry into the market and the collective power of our brand the give the scale advantage we continue to innovate and fifteen of a thorough thing with a focus on empowering women enabling opportunity in imaging community every industry will be impacted by climate change and we're doing our part to in mitigated impact but that are supply chain and on the communities where we operate earlier this month the you an aide gabbing women and water a lion and now that we have empowered one million people to improve their act that the clean water and sanitation already halfway to our goal of reaching two million by twenty twenty three looking ahead we anticipate robust apparel and access to be tilt build across the industry for the remainder of the year and into the next that said we are bell thing the favorable can do or climate against current the constraints as i mentioned earlier we are doing everything we can to improve or on han inventories vs ball and fill we remain cautious given the current environment
spk_10: when my father by handed over to katrina or the near term had wind and with the thing impact on our proponents are difficult will remain focused on executing our strategy for long term sustainable growth we're focused on what matters the man generating investment in a billion dollar bran fueled by cut
spk_2: through creative the point eight anti have to drive efficient be in the way we work and restructuring our business to reduce cost
spk_11: all that allow the emerge from the crisis growing share in creeping brand health and delivering profitable wrote long term with that i wish you and your family the happy thanksgiving
spk_2: katrina thanks sonia and good afternoon everyone and sonia said were deeply proud of the progress we're making to transform gabbing to our power plant wage twenty three we have strong demand for a brand and our fleet optimization through store closures international partnerships and divestitures is progressing well and adding value or opera eating margin remains on track to it ten percent by twenty twenty three in line with our plan even as we navigate the near term disruptions or balance sheet fortified with our recent debt restructuring enabled us to invest in our business to drive growth overturning cash to shareholders the corner canon of our power plants when he's when he three strategy or well underway and delivering value
spk_12: while we're confident with our strategy widely reported worsening global supply chain issues meaningfully impacted our third quarter perform it
spk_2: we locked approximately three hundred million dollars of revenue or eight percentage points of failed growth on a queue your basis you to launder transit time and last week the production which led to on hand inventory shortages in the quarter the backlog at us porch deteriorated limit meaningfully from the first half of the year resulting in up to three continuous weeks of unanticipated delays the fall product deliberate throughout the quarter in addition while our production capacity is largely globally diversified approximately thirty percent of our product is produced in vietnam or factory closures extended to over two and a half months significantly longer than initially anticipated or average on hand inventory and que three with eleven percent below fiscal year twenty nine nineteen so despite strong fell through trends we lost volume as a result of limited supply or or brand all experience delays in style than five years that limited their ability to fully meet strong the man or maybe was disproportionately impacted we believe the supply chain disruption impact or failed and margins are transitory although will present in queue for and potentially into early next year with that we've taken from near term actions to proactively improved apply for holiday
spk_4: and we're using the learning from acute the by crisis to accelerate new capabilities for twenty twenty two that we believe will help the better mitigate logistics challenges and more profitably increase speed to market go forward let me touch on some effort
spk_12: further in the near term we've secured and criminal air capacity to support holiday and them free in addition to an estimated one hundred million dollars of air costs incurred and que three we've also invested approximately three hundred and fifty million dollars into for airfreight the finer expedite holiday deliveries and
spk_4: and second were possible we have rounded a modest portion of our inventory east coast ports to bypass the congestion in the l a long beach park
spk_12: while we have fired to improve our online delivery for holiday by adding air capacity and utilizing alternate ports the supply chain situation continues to be volatile newly opened vietnam factories are behind on holiday province production and ramping up slowly ongoing poor delays or worsening and air chargers are causing new airport congestion
spk_4: or mitigation efforts are driving significant transitory car but we're focused on a long term impact that the lighting our customers but the products they love during the holiday season have on preserving market share and maintaining customer loyalty
spk_12: we remain cautious in our outlook for the balance of the year and are updating our full year twenty twenty one mps guidance range to forty five cents to sixty cents per share on a reported basis and a dollar twenty five two dollar forty per share on an adjusted basis we are updating our guide and solely based on the acute revenue in margin impact from supply chain disruption
spk_2: this range now reflect the estimated last they are from the by disruption in the second half of twenty twenty one to be five hundred and fifty million dollars to six hundred and fifty million dollars in addition are updated guidance range reflect approximately four hundred fifty million of transitory airfreight we have chosen to incur as we seek to meet as much customer demand of possible and we are confident that when adjusting for the substantial destructive impacts the twenty twenty one or underlying didn't have to the had of plan and we will emerge strong and twenty twenty two and beyond as we look to twenty twenty two we're adding new capabilities that will enable the navigate the disruption but more flexibility and significantly less airfreight
spk_12: beginning with them or twenty twenty two our team have added expected longer port delay time in the product bush and deadlines which we believe will enable us to ship good largely by ocean for on time deliveries
spk_2: in addition old navy has now accelerated the views of digital product creation for the majority of it's all or years with vendors this is added speed to the pipeline is the breakthrough in efficiency for the brand
spk_5: also to increase geographic different diversification and flexibility
spk_2: we expect to leverage more multinational bender and we will begin to deploy a i have my recent tv for acquisition to better drive inventory in stock in our stores a i combined with ongoing inventory management transformation effort and the leverage of our new loyalty program give us confidence in the sustainability of strong averaging unit retail and twenty twenty fail
spk_12: now turning a third quarter financial before i get into specific results i'd like to know that they're select charges be incurred in the quarter that are excluded from are adjusted financial specifically costs related to restructuring our long term debt and the transition of our european market to partnership model i'll provide more details
spk_2: upon the that i talked through the revolt starting with fails net sales of three point nine billion for the quarter were down one percent to twenty nine teen with are cute resale deceleration from the first half of the year due to supply chain issues
spk_1: fails improved five percent on a junior beta
spk_2: more particularly pleased that three of our poor brands delivered strong to your compress with old navy up six percent gap global up three percent and north america a thirteen percent and a letter of forty one percent all while navigating acute supply issue and while banana republic to your combo down ten percent the brand made progress than a quarter thread product and customer experience relaunch
spk_1: are strong ecommerce channel continue to be an advantage of the online build were up forty eight percent compared to twenty nineteen contributing thirty eight percent of field in the quarter up from twenty five percent of total failed and huge three twenty nineteen
spk_2: moving to growth margin third quarter report and gross margin with forty two point one percent an increase of three hundred and ten be point for twenty nineteen excluding impact related to the transition of your of our european descent to partnership model adjusted gross margin of forty one point nine percent for the quarter represent the highest cute three gross margin rate in over ten years expanding two hundred ninety basis of points for the twenty nineteen gross margin this is primarily driven by three hundred basis points and broad libraries from higher online failed and lower rent occupancy and depreciation as a result of strategic store closures and renegotiate a rat merchandise margins where down just ten basis points despite nearly two hundred basis points of higher online shipping costs and about two hundred and fifty based the point in short term headwinds related to airfreight product acceptance was strong across all brown with our overall que three discount rate at the lowest level in five years
spk_12: turning as today reported as una which includes twenty six million and charges related to the transition of our european operate model the thirty eight point three percent of failed he leveraging four hundred and seventy basis points to can be compared to cute three twenty nineteen
spk_2: on an adjusted basis action a with thirty seven point six percent of failed six hundred and ten days of points above twenty nineteen adjusted as today we continue to execute strategy of driving down fixed costs for investing a portion of those car and demand generation in a form of marketing and technology it's costs have been significantly reduced as we successfully closed or the know them north america divestment of tube around earlier this year and reached partnership agreements for a european market marketing up three hundred and fifty basic point for of twenty nineteen supported the roller of our new initiative particularly loyalty inclusive five thing at old navy and the brand relaunch a banana republic and other major contributor to are low discount rate the balance of good reinvestment were primarily focused on technology to build out our digital and supply chain capabilities as well as a hot on higher bonus across parts of the low twenty nineteen be fine as no meaningful than a pale for granted in that year based on performance indefinite were making today or long term differentiator and we're committed to our strategy while remaining prudent even in the face of near term comply had one but guarding operating margin operating margin for the quarter with three point nine percent reported basis excluding seventy million charges related to our european market transition adjusted operating margin with or point three percent which as i noted earlier include the impact of an estimated three hundred million in law fails to the constrained inventory in addition to approximately one hundred million in non structural airfreight costs moving on to in her thumb tacks during the quarter we restructured our long term debt by retiring all of our two and a quarter billion senior secured notes and issuing one point five billion of lower coupon unsecured senior notes through this debt restructuring we were able to reduce our overall debt by alan achieve material interests saving approximately one hundred and forty million on an annual basis beginning and twenty twenty two and unencumber are real estate assets previously pledged that collateral
spk_13: we incurred a three hundred twenty five million non and recurring charge related to debt extinguishment in the quarter future three that interests with forty three million dollars for you're not interested now expected to be a hundred and sixty three million dollars looking beyond twenty twenty one we expect annual net interest expense of around seventy nine
spk_2: and dollar effective tax rate with twenty nine percent for the third quarter excluding the impact from fees related to death extinguishment and a charge changes to our european operating model it just as effective tax rate with twenty percent
spk_1: we expect the full year affected tax rate me about twenty three percent on a report based the and about twenty six percent on an adjusted basis
spk_2: regarding earning from the quarter huge reported earnings reflect the last of forty cents per share excluding fees associated with a long term debt restructuring and the transition of our european markets your partnership model adjusted earnings per share for the quarter were twenty seven fat turning to inventory inventory delays worth and throughout the quarter and are cute three failed down one percent versus twenty nineteen out paved average on hand inventory of down eleven percent to twenty nineteen third quarter inventory and a flat to twenty nineteen and down one percent versus twenty twenty with average on hand inventory down seven percent and in transit up sixteen percent the last year on an inventory the end of a quarter remain seasonally relevant with marked down to below que three fiscal nineteen porter and levels we expect queue for ending him and tory to be up high single digits for the last year although that point nine alec may change giving continued volatility the supply chain regarding the balance sheet can cash flow we ended que three with one point one billion in cash cash equivalent in short term investment during the quarter we continue to earn to return cash to shareholders paying a cute read david and at twelve cents per share and repurchasing seventy three million dollars and shares and part of our current plan to offset the lucian and earlier that month we announced a queue for dividend of twelve cents per share looking at our global starfleet we are plan the close three hundred fifty gap and banana republic north america story is expected to be approximately seventy five percent complete by the end of the year and with the recent announcement of our agreement to transition to a partner model in italy we've now concluded important phase of the restructure of our european market all markets are expected to be transferred to our new partners in early twenty twenty jail now and like you provide an update on our for your financial outlook which we are downwardly revising solely based on the acute impact of fail the margin of the supply chain reaction oh you're twenty twenty one reported earnings per share are now expected to be in the range of forty five cents the sixties seven which include net charges a four hundred and forty five million
spk_4: i have three hundred twenty five million in fees related to the restructuring of our long term debt and approximately one hundred and twenty million related divestitures and the transition of our european business model to apart european do that your partnership model
spk_2: excluding the charges that associated tax impact four year twenty twenty one adjusted he as is expected to be in the range of a dollar twenty five two dollars forty
spk_12: it's updated guidance now include the following assumption first big the dec twenty twenty one full year revenue growth of about twenty percent versus twenty twenty this range now reflect the expected blah failed from supply disruptions in the second half of twenty twenty one of approximately five hundred the
spk_2: a million to six hundred fifty million including an estimated three hundred million from cute three and an estimated two hundred fifty million to three hundred fifty million and queue for
spk_12: second we expect full year non structural airfreight to be approximately four hundred fifty million dollars
spk_2: we constantly chose the air approximately thirty five percent of our holiday product given the two and a half month away from vietnam players and two three and the over three week west coast port delayed so that we can give our customers have much holiday product is began to deliver on their expectations while this of material to our profitability we believe it is necessary to further mitigate failed losses and retain customers for the long term
spk_12: but the added aircraft and the meaningful failed impact from supply constraints we now expect for your twenty twenty one report an operating margin to be about four and a half percent with adjusted operating margin at about five percent for fiscal twenty twenty one this is inclusive of short term air caught in the back half impacting operating margin by about two hundred and seventy basic point
spk_2: for your capital fund is still expected to be approximately eight hundred million dollars in summary when adjusting for the acute impact of supply chain disruption we're still expecting the year the and out or above original plan for twenty twenty one demonstrating that are underlying business trends are quite strong and providing real momentum the progress we've made on our power plant only twenty three strategy in the face of the challenges highlights the strength of our core business and the health of our brown and we remain confident in our path of we moved or a ten percent operating margin in twenty twenty three
spk_0: with that will open it up for q and a you as a reminder for those who wish to participate in the question answer session at the presentation you may press start want to enter the que
spk_14: and our first question will come from brooke roach with goldman sachs that afternoon and thank you so much for taking the question
spk_12: sonya to turn around one think you could help us a little bit with understanding of the impact of some of his inventory planning a supply chain delays a you're thinking about the implicated into the fourth quarter and holiday it sound like a maybe some shit loads but maybe stuff on boats in the port lied around
spk_15: i'm at her and where those constantly little really looking for that holiday season how are you thinking about killing over inventory in january and february and perhaps that more lasting impact that some of the supply chain delayed and vietnam go at least start into why
spk_2: until next year thank you i broke it's katrina so as we fed on the on call we have a amped up the air freight for holiday in an effort to really navigate the lengthening port delays as well as the late opening of vietnam arm and there's a range of possible outcomes for how that could play through the holiday season and so we'll we'll see where that lands with holiday inventory as it relates to the curia over into january february the teams have been really looking out for vietnam and particular what you did space on the closures do we need to campo so that we didn't take them at all ah what units can get read flowed into a future an arm and then what units are we going to gently pack and hold for next year we proved this past year in the front half dot pack and hold life a good strategy for us and so you know if we think that things are going to be too late for the holiday season we won't put them in stores or online and
spk_14: have them generate markdown he said will hold them for next year so we're using a variety of things to help really navigate the current inventory situation so that we don't end up with a january or february inventory liability issue
spk_16: thanks so much i'll pass it on
spk_4: and our question come from erie with bank of america
spk_2: think that afternoon on make me think about the supply chain cause how much of the comp gp a structural and other the actions you can take to take pride point higher to offset on on he had one i'm lorraine i'm sonya here at so we do think that the que three men them because the work around with air a transitory and bill that's why we have made that back we wanted to maintain the customer palmer or brand are resonating we have a ten year high margin to your price realization and so on are are that was the fail me off and than have product here to service and holiday and that's was included in our out what we do think that even with the lump enough of the quarter or we are on track to our power plan first year and as we move into next year we minimal most was more the your end but we're a comedy about navigating that so you know i think that through the price gains we've seen across all former graham as exemplified by the country margin we think that that can continue through a combination of investment we made a marketing the strong product acceptance we're seeing as well as the
spk_4: enabling capability such a personalized i thing and him into a management optimization and que levers to continue the charge over the coming years and price game across the that cost the company really pleased with the level of discounting counting we've been able to stymie we expect that bad in order to drive open brand
spk_0: the quench really that that will continue
spk_17: thank you
spk_18: and next will be matthew boss with jp morgan
spk_17: great thanks so sonia at all baby
spk_16: if we think about the twelve point sequential deceleration and com how much exactly was due to inventory and what was the timeline of exactly what what went wrong versus the plan that you had in late august
spk_2: have you seen trends improve at old navy in november and and katrina on the ten percent operating margin target what's that let of the five hundred basis points from here if we think between gross margin and as to enter
spk_4: and man so have you know we left the first half of
spk_2: the fear of with really strong momentum and old navy with twenty four percent sales growth and mommy guided me to we had begun the disruption from vietnam as we've seen another country about two to three week closures and well as a five day port delay and because that is what we've seen that for we had forecasted for go forward what what actualized was that you know much more dramatic we had a two and a half months shut down a vietnam which is our top source and country and for all maybe slightly higher which it with for women and so the compounding effect of that as well as the worsening port is the new new and so as we thought about the health of old navy the momentum or even and que three the growth in the net promoter score and
spk_3: the growth and brand awareness you had bought a quality launch we made the decision to invest in airfreight in a substantial way to compete and holiday that's what we are right now we think that the majority the bell bottom also bought in fact that do that supply chain moth and you know or maybe enter the corner
spk_2: lean in inventory because of the strong demand on the first half leaner than than other portfolio and then you exacerbate that with the out of stock due to the by constraints that a vietnam and or and so that totally what we're not getting the short term we do believe of transitory we do believe that maybe in incredibly healthy and had had you know i think a all the indicators the price realization the brand held the net promoter score a loyalty customers
spk_4: the the age of the customer with new customers joining that are younger mean all that abode to the right at bet to played up and old navy
spk_2: and then matt as it relates to the ten percent operating margin or we remain confident in that for twenty twenty three when you look at our guidance for this year with a five percent operating margin on that include about a two hundred and seventy basis points are impact from the transitory airfreight cough that were incurring this year and then in addition to that it includes the close to five hundred million of feel the impact from supply constraints and so all about give both confident that this year on when you take out the supply chain impacts would have been well ahead of our original powerplant when he when he three for here and more in line with the guidance be provided back in august on so we're confident that will get through this on as we talked about before we are looking forward we're adding that supply chain delays from the ports to are buying timelines for summer and then old navy is accelerate
spk_0: king is moved to digitizing product creation for fall all of which we think will enable us to navigate next year with much less air freight and we can see line of sight than to recovering the law failed with better supply so i'm in a more to come when we get into next year but we do
spk_19: the that the here i'm would have been had a plan and we have line of sight and getting these costs and fill boss is going forward
spk_12: and our next question will come from kimberly greenberger with mortgage right thank you so much i wanted to ask about the level of at junior spending that we're seeing should we assume that this is the new baseline of spending going forward and ah when you realize during the third quarter that old navy would be lower the inventory was there any thought to perhaps cut back on marketing during the quarter there with not to disappoint the customer because obviously with that the lack of inventory and driving traffic to the store through marketing the potential certainly would have existed thank you so much
spk_2: yeah so on the action a side kimberly on a retired the as she they do you leverage in the quarter with impacted partially by the drop in failed on and then partially by the on commitment that we had to really thing the course on marketing as you call out on and then it was offset by whole back in stores expenses which we do do in the quarter we really targeted anything that was not customer facing on to try to pull back on ah the et je ne in the face of the sales declines that we were seeing from the supply constraints that emerged in the middle the quarter i'm all it sonia talk a little bit about the marketing peace yeah not as out on that we
spk_20: pull back on payroll and other fish caught a don't add value in the base of lord they'll have to jump kimberly but fundamentally er strategy and working and live a parameter rigor around marketing effectiveness the marketing spend that gave i'm confident that it was the right level and that met and as we look at you three for old navy and particular
spk_2: or a when that per month score been up a despite the fact that we had stuck out with where we know we did we have diploma and when the fact that the brand awareness and up a point for a brand of old maybe side that really dramatic and strong based on bought an audi thereby already launch that we think the marching about and were right
spk_3: up with on fixed costs elimination that automating or stores property that's removing unproductive failed to strong odor and
spk_12: and the tradition of our you know on probably international markets are those are area that we made a lot of harvard thought that affect raw data tonight and valid our store operation of put against the law but more color on as year they were very very committed to digitizing or or operation for that are fixed as she they caught in our three year plan
spk_2: continue to be a competitive advantage
spk_21: great thanks for the color on that on and i just wanted to ask clarifying question katrina i could you just tell us what the a new are increase wasn't a quarter thanks so much
spk_22: yeah no problem we didn't quantify that on what we did say though kimberly is that in our merchandise mart margins they were only down ten basis points on the quarter and that was with arm two hundred based point of online the leverage as well as two hundred and fifty basis points of the transitory
spk_16: airfreight costs so hopefully that helpful the week for that that would tell you that that you are with up meaningfully if with that four hundred fifty this went of headwinds we only lost about ten basis point of merge margin
spk_23: understood think so much
spk_1: her and
spk_23: i brought show with wells fargo hi becky home katrina want to outgrow to question bomb on margin
spk_1: try to understand the air for dynamic a minute
spk_2: it was traded or in competitive in your mind one time and the shot a bridge the five percent margin to barriers was your temperature target and two years have to look at the basis for him for great for the for you or not this right average halfway there are certain amount of and am i guess that's what i'd like to watch and one who got the retweeted think about it at one time or to some of it's kind of third and then i rebuild the tell me that there's gonna be kind of an even build over the next twenty four months or more backloaded two to twenty three the like about dog would be would be great thanks
spk_1: oh so you're thinking about that right ike on this year include two hundred and seventy basis points of headwind when from what we would say is our air freight that is slowly attributable to navigating the supply crisis
spk_4: on and so not something that we would see continue we'll see next year how much of it continues in the front half of the year but are fundamentally the fear would have been that two hundred seventy basis points higher without having to navigate the current issues so you're thinking about that correctly and then we'll give you more arm on how it will pay thought twenty twenty
spk_2: two vs twenty twenty three but i think what sony and i would say is by the end of this year we're really proud that i would say seventy five percent of the core restructuring of the company is largely behind us on when you think about closing the north america stores devout thing of are two smaller bran getting are three country eve in europe partnered on when we do feel like you know we got the debt restructured in the third quarter would you feel like we've made really good progress against the restructuring plan until the next two years really are going to be about driving now the optimization about healthy poor with these digitization efforts that we think
spk_4: will start to add value as we talked about through inventory management through lower return raid on and through automation of some of our core prophecy to try and dry cough out but we'll talk more about pasting when we get to the end of the year on but that that's the way to think about that had person operating margin the i just add on i think fundamentally going for quarter like that
spk_2: if
spk_0: we haven't looked at our strategy and are very with all done that it is the right strategy
spk_24: we are in the customer at the center or commitment or sales growth driven by these for brands that are growing in the hell with a double digit operating return is it our objective and we think we're still on plan to meet that the quarters a lump year and we would like certainly not happy with with that quarter by the if you step back would you look at the year we will still be on track to that plan that we communicated last october and though there is it i think of that to have to look to and quello the commitment to the next couple of years
spk_2: much and or next question adrian yeah with barclays thank you for taking my question on and unkind understand and for the quarter you had probably one of the day is deltas versus other retailers on the third quarter particular on so i'm wondering is there something that happening with your be time they know that the it wasn't an issue short note the tighten up the lead time had the become you know too short the that the types of event can actually have a very good at near an impact and then of ah katrina we didn't talk much about on any average hourly rate pressure in that at in a line numbers are floating out there fifteen at that
spk_3: teen bop ominous darkly gaps that at the forefront of leading that hr they should it to how are you thinking about that and actually think about that wait inflation annually thank you very much
spk_2: thirdly at the vertically integrated approach retailer with about thirty percent of our manufacturing in vietnam we were disproportionately impacted and those who don't manufacture their had a natural advantage that we continue to believe that the scale of our supply chain and always been a an advantage my showed that been better rate and in better unit cost an act that the last mile and for that advantage now that said we are using that as an opportunity to i'm way to further insulate ourselves and so now we expected the shut down to be similar to other countries the couple of weeks for example mean i think the government delay was a potentially
spk_25: longer in vietnam especially felt vietnam where we were most exposed and and only be women were we were most exposed so it was outside of our expectation going forward were focused on multinational vendors as opposed to and point partners as well as a digitizing of a product creation process which will
spk_26: will really let us were do by called time and lead time or in in our product to market model so yeah i think we're using the prices have an opportunity and we did last year to accelerate and with the key component of our power plant wait wait three including digitization including supply chain true
spk_25: the nation and inventory management transformation which are all up to that we'd see leaning into been to move us forward
spk_27: and then they are going on the hr pressure on a we are we are definitely thing on average hourly rate pressure primarily in our distribution centers but in our stores as well i'm and so far the teams are doing a good job navigating that and it we haven't called about the night you know sort of one of the biggest headline that is definitely something that we are now
spk_0: navigating within our qa structure on as others are and contemplated and our outlook and it when i would say in the automation level we have an are the fees are great hedge for that being said we are absorbing and without a jars and then or stores we have imbedded some had went into the america
spk_28: okay have you given what your age are actually is that know we haven't
spk_29: of no thank you very much think that the bank you happy thanksgiving
spk_2: thank you to adrian and we have a question from david kelsey was healthy advice good afternoon everyone as you think about the plight in up to both that happen now and you think about going forward into twenty twenty two and and even and twenty twenty three one of the learning from this that adjust that how you adjust your supplied same going forward had a operate differently do you think that may help
spk_4: to manage the inventory that even better going forward
spk_2: thank you i would say first and foremost the starts with digitizing the information that we know exactly where every unit have in our and then supply chain we had that information but now we're going to have a greater level of detail and more real time that ability and that a link to the technology investments remake king in digitizing or end to end the pledge in thirty that first and foremost second is we've all heard the play chamber has given a cost advantage and now i will be putting a greater emphasis on with billion see and flexibility and so you know whether that sourcing more near shore
spk_28: whether that the mobile countries of origin looking at a bribe levers and ham or or or are to put a vantage in our skilled the pledging and dana particular to twenty twenty two on for spring we have ah moved a lot of our west coast port volume to the east coast
spk_0: most on which we believe will help us navigate better on and in summer we've built in the much longer port delay of lead times on into are buying cycles and that as we said for fall ah the old navy teams fully pulled forward the digitization of their fault line so that they are saying
spk_1: you are much better speed and flexibility is so i think sequentially next year we feel like we've been incorporating the learning them and and sonia said on you know digitization had always been that next leg of powerplant twenty twenty three but we've used it as a way to really accelerate some of that work can make sure that we're getting ah more advantage
spk_30: after he added me reflect on the eighteen months i would say i'd much rather have it by problem that a demand problem and on the demand side we been you know i think pleased with the response and the customer a sentimental to so really it's about navigating the short term transitory soon as we lean into the
spk_2: i think our the brand help the customer acquisition entire loyalty program which have exceeded all expectations
spk_31: thank you so much that that walk and holiday thank you
spk_4: and que and our last question will come from paul which way with city
spk_2: she gave guys i'm i'm curious how you go about measuring gave them sales india and the quarter and wondering how on a related know maybe talk about ah by brand traffic vs conversion and how that differed and three que ver structure yeah for the midfield paul we took a pretty liberal approach to really looking out what inventory wasn't here to sell on and quantifying what that would have sold or on you could say that there was actually a larger impact than that when you think about the back bad on our customers don't often by just one unit they often by a basket of units and so there's there's what you would consider may be a halo effect to not having the unit but the way we quantified the failed watch as really that literal don't have the unit don't get the sale upham and another the relate to brand by brand maybe soon you can toggle brand by brad i don't know that will break out the components on the were certainly happy to give your thoughts on the queue to trend vs two three
spk_3: yeah i mean i'd say i'm i'm really pleased with three at a for bar brand showing com
spk_1: with gap north america showing a knife acceleration that thirteen comp in north america
spk_2: and the downgrade quarter for partnerships or gap whether the more my home growth or the you've got an icon i them with the it but he being launched and then the stores really again to build momentum for the got we feel great about interim that momentum the a bear public since we launched and that the positioning and took the a luxury we've been pleased with the momentum bear with cut
spk_32: my response and then fled are really just had a spectacular quarter with forty six percent sales growth over twenty nineteen and the partnership that have been a cornerstone and a tailwind for us across the company that more miles an hour from butte partnerships with which accelerated the brand awareness for atlanta
spk_4: which has been a driver of their cell moment i'm so i'd say you know brand and pro maybe mean i think while we had the tenth healthy customer indicators be simply which just not able to meet the demand the pan add to the level that we wanted and will consider them navigate bad for the back half an hour
spk_0: plane to compete at best as we can him to for
spk_33: that bang for anybody that show up and in lower conversion and three do versus to two or lower you keep leave and metrics you can share that quantify be a diesel and from two to three que as a result of this lower and mentor
spk_0: yeah i know paul we don't actually break out those can't components
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