Q4 2019 Earnings Call
[music].
Good afternoon, ladies and gentlemen, my name is Cody and I'll be a conference operator today at this time like to welcome everyone to the gap Inc. fourth quarter 2018 conference call.
At this time, all participants are in listen only mode.
Those analysts who wish to participate in the question answer session. After the presentation. You May know press star one trichet acuity Q.
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If anyone should require assistance during the call. Please press the star Q4, but it did you see on your touched unfold.
I like to introduce your host material money head of Investor Relations. Please go ahead.
Good afternoon, everyone welcome to gap Inc. fourth quarter 2019 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 statement.
For information on factors that could cause our actual results to differ materially from the forward looking statements as well as of the description and reconciliation of the non-GAAP financial measures.
Noted on page two this like supplementing Terry's remarks, please refer to todays earnings press release as well as our most recent annual report on form 10-K, and our subsequent filings with the FTC all of which are available on Japanese dot com.
These forward looking statements are based on information as of March 12, 2020.
He assumes no obligation to publicly update or revise our forward looking.
Joining me on the call today, our interim President and CEO, Robert Fisher Executive Vice President and CFO Teri list Stoll incoming president and CEO Soviet some though.
As mentioned, we will be using sites to supplement our remarks, which you can view by going to be investors section it got exactly.
With that I'd like to turn the call a word about.
Thank you gene and thanks, everyone for joining us on the call today, we'll hear from Tiering takes us through the quarter as usual and then I've asked sanya or newly announced an incoming CEO to join in share a few thoughts before we open up the line for Q1 day.
Before we jump in on the numbers I want to see a few words about why the board and I are still confident in our choice. It's I guess the next leader this great company.
The opportunity to work with Sanya over 16 year tenure with the company and even more closely this past year.
So I knew that old Navy for 7 billion to 8 billion even sales between 2016 at 29 team expanding its north American threatens to over 1200 stores in the U.S., Canada, and Mexico Scanlin gets ecommerce site to the number four largest apparel sites in the U.S. and building competitive Mommy Chantal.
She also drove the evolution of the company's product to market model and I watch your lead organizations across the portfolio, our international business supply chain and most recently old Navy with vision conviction on a constant lie on the needs of our cost huh.
Sarnia has a deep understanding of what drives performance in productivity always focused on continuous improvement. This is why she is the right leader for this organization at this transformative time.
The passionate leader focused on moving fast well driving a culture of accountability and alignment.
What I really admired daughters, and she leads with both station in Fourq.
Additionally, she brings a wealth of institutional knowledge and the skills and experiences capacity. This company during this time.
Sarnia someone can hit the ground running and she already passed.
In addition to our Q4 earnings we also announced team members, it's not just new leadership team.
As part of that Britain Katrina O'connell, most recently served as CFO and SVP of strategy and innovation at old Navy will step into the gapping CFO seat.
I personally not Katrina for 25 years. This is a very deserving and important announcement.
Harry will stay with the company for the next few months to ensure a smooth transition and I'd like to thank her for her many contributions to our company over the past few years. After her study clear Eyed Council and partnership.
Finally, I want to acknowledge the challenges that corona viruses, creating for our customers or employees, our business and our analysts.
I can't imagine when do you all are going through right now and I just wanted to knowledge that.
Terry and sign you will add some detailed around Corona virus. Please note that as a company we're committed to protecting our people the people who shop with us any employees, where the hardest gapping [noise].
With that I'll turn it over to Terry.
Thanks, Bob Let me also thank you on behalf of our employees and the board for the leadership in Florida over the past four month.
This has been an important period of transition for the organization their decision to no longer pursue the separation we were clear we would not revert to how we had operated in the past.
With your leadership, we have begun that forward progress, providing more focused and accountability and being a champion of the imperative for transformative change.
With our Nelson last weekend, Sony will service Gapping next CEO.
Organization had more confidence that the path forward, we'll continue to build on the changes being implemented and a strong sense of urgency and driving the transformation necessary for improved results in future growth.
It's difficult to talk about the business without first acknowledging corona virus.
As most have noted the situation remains highly family and we are of course monitoring developments closely while establishing global contingency plans for a range of potential scenarios.
There are two important impacts to consider demand suppression and supply chain disruptions.
It's early days fully estimate the implications of either.
We start with supply chain, where we know a bit more.
Over the last year, we've made meaningful progress against our migration away from China, and currently source about 16% about goods from China down from 21% last year.
However, we should note that a significant portion of fabric production occurs and build operated in China supplying vendors outside of China <unk>.
<unk> early days it appears that much of the mill production will remain largely on schedule.
Additionally, we did not experience any meaningful disruption from factory closures in China at the started this year.
With regards to our broader global supply chain network, a year vendors outside of China, Our global sourcing organization is working closely.
In coordination with our logistics and transportation teams to minimize any potential delays or disruption, particularly as it relates to fall and holiday flow.
Well keep you apprised of any impact or unexpected disruptions that occur.
I just like take a moment to thank the tireless efforts of our sourcing logistics in BCP teams over the last several weeks.
Our sophisticated supply chain operation, along with our strategic partnerships to router sourcing and logistics network give us confidence in our ability to navigate through the very dynamic in fluid situation, we're facing today.
Turning to demand suppression.
China, which represents approximately 3% of global net sales has been our most impacted region quarter today as a result of store closures and meaningfully reduce traffic trends.
Our businesses in Japan, and Europe have also been impacted by store closures and reduced traffic trends there earlier in the cycle.
And with the U.S. cases, they're just emerging we started to see some impact on traffic here.
Which we while we are unable to reasonably estimate the full impact of Corona virus on a year.
Based on the reading of the trends, we've seen in China, Japan and Europe. We currently estimate the Q1 impact in those markets will be a reduction of approximately $100 million and sale.
We have not yet can you quantify didn't impact for North America.
I'll provide more perspective later with guidance for 2020.
With that let me turn to the result, and I'll start with an overview of performance by brand before getting into the specifics of the fourth quarter and moving onto our outlook for 2020.
29, he was a challenging and disappointing year with each of our major brands performing below what we believe it their future potential.
Well Navy drove the majority of our earnings decline of 29 team. We are encouraged by the signs of stabilization in the fourth quarter with the brand delivering a 5% increase in net sales in a flat comp ahead of our previous expectations.
Importantly, women positive comps for the first time since Q3 of 2018 and delivered margin expansion that outpaced the brand to average driven by strength in key categories, such as fleet sleep inactive, which all delivered double digit comp.
Further sales less traffic, a leading indicator of customer response and product acceptance inflected positively and accelerated throughout the quarter.
While they were bright spots in the quarter in we're gaining confidence that the product changes, we're making are taking hold we still have a couple areas. We are focused on for improvement, namely traffic.
The team is laser focused on traffic recovery, particularly as product continues to improve.
We are looking at natural traffic driving levers such as marketing where the brand recently engaged in new Creative agency after a comprehensive review.
We're also investing and data and analytics and area, we have not historically exploited as a company.
Order to capitalize on the full potential of old Navys known active customer file, which is now 45 million strong.
You've heard from Sony previously where in the early days of unlocking customer value into segmentation personalization and loyalty.
We had innovated in depth work underway to amplify data centered insights to better target and deliver a personalized experience for our highest quality and highest value customers.
It's foundational work that will ultimately increased store and say frequency driving that are brown.
But overall 2019 performance was disappointing for old Navy, we saw improvement in the fourth quarter and are better position as we enter 2020.
We continue to buy inventory much tighter we are seeing improvement and product acceptance. The organization is stronger and stable and the separation work from last year has solidified the old Navy strategic focus.
Volte Navy remains the most important brand in our portfolio.
With strong performance and attractive growth prospects the fundamental brand health remains strong and even in this tough year old Navy gained share and remains the second largest U.S. apparel brand.
Now turning to gap as we've discussed in previous quarters. The primary focus for GAAP brand went to improve profitability.
Over the last year. The brand has made good progress on building the foundation to stabilize the business, including tightening inventory expanding margin and reducing costs.
However, there were some meaningful executional issues in the fourth quarter, which highlighted slower progress in strengthening the underlying brand health.
Unclear brand positioning for the executed marketing messages and inconsistent product point of view continue to hinder overall performance leading to disappointing topline results.
We made several changes at the senior leadership level, including appointing Mark Breitbart to provide oversight across our specialty brands.
He was able to leverage is ski product brand management experience for the task at hand, which is to address the brand positioning and find the customer target and transponder products and operating model to stabilize and restore the financial profile of this business.
While we continue to believe that the brand is better than the business.
In respect of work the team delivered to avoid further deterioration of earnings.
Putting a focus on margin expansion, reducing expenses and execution against the specialty fleet restructuring.
We are very disappointed the lack of progress on the fundamental strategic clarity necessary to objectively evaluate the brands fit in our portfolio.
We remain clear eyed about the imperative to improve the business.
Banana Republic had mixed results.
The positive side, we were pleased to have seen an acceleration in Q4 comp to flat.
And online continued to be a bright spot with positive comps throughout the year.
However, our overall performance in 2019 was disappointing as we gave back some of the gains delivered in 2018.
Startup issues associated with the implementation of a more sophisticated inventory planning system resulted in a sub optimal mix in key sides is impacting performance for much of the year.
Now is largely fixed the focus present strengthening profitability.
Even tory position and improved yield.
As we discussed with you last quarter.
Hi, better leveraging data analytics and existing tool to implement a more strategic promotional strategy, we see meaningful opportunities for improvement.
During the year. The brand also focused on reinventing customer access which included launching rental subscription fell passports buy online pick up some store and testing a smaller store format.
Style passport, while still small initiative is ahead of plan enrollment and provides new customer acquisition and valuable customer insights that can be used to design future product can experiences across our entire portfolio brands.
Just wanted to roll be our plays in our portfolio. In addition to profitable growth. It can provide valuable scale and learning that can be applied across the grant.
Let me finish up with that let us which remains a gentleman our portfolio, finishing 2019, just shy of $1 billion and delivering topline growth of 12% with low double digit earnings growth.
Despite the growth positioning in our portfolio athletic Didnt have a strongest year when measured by the fundamentals. We made some design count changes mid year. They were intended to strengthen our operational discipline, Minnesota consistency.
We saw some of the lingering impacts in the fourth quarter, primarily driven by assortment mix challenges along with inventory likeness during the quarter, we relied on bottom kind of it heavier on top and outerwear.
The next challenges within exacerbated by inventory delays, which left the business on Soc in key styles ultimately impacting conversion.
The teams have a strong graphs on root causes and have taken action to implement necessary changes in the product market process.
Our sourcing exit organization is focused on developing even stronger partnerships with key vendors, which is important given the complex technical nature of this product.
Despite these challenges the brand continued to gain market share and has much to celebrate in 29 team franchise bottom and girls continued to be areas of strength.
Core bottoms franchises in both performance and lifestyle.
Anchored the business and deliver exceptional performance.
Limited edition and novelty items delivered strong results throughout the year and provided differentiation against competition.
The partnership we announced with Allyson Felix in July and elevated the brand with media impressions that are driving meaningful awareness in value.
The girls business continues to post double digit comp with expansion continuing across the fleet.
We opened 29 stores in 2019, ending the year with 190 stores are exclusive brand positioning unique product offering and high touch Experie until store service model sets us up to win in this competitive retail landscape and we plan to open about 20 stores in 2020.
In line with the brands historical pace of opening 15 to 20 stores per year.
Taking the learnings from the past year. The brand is completing some indepth work around customer and assortment that will support it's accelerated growth plan.
With innovative and sustainable products beautiful marketing and it's clear brand equity with the very relevant power of she positioning not to mention the unique distinction to be corp. status and less than 50% brand awareness and slow remains well positioned to grow and capture market share.
Now before turning the financial performance I, just wanted to run through a change in strategy. We made this quarter regarding our flagship which resulted in a material impairment charge.
As we and many of our peers have noted the marketing value of the historical flagship model has diminished with a continued confluence of channels in the omni shopping journey, particularly considering the size location premium brands and longer lease terms associated with flat.
Frankly, it's a little fashion and no longer makes sense in todays omni channel environment, and where possible. We are working to exit the leases on some of the least profitable stores through buyout or sublease.
Consistent with historical view of the roll ups and flagship stores, our policy happen to assess for impairment at the company wide level.
We treated flagships in this manner, because we believed in their strategic importance to the brands and the store fleet by providing broad visibility and increased brand awareness, both regionally and globally.
In fiscal 2019 in light of our change in operating strategy for flagship stores, and including an evaluation of whether to exit or sublease certain flagship store locations.
We determined that for flagship stores the individual store represents the lowest level of independent identifiable cash flows and as a result, we recorded an impairment charge in the fourth quarter.
Each of these sites has assets on our books for both the capital we invested in the stores as well is what is referred to as an operating lease assets that was established it.
Excuse me as part of new lease accounting rules that went into effect at the beginning of this year.
The total assets associated with stores has increased significantly with the establishment of this operating leased assets, which approximates the future minimum lease payments.
During the fourth quarter, we completed our impairment assessment and recorded a 296 million dollar or 59 cents non cash impairment charge to reduce the carrying them out and the corresponding operating lease assets to their fair value.
The majority of this charge is related to our time square locations.
Agreements that were entered into in 2015 extend to 2032 and where rents have fallen dramatically.
To provide some additional perspective in 2019, our 31 flagships represented approximately 3% of sale and were responsible for an approximately 110 basis point drag on operating margins or roughly $120 million.
Each location is unique and we are engaging in conversations with our landlords working towards financially responsible exit or subleased scenario with the goal of ultimately reducing the economic drag over time.
Of note with this write down we do expect about a four cents benefit from lower depreciation expense on an annual basis.
With that now I'll briefly summarize fourth quarter and physical and full year results.
Net sales for the quarter were $4.7 billion up 1% on account on comp sales down 1%.
For the full year net sales were $16.4 billion down 1% on comp sales down 3%.
Spread for the year was largely driven by new store openings of old Navy in Atlanta, as well as non comp, Jamie and Jack sales, partially offset by gap store closures.
GAAP store closures in 2018, and 2019 reduced sales by approximately $200 million in 2019.
Total sales income by division are in the press release.
Our reported loss per share was 49 cents, which includes the costs associated with our previously laid plans separation, our specialty fleet restructuring and the noncash impairment charges I just discussed.
Excluding these items, our adjusted fourth quarter earnings per share were 58 cents down 19%.
On a reported basis full year earnings per share were 93 cents.
Excluding the flagship impairment charges separation related and restructuring costs. The first quarter gain on sale of a building and second quarter impact of tax reform.
Full year adjusted earnings per share $1.97, which includes about a five cents detriment from the tariff implemented in 2019.
I didn't want perspective on gross margin NSG ne.
On a reported basis fourth quarter gross profit totaled $1.7 billion and gross margin expanded 20 basis points to 35.8%.
On an adjusted basis gross margin increased 70 basis points.
Merge margin expanded 20 basis points as reported and 30 basis points, excluding the impact of restructuring driven by margin expansion at old Navy and that's what partially offset by de leverage at the remaining brands.
Rent and occupancy was about flat as a percent of sales versus last year, and leveraged 40 basis points excluding restructuring.
For the full year reported gross profit was $6.1 billion in gross margin went down 70 basis points to 37.4%.
Excluding the impact of restructuring gross margin was down 50 basis points.
Merge margin went down 60 basis points for the year as reported and 50 basis points, excluding the impact of restructuring primarily driven by higher promotional activity at old Navy.
Right and occupancy deleverage 10 basis points as reported and was about flat excluding restructuring.
As we continue to execute against our fleet restructuring work I rent and occupancy leverage point continues to come down.
Looking to 2020, we expect to be able to leverage rents and occupancy on a negative low single digit comp.
On a reported basis fourth quarter full year total operating expenses were 1.9 billion and 5.6 billion respectively.
As we've noted we expected fourth quarter as Junaid to de leverage as we lap bonus accrual reversals in the fourth quarter last year and increased expenses related to marketing and technology investments in 2019.
On an adjusted basis operating expenses de leverage 280 basis points, when excluding the flagship impairment charges separation related costs and specialty fleet restructuring costs.
Or perspective, the lapping the reverse bonus accrual from last year accounted for 140 basis points of de leverage.
Of note a portion of this reversal related to HQ employees.
That fits within the other buckets shown on slide nine of our earnings slide the remainder fits within the respective back brand results.
And for the full year on an adjusted basis operating expenses de leveraged 130 basis points when excluding the flagship impairment charges separation related costs.
Specialty fleet restructuring costs and first quarters gain on building sale that de leverage is driven by an increase in expenses related to information technology, an increase in bonus expense compared with a lower fiscal 2018 bonus expense.
An increase in advertising expenses due to increased spending old Navy in Atlanta.
Moving to taxes and interest the effective tax rate was 27.6% for the fourth quarter.
Excluding the non cash tax impacts related to restructuring and impairment charges.
Our adjusted tax rate was about eight point lower.
The lower adjusted tax rate, which primarily due to adjustments in non deductible executive compensation.
Utilization of foreign tax credits and jurisdictional mix and timing of quarterly earnings for the year the effective tax rate was 33.5%.
Excluding current adjustments to our fiscal year 2017 tax liability for tax reform guidance in certain noncash tax impacts related to restructuring impairment charges. Our adjusted tax rate was about eight points lower or closer to our expected run rate of 26%.
[noise] provided some perspective and inventory we ended the quarter with inventory up 1% compared to last year, excluding the impact of Virginian, Jack acquisition store openings that store closures and Terra inventory was down about 1% in line with previous guidance.
As we turn to 2020 inventory productivity will continue to be a top priority for the organization, particularly in light of the uncertainty presented like run a virus.
As we discussed with you last quarter, while we're making progress on more conservative inventory buys, particularly given the challenging traffic trends, there's more opportunity to better leverage for capability to eliminate waste and they're buying process and to improve allocations based on channel demand and localizing our assortments.
Ultimately increasing yield gross margins return on inventory and improving our working capital profile.
Moving now to store count and capital expenditures.
Regarding our previously announced restructuring programs as I mentioned last quarter, our discussions with landlords around closures continued to be difficult, which may hinder our ability to execute on our strategy as quickly and decisively as we would've liked.
That said, we are still targeting to close about 230 specialty stores by the end of 2020, and we continue to expect total cost of the program. She Betsy about $250 million to $300 million, which includes the estimated bio costs of four flagship look like locations.
With the majority expected to be cash expenditures.
During the year, we closed 141 gap brand stores globally.
The 79 closures specific to our previously announced restructuring program, primarily north American specialty closures, we incurred costs of about $61 million or about 15 cents per share in 2019.
In 2020, we expect to close about 170 gap stores globally.
Estimate restructuring costs of about $190 million to $240 million with the majority expected to be cash expenditures.
For the two year program. We continue to expect these closures to result in an annualized sales loss of about $625 million, an annualized pretax savings of about $90 million.
On a net basis, we added 99 old Navy in a lot of stores.
Acquired 139, JD and Jack location.
And closed 87 gap Banana Republic in Intermix stores, we ended the year with 3345 company operated stores.
Fiscal 2019 capital expenditures were $702 million below our previous guidance of 835 million, primarily driven by reduced separation related capital spend.
Just breaking down the components of spend.
575 million of base capital in line with previous guidance.
70 million of expansion costs related to one of our headquarters building and the Buildout of our higher distribution center below our previous guidance.
And 57 million of separation capital investments, primarily related to technology and logistics.
About half of which was written off and the separation costs in Q4, given the decision to stop the planned spend of old Navy.
Regarding the balance sheet and cash flow.
Despite the challenging year fiscal year 2019, free cash flow was $709 million compared with $676 million last year.
We paid $364 million in dividends and returned $200 million through share repurchases during the year.
We ended the quarter with $1.7 billion of cash cash equivalents in short term investments well above our historical desire cash cushion of between one and $1.2 billion.
And our ending share count was 371 million shares.
Now turning to our outlook for 2020.
Providing guidance at this stage is it the tricky given where we are in the evolution of the Corona virus impact and the inability to adequately quantified the impact on the business, particularly for the U.S., We're providing guard guidance largely excluding the impact in front of Iris.
For the first quarter, we have included the expected impact in our China, Japan, and Europe businesses only.
Well, we have a better basis to estimate the impact.
Our outlook does not incorporate the potential unknown impacts from the evolving kind of virus outbreak, including possible further spread in other regions.
Meaningful deterioration from current trends or potential disruption from any supply chain impact.
Given that on a reported basis, we expect earnings per share to be in the range.
Dollar 23 to $1.35.
Excluding costs associated with our GAAP fleet restructuring plans, we expect earnings per share to begin the range of $1.80 to $1.92, which includes a detriment of about 10 cents related to the estimated Q1 impact of Corona virus in our China, Japan and European businesses.
Now let me provide you with some color around the assumptions embedded within this guidance range.
We expect.
For fiscal 2020 that both comp sales and net sales will be down low single digits. These ranges embed 2020 positive comps at old Navy Athletic and John.
But these are offset by negative comps expected a gap brand.
About a four cents benefits from lower depreciation expense as a result of the 2019 flagship impairment charge I talked about.
About a three cents detriment for the impact of terrorists weighted towards the first half.
And the reported effective tax rate of about 30%.
Excuse [laughter] noncash tax impacts related to expected restructuring charges, we expect the adjusted fiscal year 2020 effective tax rate to be about 26%.
Regarding yesterday in light of disappointing performance at gap in any further potential disruption related decorum Corona violent really focused on the levers we can control, including disciplined expense management.
As we looked at 2020, we're seeking to hold spending flat, including anticipated reinvestments in our bonus plan that will better reflect the performance culture lightning and employee and shareholder interests, while enabling us to attract and incentive Alan that are motivated to fuel our path forward.
We reset our bonus payout and lap the minimal payout. This year, we expect expenses to deleverage next year.
Despite the challenging retail environment, and our own disappointing performance I reliable cash generation and balance sheet remains strong and we are committed to taking the necessary actions to further strengthening in light of the economic uncertainty ahead, given market volatility and the current a virus.
Over the last three years, we've grown topline by nearly $900 million and generated an annual average of $1.4 billion in operating cash flow and $700 million in free cash flow over.
Over that same time, we've increased our dividend and distributed over 2 billion in cash through share repurchases in dividends.
Reliable cash generation and our strong balance sheet allow us to invest in Torrance, forming the company's operations to unleash the growth potential old Navy enough Plata, while simultaneously, taking the necessary actions to address the performance of the gap rent.
As we look to 2020, our capital allocation philosophies and priorities remain largely consistent first and foremost to invest adequately responsibly and the business for growth.
Second maintaining our dividend, which currently provides an 8.8% yield.
With regards to share repurchases and lives the current economic uncertainty stemming from a number of factors, including the Corona virus outbreak, we intend to suspend share repurchases in 2020.
We intend to proactively manage our balance sheet, and we'll opportunistically refinance our 2021 bond maturity.
Subject to market conditions.
We remain comfortable with our desire cash cushion of about $1 billion to $1.2 billion.
In light of more focused portfolio priorities and a desire for improved our I see as was cash can conservation, we have reducing capital spending in 2022 about $600 million, which includes about 50 million of expansion costs related to build out of our Ohio.
Distribution center, which began in 2019.
Investment priorities will be distorted focus on profitable growth opportunities at old Navy in athleta, including profitable new store.
Investments in technology and supply chain initiatives, we focused on the growth brands.
Expected to provide scale and leverage to all brands in the portfolio.
That opposed to south to spend a very challenging period for retail and our company and it looks like more challenges ahead.
Events of the last several years can serve as a positive catalyst and I'm very confident that Sonia and even your leadership team bring the skills and experiences to vastly the company during this time.
Focused on operating discipline and accountability are right for the challenges ahead and the talented organization that supporter opt for the task I'd be curious the sidelines for the foundational work, we have undertaken to come to fruition in the years ahead with that I'll turn it over to Sonia.
Thank you Terry is truly an honor to lead this company that builds a rich heritage over the past 50 years.
The opportunity for gap Inc. to compete successfully in the years to comp is the task at hand, and I look forward to paving the way together with a talented teams in our stores distribution centers offices around the world and supplier partners 730000 strong.
It goes without saying that the week. Following my announcement, a CEO has been unique right now like everyone else in the marketplace, we're facing a rapidly evolving climate based on the cold with my team situation.
We're leveraging learnings and business continuity planning that began with our Asia team.
We will continue to manage through disruption in real time, particularly as hot spots such as Washington in New York as we see the unfolds further in North America.
While the full impact in the duration of the outbreak is unknown, we're better positioned than most in our space to navigate the uncertainty ahead.
What we have healthy free cash flow generation and nearly 1.7 billion of cash on hand at year end two we'd have a longstanding large scale vendor relationships network that supports us a three we're well prepared to be prudent with the other levers of our business, including expense and inventory management as well as cap.
Total spending.
We've just come off completing a substantial body of work that began as we prepare for the separation, which will enable us to accelerate club transformation.
We're entering the year with the benefit of knowing this company better and more objective lead than we ever have known.
Culturally, we identified bureaucracy complexity and misaligned incentive and in some cases lack of accountability.
Across all facets of the organization, we now have a far more realistic assessment of how we can be more efficient where we can be Dr. And where are we mean may need to invest to win.
Aside from the near term business challenges presented by Cobot. My team, we have undeniably song assets and it starts with our branch.
Oh Baby is the number two largest apparel brands in the U.S. and Athleta is one of the fastest growing brands can be athleisure sector.
And we have strong brand equity in gap and Banana Republic.
Our customers and data.
We have about 60 million known active customers one of the largest customer filed in the industry. Yet we're early days and maximizing the value of these relationships.
Okay Commerce business, we were early to E commerce, and the global online business generated over 4 billion as Phil it's profitable business for us driving outsize growth with much runway ahead.
And our sourcing logistics and IP networks, they provide a portfolio capabilities and significant scale advantage.
All that said our performance has been lackluster over the last several years simply put we have fallen short on execution and have not fully monetized or brands our assets and the capabilities we have been investing.
As much work ahead for us to strengthen the performance at the company in the portfolio, but I believe and the potential this company and of our team.
Our opportunity now is to defend the love our customers have for our brands and products.
Starts with the having the right talk in place to guide the work ahead.
Today I now several leadership team changes, which will take effect on March 20 Threerd.
I'm pleased to share the Katrina Ocado will take the role as CFO.
You May know her remember her from her days, an investor relations. She had 25 years of experience that gap inc., including a CFO of old Navy. These last three years by my side for deep knowledge of the business across the brands consumption makes or a terrific partner for the journey ahead.
Mark Breitbart will lead our specialty brands oversee banana Republic in GAAP as well as franchise in international markets.
Mark has the benefit of having deep ran leadership experience, both political gapping and across the industry.
And that's the Green, who joined old maybe seven months ago will step up to lead the old Navy brands, while we conducted an internal and external search Nancy is a proven leader who grew up let up from 250 million to nearly 1 billion in sale and has made in an immediate impact on the old Navy business.
But the partnership as support the Katrina, Mark Nancy and the rest of the leadership team, we could hit the ground running.
Our only priorities will be to first and foremost make the appropriate but prudent investments to drive long term sustainable growth with focus on old Navy had an uplift.
We will develop the appropriate action plan for GAAP rent.
Focus on driving the profitability of Banana Republic.
And we will donate on creativity realize efficiencies that allowed 3000 focused while supporting the financial strength of the company.
And lastly, we intend to ignite a winning culture by providing clarity of direction and rewarding for effective execution against our priorities.
As we laid out our strategic plans for the future and focus on delivering on our commitments for the current year, we will our eyes squarely set on returning value to customers employees and shareholders. Importantly, we will ensure we are taking appropriate steps to deliver sustained growth. So a combination of investing cost discipline.
And making the most of our great brands.
Before we move up acuity I want to thank Bob and Terry for their contributions and more personally for their tremendous support in partnership through my transition to CEO.
With that we'll open it up for questions.
Thank you if you'd like to ask a question they seem especially start wondering you touched on telephone.
Using a speaker phone, especially be flux this should off throughout your signal to try to.
Once again, please limit your questions to one per participant forget that a star wars that cause good question.
But the first question from Paul Lejuez puts citigroup.
Hi, Thank you its Tracy kogan filling in for Paul.
Oh no question about half model.
5% comps have you guys posted for the year I was wondering what the drivers of back while between traffic and ticket can also as you look at fourth quarter. I know you had some issues with inventory, but what the drivers they are back about 2% Tom.
Thank you.
So we know they said in the script, we continue to see good strikes in our bottoms franchise and also in the girl, which really were the key drivers book of business.
The executional issues I talked about we're really loved ones caused a bit about how lag on what we see as the growth potential going forward and that plan.
Half the specific traffic numbers for in front of me, but that we can follow up with you offline.
Sure I guess in general has it didn't want the traffic drug and calm four or more but.
Yes, I, even if you can't quantify.
Yeah, we still think topic traffic trends in athletic I mean, that's one of the you know we talked about the profitability in the stores and the continued strength the brand, but yes, we definitely continue to see positive traffic as well as talking seating.
Thank you.
Thank you we'll move on to our next question Alex while this with Goldman Sachs.
Good evening. Thanks, so much for taking my question I had a question I'm on what you've been saying in terms of U.S. trends I know that it's very early to say that you mentioned that you'd already started to see a little bit of slowing and traffic for wonder if you could elaborate on that and then secondly, and relate to the perhaps you could also show some comments on.
What we've seen with respect to tourists and in both the U.S. I'm in Europe to extent, but that may have been weak for a little bit longer though.
Yeah, I know you're exactly right I mean, it's it's very early days in its its Ah Ah every day. This week in fact, it said you know sort of a multiplication of available information.
Yes, we definitely have started to see some traffic impacts as you say started more in the tourist stores, where whereas that that slowdown was felt but but and then more recently, we started to see it in some of the hot spots you would expect you know in northwest and in the northeast, particularly around.
The New York area. So we're watching it every day, we're putting in place contingency plans.
Tony if there's anything you want to add in terms of how you're thinking about the situation broadly. Thanks, Terry one of the benefits. We have is that we've been watching the impact of probably 19 at Asia over the last nine weeks and more recently in Europe, and so I'm working with our Asia team set up an active if it has given us a head start at how we think.
The plan for the North America business. So as some of these challenges have emerged in our south markets for tourism in the northwest and in New York as the current hotspot, we feel prepared to move into action and are working hand in hand with all the right authorities to focus first and foremost on employee safety.
Continuity of supply management, which is in good shape as Terry alluded to the script and now demand management in North America.
In Europe have you seen weakness concentrated in Italy, or as a quota weakness across a.
Across Europe, and you know is what's embedded most specifically in the guide for <unk> for Europe.
Yeah. So so what we're saying in the same thing we can do exactly what happened at the U.S., which is you know sort of wage through the geographies and so you know started.
In Italy, but particularly as it becomes more of a global pandemic and as you know the reaction that people have tends to proceed and accelerate versus how it may have developed to China, which is one of the reasons. It's so difficult for us to be able to play extrapolate an estimate the impact as it continues.
To this way so what we've done for the first quarter, where we have a little more.
Experience under our belt in those geographies is is that our best job and trying to estimate what it into other geographies, but to your point, there's still a degree of uncertainty in [noise].
Okay.
Like [noise].
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Europe. So we will keep you very much posted as we move through the quarter and.
Get further into the year.
Thank you as a reminder.
Participants please limit yourself to one question, we'll take our next question from Kimberly Greenberger with Morgan Stanley.
Kimberly Greenberger you on the lunch, though.
We'll take the next question.
Thank you, we'll move on to Lorraine Hutchinson with Bank of America.
Thanks, Good morning, Oh, sorry, good afternoon.
Operate a little bit more on what happened with gap that was a nicely positive merchandise margin story for a lot of last year and it seems like you hit a little bit of stumble in the fourth quarter, maybe talk about what happened specifically and how quickly you think you can fix that and ended the margin stabilize there.
Yeah. So many continued to show some margin expansion in Q4.
So the mix, that's really affected topline overall, such that such that you know the overall profitability became challenge and it really it did come down to the largely to the.
Items that I mentioned in my prepared remarks in that we had some marketing executional issues that were both with respect to the campaigns itself, but also some of the digital marketing execution, which which affected traffic in the quarter and we continue to struggle.
With product assortment and as I said sort of the clarity of of the brand focus and so those are things that mark is very much digging into with us with a high degree of urgency Sonya spending time thinking through what you know what the approaches to that brand I think the thing we would all say leave.
Saying it for little while is that said, we will be very objective and evaluating that brand and what we need from that brand to really are in its way in the portfolio. We continue to believe given the missteps that that we haven't really has to the brand to understand what the possibility is there.
But we have a high degree versions to to address the profitability.
And that is priority, one or mark supported by Sony as few as a strategy going forward.
Thank you.
Yeah.
Next question from Susan Anderson with B. Riley FBR.
Hi, Thanks for taking my question.
Oh, you give me elaborate a little bit on the old Navy brand and what you see that you're doing different now that's driving the improved performance I guess, particularly on the women's side and then I guess I'm. The gap front. If you have any thoughts around you know how you're thinking about the strategy going forward in terms of pro.
Got it such as styling quality priced or any changes there. Thanks.
So I can start would only be we're pleased with the signs of stabilization demonstrated in Q4 and confident when a sequential improvements we've seen core today really driven by our turnaround in our women's business and continue to raise the game in our marketing efforts. So.
That was fueled by a higher affirmation that cleared big ideas as we moved into Q4 also enabled through the tightening up inventory.
And then you know excellent execution in our stores in our E. Com channels. So it's a combination of factors certainly fueled by the tenant on winning business.
And yet we still have much more to do ahead. So we are laser focused on traffic in the priority and all the signal from the business show that is a lagging indicator for us that will catch up as the the sales over traffic continues the momentum that theme.
And then your question on gap.
The pit the playbook for strong brand is is clear we know what to do this we've done this old Navy with the clarity of the democracy as style and executing flawlessly at every touch point with the customer against that Northstar, we've done this or the power of she in Florida and also that shows up with consistency.
Ultimately it begins with a friend clarity and Mark is hard at work with the team in that gap Brad.
Illuminating that clarity and bringing it to life across the entire business coupled with that the operating disciplines and the operational execution goes hand in hand and that is the what we're after its what we know how to do and have done in other parts of the company and we had a tremendous amount of urgency against moving forward with.
Those application of those learnings for a brand that as I said you could put it this gap that being said, we're very clear eyed about the trend in the business and we'll continue to.
Back to when you know it was an imperative urgency around the cargo.
Great. That's helpful. Thank you the corpus.
Thank you all move onto next question from Oliver Chen with Cowen and company.
Hi, Thank you as we look at various scenarios units.
Total Dave situations that topic of social distancing budget, the key healthcare strategy and what's happening what are your thoughts if traffic decreases industry wide.
Well double digits negative there were some also as you take about a recessionary environment. If you could help your thoughts on fixed versus variable cost.
Frank items within your control goal would be great. Thank you.
The good news going into the situation is that we have done some excellent work in preparation for the separation I understand all of our cost drivers what we can attack and while we can go after and so with that work at hand, and with the experience. We've had a lot to last month in Asia to understand because you're.
Her behavior.
The cost levers, we have to pull we're moving swiftly into action leading into the productivity opportunity the cost management opportunity coupled with tight inventory control, that's because what is going to enable us to navigate the uncertainty ahead again, we had healthy cash flow generation.
And we start with a very strong cap out so we feel well poised relative to many others to navigate what will be an uncertain and difficult environment.
I guess I would add to that Sonia courses that in the social distancing time contacts we have such a large ecommerce business and we continue to invest in improving that customer experience and I'm sure. As you go forward thatll be a key priorities.
Yes, right I mean, all our customers will have many avenues with which to purchase from us and E. Com is certainly one of them. We also know that our stores or activating a high degree of safety measures and link to all the best advice that we've gotten from a government health.
Input.
The last part of the target you work with a mall operator, those great relationships and partnerships.
On what are your thoughts about well what will happen it along the health and safety of going at the mall and how that May impact your business.
Yeah, you know obviously, it's hard to projects exactly the course this will take but I can imagine that that our landlords in the mall owners are doing the same things. We are doing in terms of trying to ensure safe environment for for their shoppers and to be able to create as much resiliency.
He has they can and their business model to be able to ensure that they can sustain our rebuild traffic as necessary that would work our way through this.
Thank you very much best regards.
Thank you we'll take our next question from Simeon Siegel with BMO capital markets.
Hi, Thanks. This is their love to school.
So can you give any color qualification with a friend celebratory historical levels for gross margin.
I'm, sorry could you repeat the question.
Just look we'll probably color or any quantification on with individual grant Barber service for coal gross margin levels.
Which is their historic marshmallows, Okay, I'm, sorry, I Didnt hear.
What I would say is that you know we were pleased with him. So in the old Navy, which obviously is where were the focal point is and we were pleased to see a lower promotional environment. There for old Navy building off of the improvement in product that we've been seeing sequentially and so and then the tightening of inventory over the course of the year. So so we did see some margin pressure.
But there and as we look forward to the coming year, we would expect to continue to see improvement in the merchandise margin as we continue to see that sequential progress.
I definitely would would would acknowledge that the old Navy operating margins are below their historical highs I think if you go back to a few years to 2017 that was a particularly strong period of time and not sure that should be the benchmark of the expectation I think across each of our brand.
We will expect to continue to see margin progress I'm as we.
Investing a lot of the capabilities, we've talked about that should take waste out of the system and drive both financial margin, but also yeah efficiency at the SJ line as well so I wouldn't say too if you pegas today, we're not at historical highs, which we view.
As representing an opportunity for expansion going forward.
Thank you best of luck.
Thank you and we'll take our last question from Kimberly Greenberger Morgan Stanley.
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It looks like we lost through again can really I think we're about up on time. So I think that's going to wrap up our call for today.
Thank you for joining thank you. Thank you. Thank you that does conclude today's conference. Thank you all for your participation.
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