Q1 2020 Gap Inc Earnings Call
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Good afternoon, ladies and gentlemen, my name is Jenny and I will be your conference operator today at this time I would like to welcome everyone to the gap Inc. first quarter 2020 conference call. Today's call is being recorded at this time all participants are in listen only mode.
I would wish to participate in the question answer session. After the presentation you May now press star one after the Q2.
As a reminder, please limit your questions to one corporative.
If anyone should require assistance during the quarter. Please press the star.
Your oaky on your Touchtone phone.
I'd now like to introduce your host you know Ronnie.
Head of Investor Relations.
Good afternoon, everyone welcome to gap Inc. first quarter 2020 earnings conference call before we begin I'd like to remind you couldn't information made available on this webcast and conference call contains forward looking statement.
For information on factors that could cause <unk> actual results to differ materially from the forward looking statements.
As well as the description and reconciliation of non-GAAP financial measures as noted on our on page two of the sites supplementing our remarks.
Please refer to todays earnings press release as well as our current report on form 8-K filed on April 23, 2020 and are such a good filings with the I see all of which are available I'm talking dot com.
These forward looking statements are based on information as of June 4th 2020, and we assume no obligation to publicly update or revise our forward looking statement.
Joining me on the call today, our president and CEO, Sonya single and executive Vice President and CFO Katrina O'connell.
As mentioned, we will be using sites to supplement our Mark would you can do that going to the investor section of getting dot com with that I'd like to turn the call Liberty Sonia.
Thank you chinos and good afternoon, everyone I hope you're joining us today, even good call. It sounds like you're taking care of journey challenging time.
Before we jump into the results of our first quarter I'd be remiss to not addressed the situation, though the top of mind for everyone across the United States. When people are called backgrounds, and believe coming together to drive change.
The company, we have an opportunity to create a world that is more inclusive ensuring our brand serves as a forced for good like being open to all.
Listen they giving back to our community.
How many people protests and taking place across the country in some cities.
Our stores have been taking advantage of CAD 20 stores that sustains extensive damage.
Fortunate that all of our teams are C and b are working to reopen the gets Cochrane sourced pretty clean safely. So can serve our customers again.
Now turning to Q1.
And my transition into the CEO role, we were making good progress this momentum entering the quarter led by the was maybe that sounds like Oh, we could be back almost immediately with a shelter in place orders that resulted in the closure of all of our North American sales.
As we monitoring the situation in China, and Europe. He moved quickly to respond to the looming spread of the virus across geography, its implications on our business and the industry.
Well, there's no pre booked a managed to pull out the situation requires a radical shift in our priority starting first and foremost with protecting the health and safety of our employees and customers.
Well our online business continued to drive the store closure resulted in approximately 75% support demand being disrupted.
To help mitigate these impacts we took swift action to preserve liquidity and strengthened our financial flexibility, including having to furlough store team and reduced headcount across all of our global offices.
Katrina will speak to you shortly about the full breadth of actions, we've taken which while difficult have enabled us to focus on leveraging party terrorist events such as to when most coveted barn.
Throughout we have much more quickly and warranty and I just couldn't be happening here. Our teams have been oriented action that's up delivered for the business and our customers in the face of unprecedented change a challenging I could not be more proud of the team.
To date over 1500 doors are open in North America, almost doubling our previously announced plans to be on but he's not going by the end of May.
Our team's ability to pivot quickly the lead into our shop online business resulted in an encouraging 40% online sales growth in April.
Well that's their sales endorsed the all continued to reflect material decline can be due to the store closures in the mass shock, we saw over 100% growth and online sales during this past month with me.
I don't really getting so we're encouraged by the trends, we're seeing specifically the strong recovery that whole, maybe America's second largest apparel brand.
We attribute it to old Navys advantage value proposition for any of our family and strength in relevant categories, such as doctors and sleep.
We're now operating over 2100 stores as many fulfillment club to ship from store and over 500 stores, that's curbside pickup location a capability, we launched during the cold the crisis.
We have welcomed tens of thousands of our employees back to work and expect to have the vast majority of our north American stores hopefully by the end of June.
The conference 19 has accelerated the shifting consumer behavior, we're playing to our strengths.
First starting with our trusted brand.
Hi, I'm crisis brands matter customers want to spend their partner in money on branded products, They trust and not risk about customer experience was one that sounds familiar.
We don't talk about this enough, but gapping has three multibillion dollar brand in old Navy gap and Banana Republic, that's not that hopefully on the horizon, an old Navy Banana Republic in gap brand rank them on only nine specialty brands that exceeded 2 billion a sales in the U.S.
Our brands are among the most well known constructed in retail apparel, but old Navy banana, Philippine gap or exceeding 75% brand awareness.
And there are numerous examples, particularly during the pen device of how that mattered and how this is true.
Well, maybe provide access to critical category it must be just liberty and the crisis with digital Sunshine. This unique assets in a social and web marketing, resulting in meaningful online acceleration.
Achieved all time high engagement metrics to walnuts storytelling and virtual community activation with a focus on at home workouts and cozy product concept.
But now I'm, hoping served up styling sessions on digital channel offering customers, a new ways to where their payments style or will be working from home.
And got launched GAAP teamed with positive results.
Brand, new highly competitive and sustainably designs assortment in the first new age segment for the brand since 1990.
Simply put the largest U.S. specialty close the company as measured by revenue each of our brands has a unique opportunity to meet customers' needs now and assay reopens toward.
Our brands now.
Second our direct customer relationships, our brands are leveraging their direct connection with 60 million customers to make a customer fuel decisions and deliver must have products with attributes that matter most of it.
Where are your daily communicates with our customers about how we're taking care of our teams and communities and we're providing clarity and confidence in the shopping experience that returning to however, they choose the safely get 'em up enough.
Importantly, our stores remain integral to the experience we offer with approximately 70% of our stores located within strip outlet and off mall real estate locations, we expect customer to gravitate towards these locations that they consider health and safety and opportunity for us going forward.
Third our expenses ecommerce business omni capabilities.
During the widespread Chiltern place orders, we lead on the strength of our online presence, which is the second largest apparel E commerce sites in North America, that's for Billy and its annual revenue Creek open.
During the crisis, we've doubled the way customers can shop with us by expanding our buy online pickup indoor capability to include Chris I'd pick up.
Well as a new virtual come theaters that have begun testing operating customers the chance to have one on one interactions with the store associates and the comfort another article.
Before the pandemic kept the U.S., 25% of sales came from E commerce.
In a meaningful acceleration online customers choose our suite of omni capabilities as a preferred wave shop interaction between stores and online continues to grow.
During the quarter, we thought like 40% increase in customers migrating from retail only to multi channel versus last year and we all know how valuable a multichannel customer is.
Fourth products that is relevant and resilient.
The capitalization of American style, particularly accelerated during coping and its play to our product strength.
Our scaling back of the mountain business, which generated 2.7 billion sales last year, and the kids and baby business at nearly $4 billion dropping to the leader in branded children's apparel, a staple like category that was a largely insulated from volatility in retail.
In Q1, we saw a disproportion sales coming from active fleet sleep and kids and baby categories.
Fifth our advantage supply chain and agile operations, our fastest supply chain and deep relationships with suppliers enabled us to effect well over 2 billion of inventory purchases as we look to quickly match, our inventory supply within when it's uncertain to the math problem.
Our supply chain response of capabilities, particularly developed at old Navy will help us chased into the recovery, we hope to see a stores open and at the customer demands become clearer.
We were also able to deliver millions of ppt to frontline healthcare workers when they need it is similar.
At the early onset of the virus as well as the charity organizations like the boys and Girls Club South America.
We said pivoted factory capacity in access fabric to produce millions more washable fabric map for customers.
Maybe we sold more than 3 million map of preorder across our brands.
We completed the expansion of our Ohio distribution Center work that began in 2019, the new facilities is designed to be the company's higher capacity fulfillment facility with innovative automation and robotics. This launch with virtually tied as we expect online penetration to continue to climb and this provides capacity.
With improved labor productivity.
And lastly, im certainly not least our competitive team that lead with our values.
Our brand for teams are forced for good as Weve electronically strides to better serve our customers and community as a step the gold standard for safe shopping in this current environment.
We didn't see many examples of our brands acting with the force for good over the top 10 weeks.
Starting with a small cross functional team that without the accident chased into mass production to come to deliver TV to problem like healthcare workers and now for customers.
Dedicated store teams wet weather through the highs and lows with that.
And have served in a rapid responsible for the opening of our stores demonstrating tremendous care for our customers in each other.
We have donated over $50 million of new clothing to media American families.
Maybe it's a whole underprivileged get back to work Yeah Banana Republic.
And most recently our brands came together to donate more than a quarter $1 million to the end steadily CP and embraced ratings organization to stands with our customers employees and the size of games racial congested.
I wanted to take this moments of take the teams that are listening.
This this gap in community of employees to just listen to the challenge versus the occasion that led to the art a very big. Thank you for me to all of either listening. It really was a massive team effort.
As much as we expected to drive value for our strength our future success is dependent on addressing areas of significant opportunity for example, our specialty brands where cost performance has not met expectations.
We believe each bread and butter is right for investment in our focus on during this duty to key actions.
For our brands to bring to the noise in the marketplace, we must be resolute about delivering brand clarity quality products and consistent execution with every expression frankly, we have not done this wellhead gas or banana Republic.
Creative com confidence, it's something we're focused on submission.
We will also continue to rationalize the rationalization of our fleet as well as identifying asset like ways to amplify and expanding the reach of our brand and we've made progress in just a few short months, even a mix among the crisis. Some examples.
We began the systemic change for structure for success to begin we actions and 15% head count reduction across the company indexing towards gap brand with a 25% production. This is the first step and driving the organization focused on value creation to profitable growth, we're acutely focused on delivery.
Consistent on brand product and marketing.
We believe the GAAP rent is better than recent business results.
During the crisis GAAP has benefited from its high brand awareness and deep emotional customer connection.
However years have been consistent execution have depleted red cells, which were actively working to correct I just want a clear brand positioning and product filters, the translate to a narrower and deeper assortments that delivers to the customer.
I've been in our public the leadership team is taking aggressive actions to adjust its product offering them a pivot in the brand positioning to address the evolving customer needs in this crisis with the unforeseen shifts to consumers working from home, but their public with disadvantage in its product mix of customers opting for casual styles, but.
But in our public workwear categories, such as tuning addresses underperformed, which coincided with less available inventory of casual categories like this in short.
If I could online demand, resulting in less benefit that or other brands.
With respect to extending the power of our brands, we recently announced a licensing deal with EISG, allowing us to increase consumer access the gap Banana Republic, and Jane Jack to brand partnerships and collaborations including global opportunities with the kids and baby gear furniture, textiles and decor.
This is a great example of an asset like capital light opportunity that delivers value for the customer plays to the power of our brands.
Additionally, we believe we could further amplifier brands, we're optimistic about the opportunity for create a partnership to increased gas relevance and tasks the cultural nicely.
Lastly, we remain committed to our prior fleet fleet rationalization target as our goal is to operate smaller healthier gap brand position to compete Katrina, we'll share more on how we're thinking about this as well as the important progress is made and strategically reevaluating our real estate your restaurant years.
So with that but it's not going after Katrina to provide details on our financial performance for the quarter and I'll then come back to share additional thoughts and how we're looking at Q2 Trina. Thank you Sonia and good afternoon, everyone. Sonya mentioned, while the first two bonds as CFO has certainly been unique I've been both impressed and energized about how the organization has.
Responded to this unprecedented crisis.
I'd like to Echo Sonia and thanking our teams for their tremendous work and unwavering dedication to operating the business during an extraordinarily challenging period.
At a time like this that I'm truly grateful to be a part of an organization wide gap Inc.
As we continue to build towards our longer term growth opportunities, our near term priorities and navigating the crisis or clear first strengthening our financial foundation to ensure sufficient liquidity and financial flexibility to navigate the evolving landscape and emerge position to gain share.
Second leveraging our distinct competitive advantages a collection of billion dollar plus brands highly engaged customer base and nimble supply chain and an advantaged omni channel platform.
And third thoughtfully preparing for the future as we will emerge one of the winners by pursuing a balanced approach to driving profitable growth by investing in capabilities that amplifier advantages, while streamlining our operations and repositioning our fleet.
As the crisis hit we pivoted to the first and most important priority preserving cash and accessing liquidity to provide us the flexibility to navigate our worst case scenario for this term altrus tumultuous year in response, we did the following.
We deferred our previously declared first quarter dividend suspended dividends and share repurchases for the remainder of the fiscal year.
Capital expenditures in half to recession level lows.
Furloughed, a majority of store employees.
Implemented temporary executive and board pay cuts reduced expenses across all aspects of the organization, including a 15% head count reduction.
Worked with our vendors to move from 45 day to 60 to 90 day payment terms.
Developed detailed inventory plans, including tightening purchases to demand and utilization of pack and hold inventory to preserve margin.
Blended rent payments.
Raise capital through the issuance of two.
New 2.25 billion senior secured notes and secured a new nearly 1.9 billion dollar asset backed revolving credit facility to replace our prior unsecured revolving credit facility.
The new debt issuance will be partially used to redeem our existing 1.25 billion dollar notes that were due in 2021.
We also paid off the $500 million drawn on our prior revolving credit facility and have not made any draws under the new ABL facility.
It was an incredible amount of work done in a very short period and a real display of commitment by the gapping team.
Taking these actions puts gap inc. and a strong financial position it will improve the structural economics of the business.
That's behind US gapping is in a position to pivot to our second and third priorities, leveraging our competitive advantages and accelerating initiatives to improve profitability, namely reopening our stores quickly, but safely driving outside sales growth in our strong online channel, especially leveraging new omni capabilities of the cost.
I was asking for such as buy online pickup in store and curbside pickup.
Renegotiating, our existing leases, while simultaneously optimizing our fleet, but emphasis on gap brand and banana Republic, and maintaining inventory flexibility and responsiveness as we navigate through an uncertain retail environment.
Touch on each of these as I review first quarter business performance.
The temporary closure of all of our North American stores midway through the quarter combined with slow global sales as our international operations reopened catastrophic we impact in nearly every area of our financials from sales to margins, including two significant non cash impairments taken for inventory and certain store assets.
Let me start with sales, which declined 43% in the quarter as the impact of store closures midway through the quarter led to store sales declined, 61%, which overshadow the 13% growth in our online business.
As a reminder, online represented approximately 25% of the company's sales last year.
Beginning in April our online growth sequentially improved week over week, we delivered 40% online sales growth in April followed by over 100% growth in online in May.
First quarter gross margin was 12.7% down 23.6 percentage points compared to last year.
Merchandise margin accounted for more than half of the overall decline and was down 13.7 percentage points, primarily driven by a $235 million inventory impairment charge in the quarter or about 11 percentage points and de leverage.
The remaining merchandise margin deleverage was primarily related to increased promotional activity across all brands.
Rents and occupancy deleverage 9.9 percentage points driven by a decrease in net sales largely due to store closures as a result of cobot 19.
It's also worth noting that while we suspended rent payments beginning in April for accounting purposes, we have accrued our full rent expense, which is reflected in the first quarters gross margin results, let me address both starting with inventory.
Inventory of the foundation of our business, we need to write items in the right locations to support demand or we will not when the market. So we need to plan much tighter inventory levels to protect margins.
My bias is to operate leaner than we have been and leverage our responsive capabilities to meet demand as it becomes clearer.
In Q1, we took three primary actions to address excess inventory one was the write down I. Just mentioned this inventory was primarily spring inventories that were trapped had closed stores and are now seasonally irrelevant. We were pleased to donate a portion of this inventory to charities in need at the time.
Another wasn't expanded effort to leverage ship from store and buy online pick up in store capabilities to meet demand even when stores were closed.
Just help to service strong online demand, while also clearing stores inventory of a tractor enclosures.
And third we implemented a flexible pack and hold inventory approach whereby this summer so like summer and fall inventory that we will be unable to sell due to store closures and potentially lower demand will be held until next year or selling season.
Well there is a cost during this product the economics are more advantage than flowing the goods into what is likely to be a highly promotional environment.
Taking this into account our quarter end inventory balance was down 1% year over year looking forward, depending on demand pack and hold inventory will remain in our reported inventory numbers until the same time next year.
While our reported inventory levels were fluctuate fluctuate throughout the year, our underlying inventory levels, excluding pack and hold are expected to be down for the remainder of the year with Q2 down low to mid single digits.
With regards to rent as I noted upfront beginning in April we suspended threatened payments for the period stores were closed however for accounting purposes, we have accrued the full amount of Q1 rent expense.
So the expense continued to impact gross margin, even though cash payment was not made.
We are in active and ongoing negotiations with our landlords to work through this crisis together, we value. These relationships and are committed to finding mutually agreeable solutions that will enable both of us to benefit from an aligned strategic plan.
If we're successful in reaching a resolution with our landlords to abate a portion or all of the suspended rent. This could result in a benefit to gross margin in the future quarter as we reversed some or all of the rent expense accrual. It may also require a cash outlay for any agreed upon rents that is currently suspended.
From a strategic standpoint, we consider a well positioned and productive store at a fair ready to be a huge asset supporting brand awareness and relevance and playing an important part and our customers shopping journey.
Although online consumer spending is advancing rapidly that customer preferences enhanced by store locations, which can support ship from store buy online pickup in store options.
We believe a robust suite of omnichannel tools, including curbside pickup will enable us to leverage our fleet and ecommerce site to best serve our customers desire for convenience.
That said, while our economics in our old Navy enough what fleece are strong our specialty store fleet has not been as profitable as we needed to be so we're seeking rent concessions for those stores that are well positioned but cannot support the current rent structures.
And prioritizing closing those stores that simply have no role in our fleet portfolio with the majority being in gap brand.
In short our specialty store closure plans remain on track. We also will continue to consider new store openings largely for Athleta and old Navy of course will do that quite thoughtfully after considering the change in market conditions that results from the crisis.
Turning to SJ SJ in the quarter was $1.5 billion or 71.8% of sales. The vast majority of the increase was due to the $484 million non cash impairment charge related to our stores, reducing the carrying amount at the store assets and the corresponding operating lease assets to.
Their fair value.
Of note with this write down we do expect a benefit to gross margin from lower depreciation and amortization expense of approximately $60 million in fiscal 2020, and approximately $80 million on an annualized basis.
During the quarter. We also recorded a 35 million dollar charge, primarily related to our previously announced corporate headquarter reductions as part of our commitment to creating a more efficient and streamlined operating structure.
Looking ahead, we expect net savings of approximately $180 million for fiscal 2020, and approximately $240 million on an annualized basis from these actions.
Year over year SJ changes also reflected lower lower store operating cost due to closures.
Looking forward store operating costs as you would expect will continue to rise as our source reopen in addition, the operating cost of each store will be higher due to save shopping protocols being implemented across the fleet.
Looking at cash flow there were two notable items first we deferred our previously declared first quarter dividend and suspended dividends and share repurchases for the remainder of the fiscal year, resulting in no cash outflows in the quarter.
Second capital expenditures were $122 million during the quarter.
As previously disclosed we've reduced planned capital spend by about half to $300 million.
Most of the reduction comes from investment in stores with an eye towards a minimum level of capital necessary to operate the business.
The remaining capital spending in fiscal year 2020, the majority is oriented towards technology and supply chain investments and support changing customer shopping habits, including the expansion of our Ohio distribution Center critical work that began last year to double the capacity supported ecommerce demand a valuable Bennett.
But the dramatic rise in online shopping.
So let me return to cash and liquidity and start with a reminder, fundamentally gapping is a strong cash flow generator with over 10 consecutive years of at least a billion dollar some operating cash flow.
Following six weeks of nearly full fleet store closures as well as the benefit of a 500 million dollar draw under our revolver. We ended the quarter with 1.1 billion in cash a decrease of 600 million from fiscal year end.
While the reduction in cash in the first quarter significant it's important to recognize two key factors beyond the reduction in sales caused by the pandemic.
The first to seasonality Q on Q3 are traditionally smaller quarters from a sales and cash generation standpoint with Q1 following the holiday season.
Second several of the actions, we took including expense and head count reductions payment term renegotiations for only implemented midway through the quarter for both of these reasons normal seasonality and the timing of execution, our cash burn in the quarter appeared outsized.
As stores begin to reopen in Q2 and as our expense capital and inventory actions begin to take effect, we expect to see our cash burn slow meaningfully in the second quarter.
Looking to the back half of the year, we expect to see continued benefits from our capital expense actions.
Additionally, as traffic continues to recover we would expect sales trends to improve sequentially as we move throughout the year.
Further we have dramatically reduced our inventory purchases in the back half as we were just placing fall orders as the crisis escalated.
I'd also like to nodes of traditional seasonal pattern of cash flow project, particularly as it relates to the build of inventory in Q3 for holiday.
Although our new ABL facility is currently Undrawn. It does provide flexibility to support operating liquidity and leave gap inc. with ample liquidity to execute as planned.
Now turning to the remainder of the year given the current macro volatility and uncertainty we're not providing an outlook on the year. At this time that said I do think it's helpful to provide our general view on some important factors impacting our business that we're closely monitoring.
With the reopening of stores many items impacting Q1 will be meaningfully improved specifically sales operating leverage and the expected absence of impairments of the magnitude of seen in the first quarter, especially related to inventory.
While we expect total net sales to remain lower year over year, we expect sequential improvement from Q1 trends with continued improvement as we move through the year.
With regard to North America store openings and May well results have very high brand and location. We're pleased with reopened stores already generating sales and nearly 70% of their performance last year with particular strength at old Navy, where our customer base is strong and our store fleet is advantage given its off mall positioning.
Online is expected to continue to grow strongly with some lumpiness as customers adjust back to having an in store option.
Additional factors were monitoring include customers willingness to resume shopping in store pent up demand recessionary impacts on the pandemic once the benefit of scandalous money dissipate. The success of recent new items in particular masks and other distressed retailers, who are aggressively trying to liquidate inventory.
Well, it's unknown, whether another wave of Cobot 19 will have later in the year, we are modeling and preparing for it if it occurs.
Gross and operating margins should be higher sequentially as we move through the year, but still impacted by lower year over year sales and higher cost to serve expenses for both online shipping in source safety measures.
No we expect fulfillment costs the elevated in second quarter, driven by two important factors.
First with a subset of our stores still closed online sales growth is expected to be outside and second we continue to fulfill a meaningful portion of online demand through our stores, which is generally a more expensive fulfillment options.
As we look to the back half, we expect to largely mitigate these acute near term pressures as our stores reopened and we right sized inventory against demand in our online channel.
With regard to expenses, we remain committed to prudently managing expenses, particularly in light of the current environment.
Hopefully that color on key business attributes will be helpful. As you model the remainder of the year.
Before turning it back to Sonia I want to emphasize that while we are unclear on our near term priorities that will enable gapping to weather. The crisis. We also remain committed to building towards our future the unprecedented disruption experienced in the retail sector presents a very acute and unique opportunity.
Well, everyone is adapting to a rapidly changing environment, we intend to lean into and apply our strategic advantages in order to gain customer loyalty and market share over time.
As we continue name navigate the rapidly evolving marketplace, we remain steadfast in ensuring sufficient liquidity and financial flexibility to navigate the ever changing landscape and emerge position to gain share as well as amplifying our distinct advantages and scale to capture demand. That's it recovers inclusive of share growth opportunities where.
Our brands have an authority of wind and continuing execution of our initiatives to drive profitable growth through streamlining our operating model and so you optimization.
With that I'll turn it back over to Sonia for a few closing remarks.
Thank you Katrina.
So you've heard from both of US and you know that we are focused on re fashioning. This company for growth as we know that the retail landscape is changing rapidly and will undoubtedly look different in the future from the competitive set to how customer shop for us for products and engage with our brands.
This is really unique moment that the industry and everything is changing and we intend to lead that change by being a progressive leader in this transformation. We will do this quite deeply listening to our customers and working alongside our partners and other industry leaders since.
The course for the next 50 years on the back of our last 50 years, the strong and growing company.
We believe our brands will be well poised to take share based on momentum were seeing with stores, we opening at a sustained online acceleration coupled with our dominant market position in growing category I'm excited about graphics ability to win and so with that we will open it up to kuni.
Thank you as a reminder group on with who wish to participate in the question answer session. You May proceed star one to enter the today Q.
Your questions one per participant.
And we will go first to Dana Telsey Telsey group.
Hi, good afternoon, everyone and hope everyone is safe and healthy.
As you think about the complexity of the business on the margin side and the attributes going into it whether it's rent whether its wages what kind of differential do you need going forward in order to operate the business smaller in stronger and what are you looking for on rents. Besides abatements is there.
Our co tenancy is or what do you think the occupancy structure needs to be thank you.
Thanks, Dana Katrina and I appreciate you asking the question.
We think about rents I think as I said in my remarks.
We still believe that a small healthy fleet with good read economics is incredibly important to our business model as we look to maximize both are strongly located fleet combined with our strong omnichannel and E Commerce omnichannel capabilities and E Commerce plot.
For.
That said, we do have some stores that need to be renegotiated from a rent structure standpoint, and so that's where we are today is using this unique opportunity to go back in and leverage as you say, whether its co tenancy abilities to renegotiate lease terms or whether it's just partnering with our.
Landlords in the queue time to try and get some rent relief in our long term structure. So that we end up with a portfolio of stores that we think meet our profitability objectives.
We haven't put a number out there where deepen those negotiations right now, but we do look forward to emerging from this with a profitable fleet that we think well compliments our online business. Let me say that's happening Katrina and we're pleased with the progress we've made with hundreds of landlords as we reopening across the country the right progressive.
Partners are recognizing if we view that the world has changed that means that means that our customers of change and so we want to create a mutually beneficial in with structured.
With our events and that's what we're seeing happen with our partners, which is which is quite good.
Just a quick follow up on inventory I do think about inventory by brand or by by channel and the pack and hold that you have how much of it is the Pat how much of it is pack and hold and you have you ever had pack and hold levels like this before.
So we're not quantifying the pack and hold I will say, we've not had levels of pack and hold like this before we feel quite good that the pack and hold consist of.
Either ongoing basics or summer product that was not ever delivered to stores that we can keep.
On hand, we can either access it to deliver to stores or we can hold and it's sorta into.
Next year and.
So I think we feel quite good about the pack and hold I'm not sure data. If you can remind me the balance of your question.
In terms of the inventory levels, how you think about inventories throughout the year than it does it differ by brand. It's gap brand. That's the most over inventoried it seems like it's from what you'd like to see.
No I wouldn't say that at all I think all the brands have been very prudent in mass managing their inventory and you know we've we've taken care of the spring inventory glut that we had through the inventory impairment that we told you about today and we feel quite good as we think about inventory for the back half as we as a crew.
I suspect, we were able to impact our back half inventory levels to lower demand and we're using our responsive capabilities to chase into the categories that are working and the brands that are working and fundamentally as we've said, we're seeing good traction, particularly at old Navy, where we have lots of flexibility to get back into.
Demand.
Thank you.
And we'll build back to model swagger of Baird.
Good afternoon. Thanks for taking my question. So clearly a lot of important items on the agenda right now and I have to imagine certain items on your transformation agenda were put on hold during the crisis, while others, perhaps like store closures or maybe accelerated. So we spent my question is what do you think is a reasonable timeframe.
To get from where the businesses today to the optimal operating structure in store footprint of the future.
Thank you talked about we fast turning the company I guess the question is do you think the company could be re fashion by 2021 that lowers its more likely 2022 story. Thanks.
Yeah, Mark it's a good question that all that Sonya out anything.
We're not yet guiding to what we think the exit rate on store closures will look like but we still do you feel like we will make good progress similar to the progress we had put out at the beginning of the year as far as GAAP rent closures. So that battle that work is all largely on track that said because.
How does the current environment, we're actually using this opportunity to talk through really virtually almost every property and lease with every landlord to see if we can get after whether its rent.
The lease term or whether we would actually just close the source. So we're just need deep with all the landlords today, it's very hard to say how long it will take but do you know that it is one of our primary objective is to use this opportunity to partner with our landlords to come out with a better.
Profitability for the company, let me just add to that to some tough amassing Katrina.
One of the things as we study path crises and we have done that deeply.
The most important thing on strategy is not to sector strategy too early to stay flexible and to a very clearly in acutely listened to what is happening with your customers are doing and that's what we're intending that's more intense on right now what we know is our omni capabilities stores online working together.
Is critical for us and we know that we will be invested in that capability holistically that ecosystem around the customer.
That fuel our powerful brands and and you look at 60 million customers and growing with growing frequency is an enviable customer file that we intend to capitalize on those are really the top three assets, we see our powerful brands our customer file in our omni capabilities those three together.
Able to our lean operations, and our values, which values matter today more than ever to ever as far as going to be elements that shape and we fashion. This company and how that plays out I don't know the where ever done on that front. This as an evolution as a daily it's a daily work.
You know to move towards those those aspects.
Thank you Thats helpful. As if I could just ask a quick follow up on digital.
Looks like trends accelerated nicely in April and May just any color in the various drivers there whether it's pent up demand stimulus or some of these markdown activity and what do you think that the reasonable expectation the kind of normalized digital run rate in the months ahead.
Oh listen I think that if we can all periods the customer it would be a great thing, but what I will say is as we sit as we turned out ship from store and as we started to fully activated lean into our online business. We saw sequential week over week month over month growth and how that normalizes as our stores fully open.
It's something we're actively looking at we do expect being such a large T. Com business 4 billion last year and that significantly growing that gives us advantage its share of voice out there in the marketplace against smaller players that we fully intend to capitalize on.
Great. Thanks for all the detail and best of luck.
And we'll hear next from Matthew boss from JP Morgan.
Great. Thanks, maybe to dig a little deeper into recent trends what level of productivity or your old Navy stores in particular reopening up relative to that 70% total company metric that you gave and then maybe just on the 100% ecommerce growth in May what are you seeing at old Navy and Athleta relative to the.
Brent.
Yeah. Those are great question, so as it relates to productivity.
I think it's fair to say that old Navy given the strength of the brand as well is the fact that old Navy is positioned in the off mall locations, where the customer is likely I'm more confident shopping as well as the curbside pickup capability is easier to activate we're seeing a meaningfully better trends.
In productivity at our old Navy stores and you can imagine stores that are in malls are harder to get people to shop that and so you would imagine it may be gap and banana or a lower productivity that averages out at that 70% about 70% Mark that were out today, but it's early days you know we are.
Just in the process of reopening we're pleased to be at 1600 stores today open, but that's 55% of our fleet and so we have a ways to go and then as it relates to online I would say similarly, whether its old Navy, who has the advantage of being a family brand.
In servicing.
It's in baby as well as in the value space, you can imagine that seeing strong trends and then to Atlanta with strong brand health and a athleisure trend being so strong is also seeing great performance, but I think we're also pleased that you know we Sonya can potentially talk about it we made some changes that gap brand and we are seeing.
Some meaningful improvement in our GAAP brand online business as well.
Yeah, no gas brands online on the strength has built in and we're quite happy with it we don't break it out separately, we're quite happy with it for for May and you know as you know got access bid challenge for Us and we're focused on five elements. There really first is leveraging our online growth.
Second the store fleet rationalization, the third is rightsizing, our resources with the 25% head count reduction I mentioned, the fourth is new products and segments like GAAP team and the fixed cost effective our asset light opportunities like the IP licensing we think this coupled with.
Proven leaders in place in design merchandising online are going to feel this business as we right size it and built for health.
Great and then maybe just to follow up on gross margin. What are you seeing broadly from a pricing and promotion standpoint on reopening in the mall, maybe just how best to think about markdowns in the second quarter versus back after the year as you see it right now.
Yeah, I mean, interestingly it seems as though.
I don't know, but it feels like a lot of people got many of the inventory issues behind them and so while there will be promotion.
In the second quarter, I'm, not sure, but they will be meaningfully different than the first quarter.
I think the commentary we put in to our script was just to ensure that the fact that we're growing our online business. So high in the second quarter, but that the inventories being serviced from stores. We didnt onto the fact that we do have an unusual amount of fulfillment cost to consider but beyond that come up.
Notional environment.
Largely the same likely.
Great. That's good luck.
And we'll hear next from Kimberly Greenberger Morgan Stanley.
Great. Thank you so much I wanted to just follow up on the.
Activity of stores with the reopening.
And you see any geographical variance as you're opening.
In terms of productivity, the new stores across the United States seems to be are you seeing any sort of differences.
Maybe if you could talk about globally, what you're seeing that would be helpful as well.
Yeah, we've seen I'll start with global since the fed dedicated China first as we as we said we've seen a nice recovery in our China business.
Month over month, and the Ami business. There now is really pivoting towards managing in a more normalized fashion as we look into Q2, which is nice to see as Japan's we opened we've seen a better than expected rebound in our stores demands of pent up demand and yes, and then as our stores opened across the us.
It really is a factor of a combination of a few things one is real estate type. The second is whether the third is.
Consumer sentiment as it relates to safety and so you know we've seen some early on good performance in the south in the west with the weather signaling the need for the for the summer clothing.
In the northeast in particular is little bit lagging and yet as we expect that as those stores open up and if the consumer.
Wants to seasonal shift and as kids growing need both the system. That's all that's going to play out.
Great. Thanks, so much I just wanted to follow up showed your with your.
Sort of vision, you laid out with regard to the responses capabilities that you have built.
We continue to build in your supply chain.
I wanted to ask if you if you could sort of wave a magic wand and get to your destination on how much inventory you would be ordering ups for on you know on onboard standard kind of lead times versus what percentage of inventory you ultimately expect to be able to use that response of capability for.
Is it like 70, 30 split or or.
If you could just help us understand what the end goal looks like and then where are you now what's sort of got split now. Thank you so much.
Thank you I think the question you know the inventories is a complicated space right now, especially as we try to match supply demand across our multiple brands, but what I will say that we have really lean into accelerating our responsive expectations in each of our product in each of our brands.
And moving as fast as we can too.
Mmm.
Faster and more quicker order placement so that we are agile in matching them too.
In terms of matching supply and demand and you know as we as quickly as we went after mass is a great example of our of our fast and responsive supply chain across all of our brands. We when we saw the as the both the need for healthcare workers and that as a customer need we activated a responsive supply chain very very quickly. So I think we are pleased with the solar.
Ratio that we're seeing as far as the Mt. Like I said earlier I'm not sure there isn't as Dave we want faster and faster than.
More and more responsive enough what will be aiming for.
Thank you.
And we will go next to take VBS.
Launch. So my question is is the consumer goods aggregated to all the great deals that they're seeing that there.
Fiscal 21 will talk in terms of.
Your ability to return to.
Normal pricing, what you're used to we think that gross margin best specifically the merchandise margin Thats, where it was fiscal Nike. Thank you.
Yeah. Thanks, Jay I mean, I think is Sony has said, we we believe we have.
A lot of.
Assets as they relate to strong brand as it relates to a very strong and growing customer base that we intend to speak to not through pricing and promotion as much as through experience brand stories.
Loyalty the other things we have you know at Arsenal to be able to drive our business.
And so I don't think were concerned about the long term promotional aspect of the business and expect that it seems like you know so far the consumer snapping back fairly quickly and so really our role is in continuing to drive healthy brands with great capabilities and the appropriate way.
Ways to be speaking to that consumer about why to shop with us more frequently as we look to drive lifetime value with those customers.
So I don't think where is concerned about the promotional environment, but we'll see how it plays out.
Got it maybe just talk about this United second quarter, because in first quarter, you called up to 484 million.
If we take that out post the actions that you took.
I've already talked a lot of course, we can you give suppose gives an idea how much rescue they will be down.
In Q2 relative to where loans.
Onetime items in Q1.
Yeah. So we're not quantifying that I think you know in a speech we tried to give you. Some other puts and takes right we've made.
Some pretty meaningful decisions around headquarters reductions and we quantified that for you. We also are closely monitoring marketing, but we haven't quantified we've been pivoting our marketing expense fraud.
Store traffic driving marketing into digital marketing and so we've been cutting at the appropriate but also ensuring that we're driving our digital channels. So we're watching that prudently and certainly by brand that will differ but you know we're looking at marketing closely and then the other big light into stores expenses.
And as we reopened stores, we will see expenses coming back into the business and as we said those are likely to be a little higher we are all being you know very careful about metering and extra people at the doors and in the fitting rooms.
And in fact, we're getting great customer response from them feeling save shopping in our stores, but that will result in higher operating expenses.
So there is lots and puts and takes and.
We'll see how the quarter plays out.
But what we have said sort of more broadly is we understand it is uncertain time that we are committed to really watching every dollar of SJ to ensure that we are prudently investing in growth, but also being careful as we watch the uncertain environment play out.
And I was just under one of the things we did one things they did in terms of organizational structure as I stepped into the rules. The first week in fact is.
No we structured the leadership teams and the priorities that gave us some of these hires that I've talked about powerful brands.
Focus on customer and omni capabilities, and then the lean and mean operations that are going to be essential to continuously managing down and she today. So we have consolidated as many of our large operation.
To add stood up the value office in order to continuously improve.
Jamie front and while this quarter's likely lumpy, we're setting a new standard and expectation around a changing with Robertson company.
Got it thanks, so much.
Well hear next from Paul Twin cities.
Hey, Thanks, guys I'm curious if you could talk about a gap and banana missiles that have been reopen any big differences that you're seeing between outlets and close wall Street locations also follow up on the pack and hold that across brands.
I'm just curious if that's kind of portion would be the summer sales would each brand represents strong sorry, I missed that Tom and then just curious on the $484 million charge, how many stores since that punch.
Thanks, Paul so as it relates to the store Reopenings for gap and Banana Republic as you can imagine similar to the old baby discussion about outlet and ER outdoor malls are performing better than in normal.
Your second question I'm not remembering that your third question, we haven't quantified the number of stores that are related to the store asset impairment. So it's just.
It's just the number that we've given you not the number of stores.
The second question, we pack and hold across grant, Okay, all right and so as it relates to pack and hold it's different by brand, it's not proportional to brand and honestly it's just.
It's hard to quantify by brand because it's sort of moving around as you can imagine as at demand unfolds. We could go use the pack and hold so we havent quantified it by brand.
Okay. Thank you good luck.
Well move toward next question from.
Let me see capital markets.
Yes, hi, thanks, very much for taking my question I guess, so now you would have alluded to earlier approaching I believe the gap brand into the back half with more narrow and deeper assortment.
Kind of curious how you are thinking about merchandise strategy, you know ideas or flashes of newness that maybe you could potentially see into the back half just maybe to reengage. The customer and then just as we approach back to school denim is obviously, a very important category for you guys. Just how are you thinking about the.
The denim business approach you map for the back half just given some of the category commentary we've heard hearing Q1 about.
It's on lounge, and casual et cetera.
Yeah. Thank you so mark Chrysler Who's leading the brand is.
And on actively looking at all of those opportunities around the merchandise direction I know he believes that its got stands for modern American optimism and focusing on the core items that.
The French relevant famous for as you say planning to the kids and baby business. The denim business. Those you know essential center modern and available and you know American and classic those are the aspect that will change the assortment of the assortment is going to get more and more focused and deeper and so that.
As a strategic directions specific I will follow up and I know Mark will share more through my time.
Great and just on denim just.
Higher level views on the category.
No. We think we're well poised to drive denim share across the company. We're one of the worst players and so as it relates to denim and gap I think that it's a very important category for for the brand that will come to that have an important though.
And.
That will conclude the question answer session altering the club corporate centers.
Thank you UK disconnect.
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