Q2 2021 Gap Inc Earnings Call
Good afternoon, ladies and gentlemen.
My name is Jenny and I will be your conference operator today at.
At this time I would like to welcome everyone to.
The gap incorporated second quarter 2021 conference call today's call is being recorded at this time all participants are in a listen only mode for those analysts who wish to participate in the question and answer session. After the presentation. You May now press star one to enter the Q&A queue. As a reminder, please limit your questions to one per participant if anyone should require assistance.
During the call. Please press the Star key followed by zero key on your Touchtone phone.
I would now like to introduce your host Steve Austin film head of Investor Relations.
Good afternoon.
Afternoon, everyone.
Welcome to Gap, Inc. 's second quarter 2021 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 statements.
For information on factors that could cause our actual results to differ materially from any forward.
Forward looking statements as well as the description and reconciliation of any financial measures not consistent with generally accepted accounting principles. Please refer to page two of the slides shown on the investors section of our website Gap, Inc. Dot com.
Which supplement today's remarks as well as today's earnings release, the company's annual report on.
On Form 10-K filed with the Securities and Exchange Commission on March 16, 2021.
And any subsequent filings with the Securities and Exchange Commission all of which are available on gap, Inc. Dot com.
These forward looking statements are based on information as of today August 26, 2021 and.
And we assume no obligation to publicly update or revise our forward looking statements.
Joining me on the call today are Chief Executive Officer Sonya single.
And Chief Financial Officer Katrina O'connell.
With that I'll turn the call over to Sonya. Thank you.
Thank you, Steve and good afternoon, everyone.
Katrina and I are glad to be here today to share our second quarter results.
First I'll share my thoughts on the quarter and how elements of our power plan 2023 came to life across our brand platform and portfolio.
Also share how we're positioned to grow well into the future through digital transformation.
<unk> strategic expansion of addressable market and an acute focus on building customer lifetime value.
But I'll turn it over to Katrina to give a more detailed view of our financials and the outlook for the rest of the year.
We're happy with the strong top and bottom line results, we delivered this quarter.
Comparable.
Sales by 12% versus 2019 and delivered the highest Q2 sales in over a decade, even after walking away from 8% of unproductive sales from the divestiture of the two smaller brands and the strategic store closures in our North American market.
To the entire team.
Well. Thank you for your commitment to our customers and our company every day.
Our customers embraced summer with optimism hungry for listing closed vacations and reunions became reality.
We saw celebration of American style Navy as the soldier and the resurgence of denim.
All of this.
Team picked spots across our purpose led billion dollar lifestyle brands.
Staying close with our customer and keenly observing their cues allowed us to react quickly to the shifts in trends.
While there is still a favorable consumer environment. We were pleased to maintain our momentum and believe this is a strong indication that our strategy.
Is working.
Starting with the power of our brands.
Over the last several quarters, we've mentioned, an increasing investment in marketing and brand amplifying partnerships or investments at about 6% of sales for the year is roughly 50% higher than historic levels all deployed against fueling demand.
<unk> for each of our brands.
We've dialed up marketing efforts by balancing art and science to grow market share to acquire new customers and drive profitable growth.
Firstly art fueled by new creative confidence our brands are using their unique voices optimism values and cultural development.
<unk> to connect with customers rather than relying on discounts to drive the clicks and put steps.
Whether it's old Navy and Grammy nominated recording artist her celebrating the reopening of America our gap.
GAAP turning to tick tock fans to choose the next color for its iconic logo hoodie after a viral come back a bit.
Classic.
Our banana Republic tapping into as a soldier and our shared desire to get back out into the world with our recent vintage and travel inspired capsule collections.
S letter and Simone Biles partnering to help girls reach their full potential and passionately take on the world people are choosing our brand.
Brands for what they stand for that is brand power.
It's also essential that our strong brand creative is as effective as possible and showing up in the right places and that's where the science comes in.
We've updated our media mix, we balance investments between conversions with existing customers and top of the funnel to build awareness.
This brand love and reach new audiences and.
And when coupled with rigorous marketing effectiveness and are fully maximize third party dataset, we're seeing this pay off.
Brand health is improving we're growing our customer file and our brands are delivering results, let me start with old Navy old.
Old Navy delivered record sale.
Sales with 18% comparable sales growth versus 2019 strong storytelling trend right product and strategic discounting are bringing a new and more valuable customer and driving higher spend and margin dollar move.
Moving forward the team is leveraging data science to allocate inventory to specific stores.
<unk> with great precision furthering improving profitability.
Maybe it will scale this capability in the back half and we look forward to deploying it across the rest of our brands in 2022 and.
And just last week old Navy brought the democracy of style and service together with their women's inclusive style sizing launch boarder quality.
We now offer women's styles and every size with no price difference fully integrated in both stores and online no. Other top 20 mass retailer does that.
This is the largest integrated launch in the brand's history and an important growth driver for the business for years to come the average women in the U S, whereas asos.
16 to 18, so with very few competitors in the plus size space old Navy is positioned to take a significant share of the 120 billion dollar women's market.
Moving to gap.
Gap is restoring relevance is an iconic American brand in the North American business has reached a major inflection point with 12%.
<unk> comparable sales growth versus 2019.
This is a testament to the hard work the team has done to fix the core business focusing on execution at every turn the assortment is better and tighter product quality is better discounts are lower and when customers shop at gap. They are met with a faster reading.
Design site and refreshed stores that are lighter and brighter, bringing the optimism of our customers expect.
This means gap brand is poised and ready to welcome new customers as we leverage the strength of partners to amplify our reach.
Early results on gap home are encouraging and easy gap has created a new iconic item around.
Jacket, with 75% of customers, who preordered being mute a gap.
I mentioned earlier that our class a gap pretty is having a moment so much though that we reissued it in a vintage brown for preorder delivering this fall and it's not just on Tictoc, we've seen elevated search levels across Google's seven.
Times more people search for liquidity on gap Dot com in Q2 than a year ago.
Data shows we are attracting a younger fanbase with our team logo hoodie outpacing adult sizes by four times.
I share. This offer reasons. This is a brand that is resonating and this is a brand that people care about and want.
Want to wear proudly across their chests.
Net banana Republic.
I am pleased with the creative progress and momentum we saw at banana Republic quarter over quarter, the dresses business rebounded along with pants shorts and woven cloth as consumers shift back to vacation occasion and warfare.
Better execution online in a more relevant product assortment allow the brand to pullback on discounting without resistance and attract new and younger customers. There's a lot of energy heading into the brands fall relaunch and its vision of bringing affordable luxury to the market.
Beautifully designed products like silk.
Silk in Kashmir in leather and enhanced site design premium service and curated store experiences appealing to all senses will build over the next several months.
And finally athleta.
Which delivered 27% growth versus 2019.
As a country.
Three we opened Athleta site performance lifestyle assortment accelerate as customers found versatility and styles that performed for travel work and working out.
As the perfect amplifier of the brand's values are better sponsorship of world class athletes in Tokyo boosted brand awareness at 33% versus 26% last.
Last year according to Yougov.
And next week, we will launch Athleta online in Canada, which was made possible quickly due to our DC network and our existing infrastructure there.
Atlanta is a consumer curiosity that fuels every detail of its brand expression blast.
Last month, it's launched Athleta well in <unk>.
<unk> digital platform rooted in wellbeing designed to build loyalty engagement in our community of empowered with them.
Members can engage and dynamic conversations with bedded experts on topics like outfitting fitness mental health and body positivity. They can also participate.
Dissipate and one of a kind experiences from interactive workshops to guide his medications and enjoy premium content from partners like <unk> fitness.
This is an integral part of the floods evolution from a performance brand to a true lifestyle brand and a key component of our strategy to develop enduring relationships.
With new and existing customers.
Next the power of our platform, we're embracing a try fast learn fast think big mentality to push for convenience and engaging customer experiences across the entire customer journey with the debut of easy gap. We also launched an innovative out of the box online experience.
Experience complete with preorder functionality in a digital waiting room.
Instagram shopping pilot with Athleta and old Navy was a successful test of distributed E Commerce.
I'll work on site speed and inventory availability are yielding net promoter score improvement.
Just like Athleta are made possible through the power of.
Platform, we created the digital communities faster and more efficiently because of our scale and our tech might and we're able to leverage this technology across all brands as we explore new ways to connect with customers.
This quarter, we maintained our digital dominance with online delivering sales growth of 65%.
On a two year basis.
Because of this growth, we're making investments across our distribution network to accommodate additional capacity and a new two to three day shipping promise for top tier loyalty members and Meanwhile, our sourcing optimization efforts are ramping up as we look to reduce cost per package and simultaneously increase.
Our plant per package.
And finally, the power of our portfolio.
In July we unveiled our new integrated loyalty program, featuring a new value proposition anchored by faster shipping promise, a new tier structure on demand points redemption and the ability to do good three points donation.
We know we build loyalty with our more than 65 million active customers by connecting deeply with them.
This program allows us to engage personally with non credit card customers through experiences not just discounting to build lifetime value by migrating them up the value chain.
As we add customers to our file.
And transition them from one and done to cross brand and multichannel shoppers, we see a significant increase in revenue and value are growing card and loyalty program already has 40 million members. It has exceeded our expectations.
We're proud to have issued our inaugural equity and belonging report in June summarized.
Summarizing developments actions and progress towards our 2025 commitments are critical step as we work towards our goal of creating for all with them.
Looking ahead, we're prepared for back to school, our kids and Baby business has been a point of strength at both old Navy and gap in between the two brands.
We represent 9% of the market that said, we are clear eyed about the fluid ecosystem, we operate with them from inflation to wage pressures are the recent surge in the delta variance. The teams are mitigating supply chain headwinds from closures in the countries, where we source and make her clothes and delays due to poor connection.
Ramification challenges.
Thanks to the speed and scale of our omni channel business deep supplier relationships and the playbook. We built at the start of the pandemic. We are advantaged here. We are stronger we are healthier were faster and we're more focused gap, Inc. And we were a year ago and that gives me great.
Is that our portfolio can navigate any headwinds to come.
Our results show the acceleration of our power plant in 2023, and as we shed unproductive sales and increase the speed of ideation and implementation, we are doubling down on three areas to drive sustainable long term growth.
We're looking at strategic.
Transmission of the addressable market.
As we study important trends in the market like wellness and the homebody economy, we see a sizable future opportunity to compete in new categories.
This shows up in product extensions like inclusive sizing as I mentioned earlier as well as home intimates and sleep, which comprise a combined.
<unk> $326 billion in addressable market.
And when you couple that with our partner to amplify strategy, whether theres celebrity partnerships like easy gap of franchise and licensing partnership by gap home that expand our reach that's a multiplier for growth.
Net is our momentum builds we have an acute.
<unk> focus on customer lifetime value fuelled by our marketing investments are working loyalty personalization and creating signature experiences across channels will help attract new customers, while developing connections and a stickiness with our current one.
We are flooded well community in partnership with fitness platform obey.
For our upcoming work a pit transformation are ways to deepen the relationship with the customer and to encourage upselling and cross selling and increase that lifetime value.
And finally digital transformation, we are investing more in technology. This year than we ever have since moving to the cloud last October every dollar.
And spend goes further towards growth and innovation versus modernization innovation that could impact our entire portfolio of brands.
And that speed of our technology deployment has increased our confidence to invest further we are digitizing operations and increasing automation across inventory management.
Stores in key areas of the value chain to unlock cost and margin prioritizing work that will have long term impact end to end.
We believe this will radically redefine our operating cost structure and create an operating machine to support our long term ambition for growth.
Before.
Before I turn the call over to Katrina I want to take a moment to celebrate gap, Inc. Cofounder doors Fisher, who celebrated her 90th birthday. This week.
As our company's first working mom, an arbiter of cool she inspired generations of women to champion one another to follow their instincts with passion and park.
And Don.
Ron Fisher set the bar high with an eye toward what the consumer is craving and have instilled an owner culture that it's crucial we preserve.
So tomorrow in honor of her birthday, our team is dedicating our time to local communities and our first ever doors Fisher day of service because as she has said.
We can always do more with that I'll pass over to Katrina.
Thanks, Tania and good afternoon, everyone building on the momentum from Q1, we delivered very strong second quarter results.
With the backdrop of a strong consumer demand for our for purpose led billion dollar lifestyle brands remained high.
And Sonya discussed we believe this is the work of our teams tremendous progress on executing our power plant in 2023 strategy.
Of note are the following one our strategy is driving growth consistently.
First old Navy and Athleta grew 21% and 35% respectively in Q2 versus.
<unk> and combined represented 65% of company sales.
Both brands delivered standout sales performance led by their brand strength omnichannel offerings and relevant product categories.
Gap North America is growing with a 12% two year comp in the second quarter.
20, demonstrating continued strength in our core North American market.
This growth underscores the progress the brand is making in product and operations.
We're pleased to have new leadership at Banana Republic, infusing creativity, and improving customer experience, resulting in improved sales and operating performance in Q2 as the <unk>.
Gains relevance will.
We're becoming digitally dominant our online business grew 65% in Q2 versus 2019.
At over $6 billion in sales our online channel is ranked number two in U S apparel e-commerce sales and when combined with our well located fleet.
<unk> is a strategic advantage in serving our customers through the omni channel lens.
And we're targeting continued growth for all our brands, adding categories, and reaching new addressable markets through extensions like home plus size and community and wellness as we strive for sustainable momentum.
Two.
We're making the hard decisions to improve the Companys economic model and drive management focus on what matters.
Our fleet rationalization is on track and driving significant economic value.
Last year, we announced a plan to close 350 gap and Banana Republic stores in North America, and expect that 75.
<unk> <unk> will be completed by the end of this year.
These closures along with lease negotiations and higher online sales contributed to over 330 basis points of Rod leverage in Q2 versus 2019 and will contribute ongoing value for the remainder of the year.
The transition.
5% of our European market to a new and more profitable operating model is underway and expected to be completed this year, we're making great progress on our goal of improving the performance and profitability of gap brand as we partner to amplify through asset light model.
And we successfully divested two smaller brands.
<unk> focus on our $4 billion purpose driven lifestyle brands.
And three we're leveraging the power and scale of our shared platform to enable our growth agenda and help us navigate the near term volatility in the market.
Some relevant examples are as follows.
Our technology spend enabled by our recent.
As we showed in migration has been meaningfully deployed against new digital capabilities, improving site performance and enhancing customer experience across all of our brands.
Our new tiered loyalty program rollout combined with our already strong cross brand credit card program enables our 65 million known active customers.
<unk> quite a shock with rewards across our portfolio maximizing customer lifetime value.
Our scaled and automated DC network supports our online growth and our improved loyalty shipping promise increases efficiency and drives down fulfillment costs.
Strategic partnerships within our vendor base are allowing.
<unk> for rapid product innovation across the company such as the launch of old Navy's Powersoft active fabric sourced from fabric technology used in athletic powered Vita collection, which has enabled old navy to dominate the value active space and has propelled the company's total active growth with sales.
On target for $4 billion in revenue in fiscal 2021.
And our strengthened size in Canada will enable us to enter that market in Q3 as seamlessly.
There are more but these are just a few examples of how the power of the platform as a competitive advantage to growing all of our brands as we drive the synergy of the port.
With the scale of the platform.
Given our year to date performance and confidence in our strategy, we are raising our outlook for the year, despite continuing macro headwinds.
We now expect fiscal year 2021 sales to grow about 30% versus fiscal year 2020, and with an <unk>.
Port fold margin of about 7% on a reported basis and about seven 5% on an adjusted basis.
This upwardly revised outlook puts us on an accelerated path towards our 2023 operating margin target of 10% plus.
And we expect our fiscal year 2000.
Operating one reported EPS to be in the range of $1.95 to $2 five.
With adjusted EPS in the range of $2.10.
To $2.25 a.
A <unk> 50 increase from last quarter.
Covid variance continue to cause volatility in certain markets.
'twenty one we're actively working through supply chain constraints inflation and wage pressure. We expect these challenges will continue for the remainder of the year, but our teams have been hard at work leveraging our scale advantages and strong relationships with vendors and carriers to navigate materials and other cost increases and securing necessary.
<unk> Ocean and air capacity to navigate supply chain delays.
Now turning to second quarter financials.
Net sales for the quarter were up 5% versus 2019 and comp sales increased 12% on a two year basis.
Net store closures and the divestitures of our intermix.
<unk> and <unk> businesses impacted sales by approximately eight points.
In our international markets Covid related store closures persisted for most of the quarter, resulting in an estimated two percentage point impact to sales versus 2019.
We're pleased to report that while we're still carefully monitoring the COVID-19 situation.
In general belief as of the end of Q2, nearly all of our stores have reopened.
Even as store sales start to rebound outsized online growth continues.
Enabled by investments in our omni channel capabilities customers are getting a great experience engaging with our brands regardless of how they choose to shop with us.
<unk> for the online business grew 65% versus 2019 and contributed 33% of total sales in the quarter.
As noted in our press release second quarter reported results include an SG&A charge of $19 million.
Primarily related to the decision to close our stores business in the UK.
In Ireland, which will ultimately drive improved profitability and remove fixed costs from our structure.
For details on sales by brand please refer to our earnings press release.
In terms of gross margin second quarter gross margin was 43, 3%, reaching an historical high in the quarter and.
UK ending 440 basis points versus 2019, the majority of the expansion resulted from rod leverage from online growth strategic North American store closures and the ongoing benefit of renegotiated rents for the remaining fleet.
During the quarter Rod leveraged by 330 basis points versus.
Versus 2019, a trend that we expect to Directionally carryforward in the second half of 2021.
In addition, we were able to reduce discounting across all of our brands, resulting in meaningful average unit retail growth versus 2019 and significantly expanded product margins.
<unk> 130 basis points and higher shipping costs, primarily due to increased online demand merchandise margin still improved versus 2019 by 110 basis points.
Turning to SG&A on a reported basis SG&A of 33, 6% Deleveraged by 180.
Disappoints compared to fiscal 2019 on an adjusted basis SG&A was 33, 1% of sales 260 basis points higher than 2019 adjusted SG&A.
We are acutely focused on driving down fixed expense to reinvest and demand generation as we look to grow.
Basis in the long term.
In Q2, our work on optimizing store expenses yielded about 150 basis points of benefit helping to fund high impact marketing fueling brand health and relevance.
Marketing drove 230 basis points of the increase to 2019 as we leaned into.
Sales of other digital marketing celebrity partnerships and important growth initiatives like our integrated loyalty program launch.
The success, we're seeing evidenced by improved profit margins in new customer acquisition gives us confidence to lean into this important demand driving strategy in the second half as we expect marketing.
<unk> spend of approximately 6% of sales for the full year.
In addition, we experienced approximately 200 basis points and higher bonus accrual cost related to our strong financial outlook and pay for performance philosophy.
Regarding operating margin operating margin for the quarter was $9 seven.
<unk> on a reported basis adjusted operating margin of 10, 2% increased 190 basis points versus 2019 adjusted operating margin.
As the initiatives of our strategy take hold we are encouraged to see the results through growing sales with improved profitability.
Moving on to.
Persist and interest the effective tax rate was 28% for second quarter of fiscal 2021 second quarter net interest expense was $50 million.
Regarding earnings on the quarter reported earnings per share for Q2 were <unk> 67.
<unk> 23 compared to 2019.
Adjusted earnings per share were <unk> 70 cents, an increase of seven to 2019 adjusted EPS.
Turning to inventory second quarter inventory ended up 2% compared to 2020 and down 2% to 2019 as.
As part of our strategy to mitigate challenges within the supply chain.
Tax due to capacity and Covid impact we are leveraging our scale advantages to ensure we have appropriate inventory to fuel sales growth during the important holiday season.
Currently expect third quarter, ending inventory to be up mid single digits compared to last year.
Regarding the balance sheet and cash flow we ended the quarter.
With $2.7 billion in cash cash equivalents and short term investments.
During the quarter, we paid the second quarter dividend of <unk> 12 per share and completed approximately $55 million in share repurchases as part of our plan to repurchase up to $200 million in shares this year to offset dilution.
Earlier this month, we announced we will pay a third quarter dividend of <unk> 12.
Consistent with our plan to return cash to shareholders through a competitive dividend program.
We ended the quarter with 376 million shares outstanding.
Finally, before we turn to our 2021 outlook a brief update on the progress of our north.
<unk> real estate plan and the transition of our European operating model.
Year to date, we've closed 20 for gap and Banana Republic stores as part of our 350 store closure plan for North America.
As a reminder, we expect to be about 75% complete on that plan by the end of 2021 with a 100.
89, North America stores closed in 2020, and 75 stores expected to close this year.
Old Navy and Athleta opened 25% and 13 stores, respectively year to date on a path toward 30% to 40 openings at old Navy and 20% to 30 openings at Athleta rigs.
Regarding the partner.
America <unk> strategy, we're deploying in our European market, we've announced that we are in discussions to move to a partnership model in France, and Italy and that while we will still maintain an online presence we will be closing our store locations in the UK and Ireland.
Year to date, we've closed 26 stores with the remaining 58 stores.
To ample spectrum to close by the end of September.
In the short term, we're not projecting a benefit in the back half of 2021 due to employee and lease related costs as we wind down the stores business, but these strategic changes are expected to drive earnings accretion on an annual basis.
For some helpful context.
Tours in fiscal 2019, the European market generated $539 million in net sales.
About half of these sales were generated by the UK and Ireland stores at a slight operating loss.
Now I'd like to provide an update on our full year financial outlook.
Next we are providing both our reported and adjusted outlook for the year.
Earnings per share are now expected to be in the range of $1.90 to $2 <unk> on a reported basis, which includes nonrecurring charges related to divestitures and the impact of changes to our European operating model.
Totaling approximately 20.
Excluding these charges, we expect adjusted EPS to be in the range of $2.10.
To $2.25 at.
A <unk> 50 increase to our prior guidance.
We now expect sales growth of about 30% versus 2020.
It'll this incorporates the loss of sales due to store closures in the UK and Ireland.
Reported operating margin is expected to be about 7%. Our adjusted operating margin is expected to be about seven 5% an increase of 150 basis points versus prior guidance and puts us.
The path to the 10% plus goal laid out in our power plant in 2023.
As we develop this outlook, we considered a number of scenarios carefully balancing the benefits related to our brand strength, new product offerings and loyalty program against the near term expense from inflation and supply chain pressures.
Including sizable investments in airfreight to partially mitigate longer lead times and shipping delays, so that our inventories will be well positioned to compete during back to school and holiday.
Regarding capital expenditures, we continue to expect to spend approximately $800 million for the full year, our strong cash generation.
<unk> is enabling investments in our sustainable growth strategy with a sharp focus on ROIC.
<unk> targeting high return investments in digital loyalty and supply chain capacity. In addition to store growth at old Navy and Athleta.
As I look forward I'm energized by the following first.
First is that our strategic approach to growth is working and Sonya articulated we're driving growth in existing categories, and we're targeting new addressable share rooted in customer trends with initiatives like bought a quality at old Navy and athletic Canada launching in Q3.
And our study of the homebody economy and wellness.
Trends may open the door to other new and exciting growth categories and services in 2022 and beyond.
Next is our acute focus on customer lifetime value with the formal launch of our integrated loyalty program in July we're significantly increasing our ability to attract interact with customers in a more personalized and meaningful.
The way.
The program has already grown to over 40 million members and based on the early results from the program soft launch last fall, we expect to see increased purchase frequency and higher average order size from loyalty members.
In addition to driving better transaction economics with Interbrand the program.
Ram encourages consumers to become multi brand loyalists through our universal rewards program.
Loyalty is just one way that we've doubled down on building deep relationships with our customers that result in stickiness and deliver value.
Finally, our commitment to transforming the fixed cost in the business into demand generating dollars.
Investment or EBIT expansion is showing results our fleet rationalization is deeply underway our smaller brands have been divested and our partner to amplify strategy for international operations is in flight.
We've also begun to pivot our technology investments towards the Digitization of the enterprise.
From our inventory management transformation and shipping optimization work to productivity improvement in stores using technology and proven automation practices from our Dcs. We are now developing a roadmap for leveraging the use of data and AI to unlock trapped costs increased speed and aid in decision.
Isn't making proactively unlocking investment dollars to drive long term growth.
With that I'll now turn the call over to the operator for questions.
Okay.
Thank you.
Again that is star one to ask a question and ladies and gentlemen, as a reminder.
Please limit your questions to one per participant.
Our first question comes from the line of Matthew Boss of Jpmorgan.
Great Thanks, and congrats on a really strong quarter.
Yeah.
So maybe.
Maybe two part question first Sonya.
And yet at old Navy I guess, as we think about the 18% comp growth relative to 2019.
As well as 20% growth we're more in the front half I guess, how do you rank drivers of the top line inflection you're seeing any thoughts on back to school. So far and then Katrina on your updated 30% revenue.
For the year I think it implies double digit back half net sales growth relative to 2019, and that's versus 6% in the front half.
So just any drivers and your confidence in that embedded revenue growth acceleration in the back half of the year would be great.
Okay, Matt it's nice to hear from you.
Got you.
So I'll start with the back to school component first around old Navy and you know as you know for American families. This back to school season will be the first in over a year and old Navy is prepared as this gap brand and together they hold 9% of kids and baby market share so position.
Our strength.
And as we think about that as they think about their board quality launch, which just happened offering.
The entire women's assortment from double zero to 530 in stores and online at the same price and you know.
And one of the best biggest launches.
Physicians history. Those two drivers of growth is something that we're confident in and coupled with the science that old Navy is building.
Its operating model right the inventory management transformation that they're driving as an example.
Which is allowing for greater position.
And the branching or supply demand in their stores and in their D. C. So three great drivers and I think we feel quite confident in our outlook and the momentum old Navy.
Yeah, when it comes to the company and the acceleration youre, referring to in revenue in the back half I think what's exciting to us and what you heard in some of our prepared.
Is that our strategy really is about continuing to take market share in the core categories in which we dominate so whether that's denim or active or kids and baby. But then also continue to supplement those core categories with new addressable markets like.
The Baltic quality launch, which will drive.
Incremental value in the back half and old Navy or the athletic, Canada entry, which will drive incremental value for <unk>.
Let us then combined with new lifetime value levers like loyalty launch and then all supplemented by an incremental marketing spend but continues to drive.
Profitable sales for us. So it's really this layering effect of initiatives and capabilities against our great brand strength thats driving that level of growth in the back half.
Congrats again.
Thanks, Matt.
And we will go to our next question from Ike <unk>.
Brito a wildcard.
No.
Previous Hey, Katrina Sonya.
Just wanted to ask about gap brand specifically on them on the easy collaboration I mean that was pretty interesting the 75% of the preorders from non gap customers.
I'd love to hear a little bit more about that and then.
Tony I think on the last conference call you said you'd have more to share with us a few months. So it's got a few months and you've got.
Got a little bit more in front of me.
Can you help us out with timing or just anything else for all the launch would be great.
Yes, sure Ike so as we spoke last.
Last quarter, we said, we would launch in Q2, and we launched easy gap with the beginning of an iconic new products around jacket, and we have pure sold it in North America, and Tokyo and in Europe, and and it's.
Had a great response, we've had.
Had a much younger customer.
75% of those customers being new to the gap brand and so we're excited to be off the gates and let us see this as a strategic partnership with a long term partnership.
And.
When we think about the what we where we expect it to be now we're pleased.
With the customer response was validated with partnership we're pleased with the product and the product pipeline that we have coming and so more to come and I think that you know.
The coolness of it will mean, we don't believe revealed that much on the earnings call versus out there on Twitter or something but more to come in the coming months and years.
Yeah and I.
I think we would say that it's you know it's.
It's following a creative process versus a more traditional process and so that will lead to incremental excitement as the as this all builds but it also leads to sort of a different path and so again the round jacket launch and the customer acquisition. We're seeing there is really giving us great.
Confidence in the long term potential of this.
Partnership.
Great. Thanks.
And we'll go next to Adrian.
Please.
Okay, Sonya Katrina I have to say I don't think I've ever seen at speed of transformation like the one.
<unk> set in motion under 18 months right. If I did my math correctly. So congrats.
Thanks Adrian.
Youre welcome.
So I.
I guess my first question is going to be on the.
Comment on all three brands being less promotional and I wanted to just get a.
It feel for where is the high watermark on each of old Navy banana and gap. It seems like banana gap are just getting underway and probably have a long way to go and then Katrina. If you could just help us quantify either the well actually both if you can help us quantify AUC growth in AUR growth in the second quarter.
What we should expect for those in the back half. Thank you very much.
Let me start and then kick over to Katrina in terms of pricing power.
Seeing the margin expansion as you mentioned, but we have a long runway here. If we look at each brand in their competitive set we think that we have multiple years of price realization.
<unk> ahead of US you know the first order bit was getting the art right the brand positioning the product the marketing.
The store experience right the fundamentals and the online experience.
And we're making momentum there, but I would say that as we invest more in marketing as we invest more in the technology to drive yield.
<unk> such as examples like inventory management order logic or minimizing return via the acquisition, we announced today. These are all multiple drivers of growth and then layer on top of that are our new loyalty program, which we all know is a proven mechanism to drive price and.
Customer values. So we think we've got multiple prongs of our price realization ahead of us and I'll turn it over to Katrina that pick up the rest.
Yeah, I think that's right I mean, we continue to have confidence that we'll grow our AUR is in the back half of this year based on everything that Sonya just said whether it's the.
Marketing.
That's driving significant brand health.
Or whether it's the product care categories in which we compete or some of the new.
The capabilities, we are launching at old Navy that will deploy next year at gap and banana around yield optimization all of that gives us great confidence in the AUR expansion in the back half I'm not going to comment on.
On AUC other than to say our outlook already contemplated.
Any potential increases in AUC that would come from the incremental air freight that we've put in and as Sonya mentioned, you know and I mentioned, we are spending money on airfreight to compete in the back half. So that we have the right inventory here to be able.
To continue our market share grab in the back half of the year and so that's all contemplated in the raised guidance we gave today.
And so we feel quite confident that our strategic.
Strategically advantaged supply chain is giving us the opportunity to compete well combined with then the AUR and price elasticity that we have in the background.
Fantastic best of luck.
Thank you.
And our next question comes from Brooke Roach of Goldman Sachs.
Thank you good afternoon, and thanks, so much for taking the question.
I wanted to follow up a little bit on some of the industry wide.
Fly chain and product availability pressures, but there was a lot those covered on the call so far today.
Wanted to understand maybe in a little bit more detail. How confident you are that you'll be able to source the merchandise that we need for holiday and into spring what level of pressures or embedded in your outlook from these disruptions and.
And whether or not there's any pockets of inventory that may be tougher to source that your customer is looking for thank you.
Yeah happy to answer that and you know you you may be aware that my background is supply chain and manufacturing and so you know as we have navigated the last few months.
And some of the headwinds here is that our advantages we have big powerful relationships with our manufacturers across multiple countries of origin. So if theres a country like Vietnam, We've all read about.
Having some COVID-19 concerns we're able to work with these partners across multiple countries of their man.
Manufacturing to shift as needed next we have advantaged transportation relationships, we booked our advantage cost advantaged air capacity.
Six months ago, So we're not paying spot rates, we're being strategic here, we have vessel capacity.
That is attached and giving us beat.
So you couple all of these nodes in the supply chain together and you then apply that against our 1 billion units a year and you know this this is where scale matters. So we will be first out of the gate with from our vendors and also we will pay the least amount for the advantage speed that we are investing and so are we.
Feel good about navigating what it's a very volatile environment certainly in changes all the time, but we have real time near real time visibility to what's coming and it's all baked into our forecast.
And we will go next to Kimberly Greenberger of Morgan Stanley.
Okay, great. Thank you so much.
I wanted to ask if Bob if you have any outlook in the back half of the year by brand.
You know, how we should think about the revenue breakdown and Ah just on the supply.
Hi chain question.
You talked about a sizeable increase in air freight.
In our in the back half of the year I just wanted to know if you had a.
Any.
Any color on magnitude there and then if you could just remind us what percentage of.
Of your inventory you have historically sourced from Vietnam.
That you would be looking to sort of reallocate to other countries that would be great. Thank you so much.
Sure Kimberly so when we think about the second half revenue.
We don't actually break that out by brand.
But as we've said we have a strength at old Navy driven by the sizable kids and baby denim and active businesses that we have combined with BARDA quality.
Launching and so as you can imagine as we talked about some of the incremental volume is coming from old Navy with the BARDA quality launch.
And that Athleta continues its momentum and also is entering with online in Canada in the back half as well as having a simone biles relationship really begin to take traction with the girls customer there. So that's how to think about those two brands.
And then a banana.
Our Republic we'd.
We'd really do you expect that with the fall season, we will begin to see their their new marketing and execution on their website and in stores with web products start to take hold fall into holiday.
And a gap I think youre seeing that the core gap is very strong in the north American market and I.
I think we gave you some color on how to think about the U K and Ireland stores and the revenue that we will see lost there. But then also the better profit impacts going forward 2022, what that'll be so lots of pieces to the puzzle.
But that's how to think about the revenue by brand as.
As far as the air cost we have.
Haven't quantified that but it is significant and we are obviously as Tony said, we've actually taken a bunch of capacity in the market about six months ago. So we're actually evaluating daily weekly hourly what of that capacity to use and when so it's really.
Evolving and all the possible scenarios are really contemplated in the updated raised guidance that we gave you today.
And then I think you had a question on inventory to remind me Bob.
I'm, sorry, I'm, sorry was that just which piece of how what percentage of inventory have you did you.
Source from Vietnam, historically, either you know last year or the year before that you would look to relocate to another country.
Nam is a top five sourcing country for us it is an important country and and I'd say that you know as we think about countries of origin.
We are able to get manufacturing.
Out of Vietnam, and use accelerated transportation to make up any slowness.
Slowness coming out of the factories as we deal with you know in factory closures and and temporary de La for example, we also have the strategic partnerships that have a product based in Vietnam and.
Other parts of Southeast Asia, and India, and Latin America et cetera, So the flexibility to move across countries of origin for our big billion dollar relationships that we have with our manufacturers is what's giving us the agility to navigate them you know the COVID-19 impact as it has.
It's impact around the world, including Vietnam, hopefully that's helpful.
Yes. Thank you.
Okay.
And ladies and gentlemen that does conclude todays question and answer session and our conference for today.
Yeah.
I appreciate everyone's participation you may now disconnect.
Thank you all for joining us today, and we look forward to speaking with you at the end of the third quarter.
Okay.
Yeah.
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