Q2 2022 Gap Inc Earnings Call
And wellness category.
No.
I'm realistic about the hard work lies ahead, we know what we need to deliver to our customers and we know that it has to fully measure up has to be compelling. It has to be worth a trip every time.
Confident that our team has the capabilities needed to deliver what our customers and shareholders expect and what is needed for long term profitable growth and it will take an aligned focus on adopting organizational behaviors that will enable change and unleash our potential.
Lastly, I'm sure that many of you have questions about our search for a permanent CEO . So our briefly address them now.
The board is actively evaluating potential candidates working swiftly and thoughtfully to ensure that we find the most qualified person employment growth.
We are focused on someone who can lead GAAP based from defense to offense.
Finalize our creators while returning us to a position where we are gaining market share across our brands.
A leader who can build upon the company's strong foundation powerful assets well established value to further scale, our omni platform and market leadership.
Ultimately a leader focused on delighting, our customers every experience and driving the change in momentum necessary to deliver value creation for our people and our shareholders over the long term.
And with that I will turn the call over to Katrina.
Thank you Bobby and thanks, everyone for joining us this afternoon as Bobby just discussed we have strong brands and leverage in the portfolio that will enable us to compete and win.
However, the current execution challenges combined with our volatile operating environment are requiring us to move swiftly to manage the levers in our control and take the actions necessary to drive immediate and long term improvements across our entire business.
These actions include one sequentially, reducing inventory through the second half of the year, including the impairment of unproductive inventory as well as reducing future receipts.
To rebalancing, our assortments to better meet changing consumer needs and aggressively manage overhead costs and the reevaluation of our technology and marketing investments in order to better position our model for the long term.
And finally fortifying our balance sheet in the face of uncertain macro trends and near term execution headlines.
I will get into more details on these actions in a moment.
So let me start with our second quarter results as well as key drivers of our first half performance and share some color as well much of the remainder of the year.
Starting with sales total company sales of 386 billion.
We're down 8% versus last year or 7% on a constant currency basis.
Coming off a peak inflation in a higher gas prices, particularly impacting the low income consumer in June we have seen an improvement in sales trends in July and into August consistent with many other retailers.
Comparable sales were down 10% a sequential improvement from the negative 14 comp reported in the first quarter, which was negatively impacted by the lapping of stimulus in the prior year.
Door sales declined 10% from the prior year.
As we look to the remainder of the year, we anticipate opening 30 to 40 Athleta stores.
1% to 30 old Navy stores and continue to expect to close about 50 gap and banana Republic stores. This year, bringing us to approximately 85% of our goal of closing 350 stores in North America by the end of fiscal 2023.
Online sales declined 6% versus last year and represented 34% of total sales in the quarter.
Impaired to pre pandemic levels in 2019 online sales increased 55%.
Year to date total sales were down 11% compared to last year and were down 5% relative to pre pandemic levels in 2019, while we believe strongly in our ability to maintain core category leadership in the back half of the year, we are taking a more conservative posture as it relates to our sales outlook as we read the consumer response to the many changes we've made.
Good product Assortments, which are just taking hold and considering the uncertain macro environment, particularly in the low income consumer.
Let me now provide sales color by brand starting with old Navy sales in the second quarter declined 13% versus last year to $2 1 billion.
Relative to 2019 old Navy sales increased 6%.
In the second quarter old Navy comparable sales were down 15%, representing a sequential improvement from the negative 22 comp last quarter.
The year over year declines at old Navy stemmed from continued previously discussed size and assortment imbalances.
While we believe old Navy's value positioning should enable us to attract a wide range of consumers. The brand is not immune to the pullback in spending by the lower income consumer, which we believe may all gone out on the bottom of the year on a softness.
The old Navy team remained focus on adding a balanced and relevant assortment with broader end use, particularly dresses pants denim and woven tops and improved fashion choices, which we believe will begin to see this fall and even more into holiday.
We continue to lean into maintaining our leadership positions in categories. We are known for like denim active and kids and baby.
In addition, we remain on track towards optimizing our extended size boarder quality offering in stores to better match demand late in the third quarter.
Also remain confident following supply chain disruption in inventory delays at our core sizes will be back in stock for late fall.
Turning to gap brand global sales in the quarter declined 10% versus last year to $881 million.
Global comparable sales were down 7% an improvement from the negative 11 comp reported last quarter.
North America comparable sales were down 10%.
Sequential improvement from 11% in the first quarter.
Gap brand remained impacted by casual category softness, particularly knit tops and casual shorts, while more relevant categories like dresses and pants showed better results given the shift in consumer preferences.
The team is focused on fixing the category mix imbalances in fall and holiday. In addition gap outlet demand is experiencing near term softness, which we attribute to continued pull back from the lower income consumer.
Banana Republic second quarter sales grew 9% year over year to $539 million.
Comparable sales were up 8% during the quarter.
Banana Republic maintained its focus on quality product differentiated experiences and continues to capitalize on the shifts in consumer trends, while realizing continued benefits since last year's brand relaunch.
Athletic sales grew 1% to $344 million with comparable sales down 8% athletic posted an increase of over 37% in sales compared to 2019 pre pandemic levels, reflecting the brand's continued progress in driving awareness and establishing authority in the womens active and wellness cat.
Laurie.
As we stated last quarter, we are focused on ensuring that athletic strikes the right balance of active and lifestyle in its assortment mix to best meet the evolving consumer demands, which have shifted from athleisure towards work, an occasion and a short term.
While there has been a modest slowdown in the women's athleisure category and athletic is maintaining share in that market, we expect market share gains we.
We believe we had some print and color misses in our summer assortment.
Which drove some of the softness in the quarter.
Team has pivoted quickly to deliver a more cohesive color story across its assortment, including more elevated prints and a higher penetration of on trend styles. This fall, which will better position the brand in the back half.
We are confident that the brand will capitalize on the continued secular shifts and growth in the health enrollment categories broadly and drive outsized growth over the long term.
Now turning to gross margin.
Reported gross margin in the second quarter was 34, 5% during.
During the quarter, we wrote off $58 million of unproductive inventory, primarily styles and sizes at old Navy.
We expect that clearance inventory will enable us to drive an improved consumer experience across all channels and better showcase the newness in merchandise that resonate most with our customer, while allowing us to better optimize our margins.
Adjusted for the inventory impairment gross margin was 36% deleveraging 730 basis points from the prior year.
Close to half of the deleverage stems from onetime or macro related headwinds, while the balance reflects our increased promotional activity, resulting from our current inventory challenges and assortment imbalances.
Let me share some more specifics on these factors first we continue to navigate inflationary cost headwinds, which we estimate had an approximate 200 basis point negative impact on margin.
Consistent with our expectations, we realized an estimated $50 million of incremental air freight during the quarter, which resulted in approximately 130 basis points of margin deleverage and third while we continue to benefit from our fleet restructuring efforts through lower log costs, which were below last year on a non.
Domino basis.
Rod Deleveraged, approximately 30 basis points, primarily as a result of the lower sales volume during the quarter.
The remaining deleverage of approximately 370 basis points stemmed primarily from higher discounting at old Navy.
Like so many others in our industry, we are managing through elevated inventory levels as a result of changing demand trends and shifting consumer preferences.
Additionally, as you know we've been navigating through product lateness and product acceptance issues, most notably at old Navy, which has forced us to increase the level of discounting in an effort to better balance our assortments.
Let me quickly frame up the drivers of our first half gross margin in order to contextualize the puts and takes as we look to the back half of the year.
While there are factors in our control and levers we are pulling to drive improvement. There are also gross margin dynamics and we have substantially less visibility as we look to the back half.
First half adjusted gross margin was down 820 basis points year over year, driven by an estimated 300 basis points of airfreight deleverage.
220 basis points stemming from higher discounting.
Roughly 200 basis points of inflationary cost headwinds.
And roughly 100 basis points of Rod deleverage.
As we look to the second half of the year Airfreight expense is expected to normalize and we will be anniversarying last year's investments, resulting in roughly 400 basis points of leverage.
The roughly 200 basis points of inflationary deleverage is expected to continue and rod is expected to be flat or deleveraged slightly.
Where we've seen the most significant variability versus our expectations in the discount rate.
We are taking actions to rightsize inventory. We are also mindful of the uncertain an increasingly promotional environment clouding our visibility.
We entered the third quarter with elevated levels of inventory and expect inventory growth to moderate as we move throughout the year as our actions take hold we reduced receipts and begin to anniversary higher in transit levels last year by.
By spring, we expect to begin to lean into a responsive levers, providing the flexibility to better align inventory levels with demand trends now turning to SG&A in the second quarter SG&A was $1 $3 6 billion or 35, 2% of sales deleveraging of 160 basis points from the prior year, primarily as a result.
<unk> of lower sales volume.
Excluding the $35 million charge related to the old Navy, Mexico transition adjusted SG&A as a percentage of sales deleverage of 120 basis points versus last year's adjusted rate.
While we made significant SG&A investments over the last few years to help fuel our future growth opportunities. The current operating environment does dictate a moderation of these investments as well as the implementation of distinct expense savings actions in the near term.
We'll begin implementing later in the third quarter, a reduction in overhead investments, including a pause on planned hiring and open positions among other actions.
In addition, we are reevaluating our investments in marketing and technology, we firmly believe that marketing investments are a key contributor to brand health and customer acquisition, but in light of the current operating environment. We are looking at specific opportunities to invest more prudently focusing our spend on the most productive and highest return opportunities.
So believe there's an opportunity to slow down more meaningfully the pace of our technology and digital platform investments to better optimize our operating profits.
We will share more details as we implement these actions and expect these initiatives to mostly benefit fiscal 2023 and help offset the incentive compensation that will come back into our forecast next year reported operating margin in the second quarter was negative <unk>, 7%.
On an adjusted basis, excluding the inventory impairment charge and old Navy, Mexico charge operating margin in the second quarter was one 7%.
Reported EPS during the second quarter was a loss of 13.
Adjusted EPS was eight.
Which excludes the inventory impairment and or maybe Mexico transition charge.
The $50 million of estimated transitory airfreight expense in the quarter.
It had a negative <unk> <unk> impact to reported and adjusted EPS.
As we look to the third quarter, we continue to expect a net benefit of approximately $85 million from the planned sale of our UK D. C. Now that our European partnership model transition is complete as previously communicated this will have a positive impact on our reported earnings and will be netted out of adjusted earnings in the.
Third quarter.
While we're making progress, particularly on adjusting our assortments to better reflect shifting styles and evolving fashion across our brands. We know we have more work ahead of US. We're also navigating a unique set of circumstances, a CEO transition new leadership at our largest brand old Navy and several actions currently in <unk>.
Right towards right sizing, our inventory and our cost structure on top of that the intensifying promotional background and signs of weak demand in the low income consumer or making forecast precision increasingly difficult.
That being said, we are committed to providing transparency as it relates to our forward outlook. We will continue to provide you with color on the factors that are most in our control and come back with further details once we have greater clarity on the consumer response to our product and inventory actions and once we have more of the work pertaining to our cost saving initiatives complete.
Now, let me turn to the balance sheet and cash flow ending inventory of $3 1 billion was up 37% year over year.
This includes nearly 10 percentage points of pack and hold inventory and seven percentage points related to in transit.
More than half of the remaining increase is attributable to elevated levels of slow turning basics and the remainder of seasonal product.
I'd like to provide a brief reminder, on our pack and hold strategy and approach for managing basics.
As you May recall, we have utilized pack and hold strategies and inventory management tool in the past, which has proven to be successful while our use of cash in the short term, we are able to optimize our margin in the near term and benefit working capital next year, as we buy lower receipts and sell through the pack and hold inventory.
We're confident that we will be able to integrate our pack and hold inventory with future assortments as the majority of goods are carefully selected seasonal core items, which you may use to round out our assortments.
Examples of these more timeless style, our basic shorts are short sleeved Tees and tanks.
We've had some supply chain impacts as well as product assortment missteps in the near term. We are focused on sequential inventory improvement and deeply committed to inventory productivity and getting back to a responsive levers.
As discussed earlier, we have taken action to write off unproductive inventory in the second quarter and received across the assortment beginning in late fall and into holiday positioning our brands to be able to take advantage of our reinstated responsive capabilities and chase into demand as we enter fiscal 2023.
These actions are part of our focused approach to inventory planning for the remainder of fiscal 2022 and beyond.
As we look to the remainder of the year, we believe that third quarter ending inventory growth will moderate substantially and are targeting negative inventories versus last year by the end of the fiscal year.
Quarter end cash and equivalents were $708 million.
Year to date net cash from operating activities was an outflow of $207 million.
Free cash flow was an outflow of $613 million above our historical first half outflows driven by our net loss and the timing of merchandise payments.
As we look to the second half, we anticipate more normalized cash levels as we cycle the inventory timing effects of the supply chain challenges last year as well as benefit from the actions we've taken to reduce receipts as we move through the back half and into fiscal 2023.
We've taken action to fortify our balance sheet and cash positions.
We have cut our deferred some capital spending and reduced the number of old Navy new stores slated for the back half of the year and now expect capex of approximately $650 million for the year compared to our prior expectation of $700 million.
During the quarter, we completed an amendment and extension of our secured revolving credit facility, securing modestly improved pricing, while increasing flexibility and liquidity within our capital structure.
We remain committed to delivering an attractive quarterly dividend as a core component of total shareholder returns.
During the quarter, we paid a dividend of <unk> 15 per share and on August 15, 2022, Our board approved a 15 cent dividend for the third quarter of fiscal 2022.
During the second quarter, we repurchased five 7 million shares for approximately $57 million as part of our plan to offset dilution.
We do not anticipate further share repurchases for the remainder of fiscal 2022 as we've completed our goal early are fully offsetting dilution for the year.
In closing we've taken action in light of our ex additional challenges to rightsize inventory re evaluate our investments optimize cash management and taken a more conservative approach to our outlook.
We continue to navigate a difficult consumer environment and a promotional competitive environment. We are confident in the actions. We're taking and believe we are taking the right steps to position <unk> back on a path towards growth margin expansion and delivering value for our shareholders over the long term.
With that we'll open up the line for questions operator.
Thank you as a reminder, 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.
We will pause briefly ask questions registered.
Our first question is with Lorraine Hutchinson from Bank of America.
Lorraine Your line is open.
Thank you good afternoon, I was hoping to follow up on the comments you made about Athleta and see if you could expand on any of the actions that you plan to take to improve comp and then also comment on profitability of that concept today and where you think it can go. Thank you.
On.
I think what's important to note about Athleta is the following first of all according to NPD the women's athleisure market in the quarter did slow.
<unk> did maintain share with him not slower athleisure market.
That said, we expect athleta to be gaining share and so as we've looked at the performance I think theres a couple of things we would point to first of all if you.
Remember they did have about 50% of their inventory source from Vietnam and.
And the supply chain issues from the back half of last year did continue to impact the performance in the first half of the year, whether it was late product or assortment.
Assortment imbalances that that resulted from that that all did play through their performance as well and then as we talked about they did have some print and color that just didn't resonate well with the consumer and so the team is definitely acknowledge that and as you look towards the fall merchandise.
I think it is a more focused assortment and a more balanced assortment with.
Great product in the performance aware that they need to be delivering as well as a really versatile product in our.
Lifestyle, where that we know they are using for some of the work.
And.
The ability to sort of do everything in addition to working out so we feel good about the actions they've taken out.
And know that they will navigate through this shift in consumer and the supply chain issues over the long term.
Nothing else that really did create a bit does the real highlight the areas of this product and again fall product.
It is.
Just underline again, most of our competence as well with the ballots.
With performance lifestyle as well as we commented on.
Core to the DNA of the brand I think you will see results turnaround of the way we want them to do so.
We're eager to get into that.
Our next question is with Matthew boss from Jpmorgan.
Matthew Your line is open.
Great. Thanks, So two questions I guess first would you separate the macro from the micro <unk> that you think that your business is fee.
Thanks.
Maybe touch on what you think the drivers of improvement you've seen so far in August .
And then separately Katrina is there a way to speak to the quantity and composition of the inventory that you have today across your concepts and just timeline to clear the excess inventory back to normalized levels in your view.
Yeah, Matt So I think I can start I don't know Bob if you wanted to stay tuned coming first or I am happy to dive in Appalachia.
I think the comments around the macro micro level, we'll do it on both is fairly clearly highlighting where we have phase I believe that the impact on the lower end consumer there's been an impact there. It's obviously affected trip.
The challenge of keeping diversion.
Maximizes, though or refocus the inventory transitions then.
So what both macro and micro but we've.
We've already talked about how we work to clear those things out. So we can go back to three and I think every week.
Address the bigger question will go back to your answer there for lip Bu.
Yeah, I mean I think.
What we said in our prepared remarks is that July and August trends are right in line with our prior expectations.
<unk>, we did see a dip in performance really with peak inflation and peak gas prices. So we're pleased to see July and August come back to sort of about our prior expectations.
<unk> point on inventory.
We announced that our inventory at the end of the quarter was up 37%. We said 10 points of that is pack and hold and seven points of that is in transit.
And the balance is really sitting in slower basic product, which we can cut receipts and work down over time as well as seasonal fashion seasonal fashion as we head into Q3 is pretty in line with how we owned Q2.
And so we'll see how that plays out but.
Could indicate some near term pressure, depending on how the customer responds to the content and how the and how the customer overall is as well as what the promotional environment in the industry is as.
As we look forward.
We said that ending of Q3 inventory will moderate substantially as we were able to cut our holiday inventory and we start to re flow our basics and then heading into next year, we expect inventories to be negative on a year over year basis and the good news about spring in first quarter is.
We've been able to stand back up our responsive inventory levers, which on top of that negative inventory will allow us to stay open and be able to chase back into trends. So near term inventory is higher than we'd like it to be.
We did take the inventory write off and we think that helps at least in third quarter present, the old Navy inventory to the customer in a better.
Experience.
And then we have taken aggressive actions over the next six months to really get our inventory levels back down.
Great color best of luck.
Thank you.
Our next question is with Bob <unk> from Guggenheim Partners.
Bob Your line is open.
Hi.
Great. Thank you.
I guess Katrina on the SG&A can you unpack your expectations a little bit more just maybe on some numbers around Q3 Q4 at least how that helped us.
Model it for the remainder of the year that would be helpful. Thanks.
Yeah sure Hi, Bob.
As we look at SG&A for the year. Our current outlook is that full year SG&A could be about $5 $6 billion, which we acknowledge is just too high of a cost structure for the performance of the company as well as for the current operating environment and so.
While we've made tremendous progress on the restructuring of a lot of the fixed cost in the business through closing of stores and partnering of markets, which and selling a small businesses, which I know you guys are well familiar with.
<unk> made strategic investments in marketing.
Building technology to support our digital growth in other areas of the business as well as adding head count.
And in light of our performance and in light of the outlook. We are really committed and I think thats, what <unk> heard today to putting in place real action against working that SG&A level down to a much more appropriate level. So more to come on the actual levels levers. We will take we are in the process of standing those actions up and we will.
Provide clarity on those actions as they happen.
But many of those actions will take place like we said the overhead actions in the third quarter, and then more to come but likely mostly those actions will impact 2023, given the timing in the year.
Thank you.
Our next question is with Brooke wrote from Goldman Sachs Brook. Your line is open.
Good afternoon, and thanks, so much for taking our question.
Our question is about the promotional levels that you saw in <unk> your outlook for promotion into <unk> and holiday and what your current plans are with regard to the discount rate on both a year on year basis and versus 2019 do you feel like youre going to be in a better place with the old Navy promotional activity in the <unk>.
And how should we be thinking about that promotional level overall.
In terms of recapturing the old Navy brand margin as we look into 2023. Thank you.
Yeah, Hi.
As we Dimensionalize the first half margin.
We were trying to be helpful in breaking out all the pieces since there's so much happening in the margin dynamics so as.
As we said in first half we saw a.
A deleverage based on all the airfreight of about 300 basis points.
220 basis points of the front half deleverage with discounting so put that aside and let's talk about that in a minute.
220 basis points with inflation and a 100 bps with Rod So what we said as we move forward is the air becomes a benefit in the back half will be lapped last year's substantial air Freights up 400 basis point benefit in.
Inflation remains about the same at about 200 basis points.
Rod can be flat to slight deleverage so.
I'll, let you model what that means but it means that.
We are leaving ourselves sort of a range in there that that could be.
Worse than loss than the first half could be better than the first half and I think that's where again we're focused on the actions, we're taking to drive a different outcome.
Everything from re changing the assortment away from active and casual into more wear to work the boarder quality inventory changes, we've made and the write offs there to try and get the sizing back in place.
And then really getting back to the true value proposition of old Navy, which is jaw dropping value on great fashion for the family.
And all of that we think we're better set up for but.
Acknowledging as well that inventory in third quarter is still fashion.
<unk> fashion inventory is still relatively in line with second quarter and then it gets a lot better for fourth quarter.
And I think the X factor too as we said broke is you've been seeing the reports as well that the industry is awash in inventory and so we're just.
<unk> been careful to a little bit about what we what we will be navigating with others promoting so lots of dynamics, which is part of the reason why we've left that as sort of the open variable, but we will stay close as we read our own performance on product and pricing as well as what's happening with the consumer and.
The competitive environment.
Thank you very much.
Our next question is with Dana Telsey from Telsey Advisory group.
Dana Your line is open.
Thank you. Good afternoon, everyone. Obviously, you have a new leader at old Navy and just wondering is it just hasnt been there very long, but just wondering if you see the game plan to two two approvals Navy whether it's in the size and assortment imbalances what does the path that we should be looking for and did you.
Think about the core gap brand.
And the enhancements that could come there.
What trajectory are you on now and how do you see the leadership in terms of the role of CEO is that do you see that being fulfilled within the next six months and is there any particular qualifications that you are looking for in the in the CEO role. Thank you.
Let me start with legal battle on the backside.
Again data to you in.
Yes.
Just barely three weeks in his job.
<unk> hit the ground running.
I think as we talked about earlier does this highlight relative to the brand and what you might expect how do you see.
Old Navy.
We appointed in Italy, and he is the right balance, particularly with product focus.
The premium personal customer experience very strong proven.
Operator, and again manage in challenging times, so understanding value.
Judy.
In the format that old Navy serve.
I think we'll see him really strengthened a lot of the.
The category of execution, and so forth and make sure that we rightsize the assortment, we're going to have to get it done.
<unk>.
Now focusing on these next few quarters, while also looking at.
The commitments and plans and product for spring and summer here, but.
We just need to give him a little bit of time.
I'll, let me just shift on the back side that you asked about the CEO search.
Because again I commented in my prepared remarks that I'm sure a number of you really wanted to understand what are we doing and again the borders.
Commissioning of the search we're well into it.
And looking to move as aggressively as swiftly as we can but as you would imagine expect also very thoughtfully.
In terms of gas as this is a very attractive.
Company to lead so with.
Plenty of it but again, we want to make sure that the right leader in place and as we look at that I mean, clearly we are looking for a leader that will move.
In total from Vcs office and position us back, where we see meaningful share gains across our brands.
We have very strong foundation of this company.
Powerful iconic brands that we believe that we still own and compete with us all of us.
We continue to move forward with and the progress that we are we're going to continue to build on those strengths.
Establish values of the company and our scale of our omni platform or things are really looking.
Four out of the less leader, so a very modern minded transformative executive though again Kim.
Again strengthen us back into our position of leadership, while also them moving us hopefully even towards newer existing categories.
Particularly diversification in areas that we feel would might make sense, but ultimately as you would expect a leader that we believe can deliver on what our customers expect and again, what's going to drive the value creation that all of our shareholders expect.
To come on that.
Thank you.
Question is with Mark out stronger from Baird.
Mark Your line is open.
Thank you.
Great. Thank you for taking my question.
First on the margin, obviously, a lot of headwinds impacting.
In 2022, what.
What are the areas, where you have the greatest.
The ability or the greatest amount of confidence.
Most of the.
Next year.
And then separately on that one.
These results speak to the company for.
Potential strategic actions there whether it is unchanged if you approach it.
Thank you.
Hey, Mark It's Katrina I'm, sorry, you were breaking up a lot so I'm going to do my best with your questions.
Go ahead and take the 2023 margin question, which is I think what you asked and then maybe I'll, let Bob talk about strategic actions for the company.
When I think about next year's margin I think we have a lot of.
Things just don't work through and so we will have to owe that when we have more insight.
The levers will be similar to the levers we've been talking about I think the one lever we know is that.
We don't plan to be using airfreight going forward I think that's the one thing we know that.
It's an expensive lever and we've created responsive levers back in the business. So we shouldn't have to do that again and then as it relates to inflation in some of these other areas of the business I think it's too soon to comment on that so we will be committed to providing color as we have more insight into 2023.
And then Bobby I don't know you want to talk about strategic options yes.
Yes, I did really I'm, sorry, Mark I didn't hear your question is yes.
Okay, sorry for that.
Just with respect.
I'm wondering if there's been any change to the company's 15.
With respect to strategic actions there since we heard from you in that.
Look I think.
While we will always see.
David Here I mean, we're always looking at the.
The best way to.
Great value creation, and so we're constantly evaluating those as the brands.
Play a lot of straight off of the scalability of the company combined and so forth but.
So that is a brand that we're very proud of and have a lot of promise in but again. The board is always constantly looking at options. So.
Certainly nothing to talk about but.
Please go ahead.
Our next question is with Oliver Chen from Cowen.
Oliver Your line is open.
Alright. Thank you very much as we think about the product assortment at old Navy, which classifications and or lack of classifications have the lost opportunity.
Like you said.
In terms of creative would be.
The back half of next year, just given the timing of that a true statement.
With respect to that question also.
The good better best matrix.
Would love your thoughts on how you need to talk about as you continue to refine the inventory and then Katrina on the responsive inventory plans.
Could you just be more specific about what you are talking about how it could help the financials.
With that programming in the fall. Thank you.
Yeah.
Sure so.
On the old Navy assortment Oliver.
What hasn't been working really not just at old Navy, but in general is a shift away from the cozier categories Like Act.
Active and fleece.
As well as like T shirts, and casual shorts and so.
That's less about the product not being great and more about the fact that the consumer as you know is really buying a lot less about this year and really wanting to spend more on things like.
<unk>.
Dresses.
<unk>.
Even dressier denim.
And we've been top things that she can wear out to parties or to work and so the pivot that we've been making at old Navy, but also a gap is really less of those casual categories and more of the going out categories. As we talked about that is better than fall and much better bye.
Holiday.
As far as the fashion elements that didnt resonate at old Navy, that's really holiday that we're able to change the aesthetic more dramatically based on some of the learnings we had in first quarter.
I know you asked about good better best I think at old Navy.
Maybe the best items got a little too little too high on the best side and so the team will be looking at really making sure we have enough of the good and better and better product as we head into spring.
Which is especially important as we navigate this consumer environment.
And then on responsive when we say a response that we have a couple of levers that we use first of all we.
Vendor managed inventory, which means we're working closer with our vendors to buy inventory on a more regular basis and they hold it for us and we pull it as opposed to buying so much in advance.
And then platforming of fabric with our vendors that allows us to.
Chase into styles and colors as we read the consumer so those are a couple of examples of where we will get speed and flexibility back, but those levers as you can imagine when the manufacturing base was so disrupted we're just not at our.
Ability to leverage so we're.
We're looking forward to getting that back as the manufacturing base is stabilized.
Thanks, Rick Shane Katrina very helpful.
Our next question is with Simeon Siegel from BMC.
Simeon Your line is open.
Alright, thanks, guys.
Hey, good afternoon, everyone hope, you're having a nice end to the summer.
Sorry, if I missed it and I know, we don't normally talk about it. So just given the orders of magnitude any way to talk about old Navy's AUR versus pre pandemic and then maybe just how youre thinking about the old Navy long term revenue opportunity.
You stress tested whether there might just wondering if you might be better served letting some of the elevated revenues from recent years settling a little bit to protect margins you've got lower volume.
And then just lastly did you say if youre seeing any meaningful deviation in product category I guess I'm wondering are you seeing the same athleisure softness at all maybe thank you.
We didn't comment specifically on AUR is by brand, but I would say overall, while we're reversing reverting on discount levels to last year.
Still as a company we are up to 2019 as far as our ability to be less discounted so whether thats being aided by banana Republic turnaround or are we did do a significant amount of improvement in AUM in Navy over the long term, we are still seeing some stickiness on that discount rate improvement to 2009.
<unk> now.
Now we will see how the back half plays out, but but that's sort of so far what we've seen and again the reversion is really the year over year reversion to last year's big gains.
Remind me of your second question sorry.
Just thinking through your stress test volume versus margin.
The elevated revenue from last year, whether that's the right base or whether you could do better you can make more with less.
Yeah, I mean, I think it's a great question Simeon and certainly one we'll tackle as we head into 2023 I think fundamentally.
As you heard today, we are highly committed to our inventory productivity as we move forward and making sure we have a much sharper view on.
Tight inventories and so finding that right balance between unit velocity and AUR and margin will be critical.
And we'll have more to say about that as we think about the architecture for 2023, but we're early days in shaping what that looks like.
Great. Thank you and then just the last one was I'm sorry, if I missed it could you talk about old Navy Athleisure. So did you talk about product category and what you saw the similar.
Sir.
No.
Think fundamentally access continues to be a massive business at old Navy theyre dominant shareholders of active.
And.
The true statement for Athleta as well they continue to do a significant amount of their business out of active I think what we're seeing in both of those businesses are all of our businesses is really just a step back off of last year is massive growth based on the shift of the consumer now towards workwear, but old Navy is active business is still quite.
Large and important and still quite healthy just not as big growth as we had planned for before we saw this big shift in the consumer demands.
Great. Thanks, a lot Ron best of luck for the rest of the year.
Thanks Simeon.
Yes.
Our next question is with Paul <unk> from Citigroup.
Paul Your line is open.
Thanks, guys couple of quick ones. The improvement that you saw July into August can you talk about that where you saw the <unk>.
Pick up by brand and then if that was promotional rate driven or if youre happy with the margin performance.
Second the $15 million write off.
Where is that product because it does you're right that tahira was that destroyed is it still in stores.
Just wanted a little bit more color there and then just early.
Harley thoughts, but thoughts on AUC.
For first half of 2020 thanks.
Yeah. Thanks, Paul.
As we said July and August are sort of relatively in line with our prior expectations. We haven't commented on the margin component of that I think in general you have heard a lot today about how we're thinking about margin and so we will let you work through your model on that.
As it relates to the write off so most of that inventory is old Navy inventory as it's summer spring and summer fashion that we determined who is going to be really hard to clear.
In the quarter as we moved into third quarter combined with a lot of the extended size inventory that we've talked about before.
Really not resonating with customers.
That will be taken out of old Navy stores.
Over the next couple of weeks as the teams are able to navigate the workload between back to school and pulling that inventory out of stores.
We have determined some level of recovery for that and that's embedded in that $58 million.
And then your last AUC on.
Early days I think.
Certainly.
The first quarter as we've been buying spring, we still see inflationary pressure, primarily coming from cotton wage pressure and on.
Freight and all that on oil and all that other stuff, but but more to come on where those buyers settle and how that ends up settling through our financials.
Okay. Thanks, good luck.
Our next question is with Janet Kloppenberg from <unk> research.
Janet Your line is open.
Hi, everyone.
I wanted to ask Katrina as you think about the brand positioning.
Old Navy and gap in contrast to the tough times the casual positioning of both of those brands. In contrast, with the dress up times that we're seeing now is there a thought to pivoting the brand's terminal level.
Software to work looks what should we expect as the Assortments your fall and the holiday season and into next year. Thanks.
<unk>.
Yes, Thanks Janet.
Certainly we don't expect to broadly pivot the brand DNA I think by nature. Those are casual brands and that's how they've won that said there are lots of elements with each of the each within each of those brands, where do you think of dressed up denim or pans like the pixie pant or a khakis that gap.
Wolven tops outerwear, even sweaters that we believe we can put together and diverse so looks that should take her from day in Tonight, and so I think that's the commitment that the team has is in the near term they've been working on really rebalancing out of the casual into more of those looks I think we all.
Know that right now we have a little bit of a.
Of a whipsaw from casual into work and we want to be careful to keep the balanced DNA of both of those brands because I think we can win with with both elements of product. So we will stay balanced, but certainly we'll be showcasing that more versatile desktop look as we head into.
The back half of the year.
Thank you.
Our last question will come from the line of Marni Shapiro with retail tracker.
Marni Your line is open.
Hi, everybody. Thank you I actually want to follow up on a question that was asked but you guys didn't answer if that's okay and maybe on this concept of a slightly more positive you said trends picked up in July and into August I'm curious if that was.
Related specifically to old Navy less across the board was it driven by back to school in the kids business. If you could just walk us through a little bit what those trends look like and I know, it's early innings for back to school and fall, but just.
Have some idea as to where youre seeing the turn.
Yes, Marni I mean, we haven't set by brand, but I think that.
We continue to feel quite good about the fact that we have big and important denim and kids and baby businesses in both gap and old Navy.
And we also have active whereas we've talked about which we still think plays an important rolling back to school. So back to school is a long season, we'll see how that plays out.
But we're also really pleased as you've seen over the last couple of quarters with banana Republic and with the way they've been competing on their repositioning.
Feel like they've done a great job so more to come on where the quarter plays out I think the trends are on our expectation, but we are remaining prudent in sort of what the outlook looks like so we'll see how that all settles for the quarter and for the year.
I think it's worth noting that you'll see.
Seeing a little more positive.
In the online.
Penetration as well.
Concurrently.
Well best of luck for the rest of the back to school and fall season.
Thanks Marni.
Thank you that does conclude our conference call you may now disconnect.
Yes.
Yeah.
Okay.