Q2 2023 Gap Inc Earnings Call
Good afternoon, ladies and gentlemen, my name is Brianna and I will be your conference operator today I would like to welcome everyone to the Gap, Inc. Second quarter 2023 earnings conference call at.
At this time all participants are in a listen only mode for.
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.
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I would now like to turn your call over and introduce your host Emily <unk> director of Investor Relations.
Good afternoon, everyone welcome to Gap, Inc. 's second quarter fiscal 2023 earnings conference call.
Before we begin I'd like to remind you that the information made available on this conference call contains forward looking statements that are subject to risks that could cause our actual results to be materially different.
For information on factors that could cause our actual results to differ materially from any forward looking statements as well as a description and reconciliation of any financial measures not consistent with generally accepted accounting principles. Please refer to the cautionary statements contained in our latest earnings release the risk factors described in the company.
Yeah No report on Form 10-K filed with the Securities and Exchange Commission on March 14th 2023, 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 24th 2023, and we assume no obligation to publicly update or revise our forward looking statements.
Joining me on the call today.
Our executive Chair, Bob Martin, Chief Executive Officer, Richard Dickson, and Chief Financial Officer Katrina O'connell.
With that I'll turn the call over to Bob.
Thank you Emily and good afternoon, everyone.
Before Katrina shares our second quarter results.
The pleasure of welcoming our new Chief Executive Officer, Richard Dickson to the call.
There's no denying that Richard was destined for this role at this moment.
His experience as a transformational brand builder makes him a perfect fit for this break Japanese.
He's uniquely qualified to lead and carry out the transformative work already underway and more importantly, he is the right leader for tomorrow defining the future for Gap Inc.
Appointed to our board of directors in November of 2022. He has had a view into how we are changing the way we work and the results we deliver.
What energizes him most is building a new legacy for our renowned portfolio of brands, one that matters to our customers employees and shareholders.
And before I hand, al I wanted to say, thank you to our entire team for their commitment to the success of this company and their tenacity and care for our brands.
Embracing operational rigor and regaining the product and customer <unk>.
Session with an eye on modernizing the way we work.
All of which becomes a strong foundation for what's ahead under Richards leadership.
I have great belief that Richard and his team will define a very bright future for this company so with that I want to welcome Richard Dickson, The New Chief Executive Officer of Gap, Inc. Richard.
Well good afternoon. This is my third official day.
Oh, a gap Inc. So first let me begin by thanking Bobby.
The board and the entire gap, Inc. The organization for the opportunity to lead this incredible company.
And thank you everyone for joining us today on our second quarter 2023 earnings call now many have asked me why gapping.
And why now so let me start by saying that I have admired gap, Inc. And its brands old Navy gap Banana Republic, and Athleta for decades, as a customer a brand builder and most recently as a board member.
Those of you who know a bit about my career no that I've always been drawn to companies and brands with storied legacies and powerful purposes.
And in apparel Theres, no equal to gap Inc.
When Don endorsed Fisher opened the very first gap store in San Francisco in 1969, little do they know that they had tap into the zeitgeist in a way that would democratize and define American style suddenly.
Great close where accessible stores, where experiential self expression could be an every day pursuit open to all.
Talk about a game changer gap did that.
Creating an opportunity from the current of culture has been a hallmark of gap, Inc. For more than five decades.
Over the years, our brands made jeans khakis kids wear suits yoga pants, you name it into massive trends through great design, great marketing and in all our obsession with our customer.
Fast forward to today, the apparel and retail landscape has changed dramatically.
Moving at an even quicker pace now it requires that great brands run at the speed of culture to maintain relevance.
What has not changed is the customer's desire for fashion that they can make their own.
We will take that one step further making what we do what we stand for and what we sell relevant.
As anyone in this industry will tell you.
Clothing is a rational need while fashion is an emotional want.
Our brands well balanced both.
Going forward I'm confident that we have the scale talent and determination to sparked huge defining trends again.
Think about it gap, Inc. Is the largest specialty apparel company in America.
Unempowered community of more than 90000 people, who apply their talents to gap, Inc, and our brands.
Producing about 900 million units a year.
Our brands draw of 600 million visits to stores and one 4 billion to our sites online each year, making gap Inc. The number two player in the U S apparel e-commerce.
These customers across multiple generations, turning to old Navy gap Banana Republic, and Athleta to help them step out everywhere from schools and studios to offices and date nights.
So our brands matter.
But they can matter even more.
In my previous role in toys, and entertainment, we always strive to make consumers fans and to grow those standards and I want to apply that approach to our portfolio of brands a verb.
Through a cycle, where our products and experiences motivate belief and loyalty that bans than badge and amplify in culture growing the fandom, validating and inspiring us to even greater creativity and monetization.
It works because everyone wins gap.
GAAP, Inc. Brands already have incredible fans, our job now will be to excite and delight them, even more growing their numbers and the value of our brands.
The comprehensive transformation effort that Bobby initiated has been an important step in that direction stream.
Streamlining operations, so that we can focus on growth driving initiatives.
And Katrina will take you through that progress in addition to the quarterly performance in detail.
But before she does I want to acknowledge that restructuring is challenging and that change of this magnitude doesn't come fast.
Transformation is difficult.
<unk> our people at every level of the organization have stepped up made tough calls and championed the progress we've made so far in.
We're going to keep going.
As we continue to focus on strengthening our financial footing, we're now going to build on that progress accelerating our efforts to drive profitable growth by unlocking the value in our brands.
This time, we'll do it differently with a clear focus on brand revitalization redefining our brands meaning to consumers.
Focusing on creativity designing for relevance as a pursuit.
Other than our goal.
Building to quality and leveraging our remarkable legacy to shape, an exciting new future.
That's my passion is why I'm here and why I'm here now and I know that our teams are just as passionate and committed to making it happen.
In the quarters to come I'll share specific priorities and plans.
What I can tell you today is that I am intent on reigniting, a creative culture at capping that as a magnet for the industry's best talent, including the great Creative talent, we already have.
Recommitting each of our brands to a distinctive brand purpose that aligns with customer values and sets them apart.
Reorienting our brands around both the art and science, a design centric thinking informed by consumer insights and an absolute obsession with our customer.
We are engaging in the cultural conversation with hyper relevant products and ideas that inspire constructive dialogues.
And rethinking how our brands show up in store and online with customer experiences that excite and delight.
Most of all mattering to our people our investors our communities and the world.
In the coming weeks I look forward to spending time in every part of the organization our headquarters offices stores customer support centers Dcs and with partners in key regions of the U S and globally.
Meeting the people behind our brands the customers, who shop us and you our shareholders listening learning experience at all firsthand in order to get grounded and even more defined about where we're going.
I'll wrap up by saying that my start date was deliberate.
Justice August 22nd 1969 was the milestone that created this remarkable company.
I want August 20.
2023 to Mark the start of an exciting new chapter for Gap Inc.
One that celebrates our past as we pioneer an extraordinary future.
Thank you and I'll now hand off the call to Katrina.
Thank you Richard it's been a pleasure working with you in your role as a board member for the past nine months and I'm thrilled to partner with you in your new role as CEO .
Let me start with some reflections on our financial performance before I dive into more detail.
Notably we continued to strengthen our balance sheet and improved cash flows reducing inventory, 29% year over year generating over $300 million of free cash flow further paying down our ABL balance and ending the quarter with cash and equivalents of $1 $4 billion nearly twice as.
Much as last year.
Even in a choppy consumer market each of our brands maintained or gained share during the quarter fueled particularly by strength in our women's business through great style and relevant fashion we.
We delivered net sales within our previously communicated guidance range, despite a weak in parallel environment.
We substantially completed the organizational changes that we previewed earlier this year, which we continue to expect will drive about $300 million in cost savings annually, but more importantly, it will change how we work, allowing teams to be more consumer centric.
We continued to successfully recoup the excess air cost we incurred during the pandemic.
That combined with improved unit sell through rates driving AUR is it.
Enabled meaningful gross margin expansion, despite the inflationary cost headwinds we have faced and.
And we believe the actions to improve our operations and shore up the foundation of Gap, Inc. Continued to position us well as we enter the second half of fiscal 2023 and beyond.
While we're pleased with this progress we're mindful of the mixed economic and consumer environment in which we are operating with that backdrop. We continue to plan the business prudently and the outlook, we're providing today for both the third quarter and fiscal 2023 does contemplate the headwinds we continue to navigate in the second half of the year. While also takes.
On new challenges like the resumption of student loan payments.
Let me start now with our second quarter results.
Net sales of $3 $5 billion decreased 8% versus last year in the range of our expectations for second quarter sales to be down mid to high single digits store sales decreased 70% from the prior year.
Online sales decreased 11% versus last year and represented 33% of total net sales in the quarter.
As a reminder, the sale of gap China completed at the beginning of the first quarter of fiscal 2023 had about a $60 million or two point negative impact to net sales growth.
There was also a one point foreign exchange headwind. Excluding these factors total company net sales would've been down about 5%.
Comparable sales were down 6% in the quarter.
In spite of the sales declines were pleased to report that all four of our brands gained or maintained market share during the second quarter with particular strength in women's we know that regardless of market conditions strong brands brands that matter win. So we remain focused on the levers and opportunities in our control to deliver on behalf of our customers.
Employees and shareholders.
Let me now provide some sales color and highlights by brand starting with old Navy.
Net sales in the second quarter were $1 $96 billion, both net sales and comparable sales declined 6% versus last year.
We're pleased that old Navy again modestly gained share in the quarter. Despite increased softness in the active category as well as continued slower demand from the lower income consumer.
We believe that old Navy remains well positioned given its value orientation in the marketplace.
Old Navy team has lined up great marketing product and value to compete in the important back to school season.
Turning to gap brand gap around total sales of $755 million were down 14% versus last year and comparable sales were down 1%.
Excluding the negative impact to sales of seven points related to the sale of gap, China two points due to the shutdown at <unk> gap and the estimated one point from foreign exchange net sales were down 4% versus last year predominantly driven by store closures in North America.
Women's was the standout segment in the quarter outpacing the market as the brand's reinvented icons are resonating with consumers.
<unk> continues to make great strides with exciting collaborations and partnerships as the brand executes against its strategy to re imagine its product icons in new and exciting ways.
Earlier this month gap brand partnered with loves Shaq Fancy on a limited edition multi category capsule for every generation the collaboration merchants gaps iconic styles with Lovestruck fancies vintage inspired florals and feminine silhouettes. This most recent collaboration is a prime example of how GAAP strategy of partnering with relevant.
Rand and individuals can create buzz and marketing for the brand, reaching new consumers and garnering more premium pricing.
Turning to Banana Republic.
Quarter sales of $480 million declined 11% year over year comparable sales were down 8%.
Revenue remains impacted in the short term as the brand lapse, an outsized benefit last year driven by the dramatic shift in customer preferences.
VR continues to make impressive strides in its evolution to a premium lifestyle brand.
Find fabrics like linens cashmere in leather showed signs of strength in the quarter and the brand expects to maximize them in the back half of the year.
Banana republics transformation towards a more evolved lifestyle position is coming to life through an elevated fashion aesthetic and more full price selling.
As we look to the future. We're excited to see the brand extended division and refined aesthetic to other addressable markets with BR home, including the launch of premium bedding rugs pillows and decor in March and the upcoming debut of a broader home offering this fall.
Athletic sales of $341 million declined 1% from the prior year comparable sales were down 7% an improvement in trend from Q1 <unk>.
<unk> and core performance bottoms, the critical backbone of athletic assortment accelerated throughout the quarter and outperformed total brand sales.
Athletic positioning empowering our community of active women and girls to reach their true potential through the power of she is as relevant and impactful as ever.
The work the team has been doing to improve product presentation customer experience and creative in the short term optimizing online marketing site merchandising and resetting store floors and key markets emphasizes the performance DNA that athleta is known for.
We're really excited to welcome Chris Blakeslee to the team as a proven leader in driving growth and innovation in the active apparel and wellness sector. Most recently at Allo Yoga, we look forward to the work he and the team will drive to bring the athletic brand to its full potential over the long term.
Now turning to gross margin in the quarter gross margin was 37, 6% an increase of 310 basis points versus last year's reported gross margin comp.
Compared to last year's adjusted rate gross margin expanded 160 basis points due to merchandise margin expansion of approximately 260 basis points, which was slightly ahead of our expectations.
Partially offset by raw deleverage of 100 basis points.
Drivers of the margin rate expansion were as follows approximately 200 basis points of leverage as we lap last year's elevated airfreight and drove our normalized are expense down.
Approximately 200 basis points of leverage driven primarily from improved promotional activity relative to last year.
Approximately 140 basis points of deleverage related to inflationary cost headwinds, which was better than our prior expectations of approximately 200 basis points as we realized improved ocean freight rates and rod was flat on a nominal basis compared to last year, but deleveraged 100 basis points due to the lower sales volume.
Now, let me turn to SG&A.
Reported SG&A in the second quarter was $1 $2 billion and included $13 million in restructuring charges related to our head count actions.
On an adjusted basis second quarter, SG&A declined, 8% and leveraged 10 basis points versus last year, driven mainly by lower advertising expense payroll and technology investments.
Reported operating income was $106 million.
Adjusted operating income, which excludes restructuring charges was $119 million in the second quarter.
Adjusted operating margin improved 170 basis points from last year to three 4% in the quarter driven by the 160 basis point improvement in adjusted gross margin and 10 basis points of adjusted SG&A leverage.
During the second quarter, we recorded a benefit to both tax and net interest as a result of a transfer pricing settlement related to our sourcing activities.
Reported EPS was <unk> 32.
Adjusted EPS, which excludes restructuring charges was 34.
Share count ended at $369 million.
Turning to balance sheet and cash flow, starting with inventory ending inventories declined 29% in second quarter versus last year. This includes a nine percentage point decline related to in transit as we lap the prior year supply chain challenges and six points of decline related to releasing the majority of our pack and hold.
<unk> balance.
The remaining 14 point decline was driven by more efficient inventory management as.
As you know we made significant progress on reducing inventories as we exited fiscal 2022.
We remain focused in fiscal 2023 on moderating buys and utilizing a responsive levers.
As a result, we are planning for year over year inventory to be down generally in line with year to date trends at the end of third quarter.
Quarter end cash and equivalents were $1 $4 billion, an increase of 91% from the prior year.
Year to date net cash from operating activities was $528 million, driven primarily by lower inventory levels cap.
Capital expenditures were $199 million, we are pleased to have generated free cash flow of $329 million year to date.
As we told you last quarter, we expect to be positioned to pay down the $350 million draw on our asset backed line of credit this year.
During the quarter, we paid down $200 million and intend to pay down the remaining $150 million balanced by the end of the year.
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 16th our board approved maintaining that 15th dividend for the third quarter of fiscal 2023.
Now turning to our outlook.
We are all well aware of the mixed economic data and uncertain consumer trends in the marketplace, including the new dynamic regarding student loan repayments beginning in the third quarter. As a result, we continue to be prudent in our approach to planning in light of what remains an uncertain macro environment and choppy consumer backdrop.
We now anticipate fiscal 2023 net sales inclusive of the 50 <unk> week to be down generally in the mid single digit range compared to $15 $6 billion in net sales last year and similar to our first half 2023 sales performance.
The extra week is estimated to add approximately $150 million to fourth quarter and fiscal 2023 net sales.
Specific to Q3 sales, we're encouraged by trend improvements as we exit second quarter and into August . However, we remain mindful of two important dynamics for the quarter first we are lapping tougher sales comparisons from last year and second as mentioned we remain measured in our outlook.
With these dynamics in mind, we are estimating third quarter net sales to be down in the low double digit range compared to the $4.04 billion in net sales last year.
Turning to gross margin.
<unk> with the full year compared to the 35% adjusted gross margin in fiscal 2022 gross margin expansion in fiscal 2023 is expected to be driven by the following factors.
And the estimated 200 basis points of leverage as we lap last year's elevated airfreight and continue to drive down normalized are expense.
At least 100 basis points of margin benefit as a result of our better inventory position than expected improved promotional activity compared to last year.
Approximately 10 basis points of inflationary cost deleverage versus last year as.
As we look to the second half we expect the inflationary deleverage in the first half of the year will shift to leverage in the back half as we benefit from both improved commodity costs and ocean freight rates.
And rod as a percentage of sales is now planned to deleverage roughly 70 basis points compared to last year.
For the third quarter, we expect gross margin to be generally in line with last year's adjusted gross margin of 38, 7%.
We anticipate lower inflation and Eric costs slightly below normalized levels are expected to offset approximately 150 basis points abroad deleverage and.
And we expect the promotional activity will be largely in line with last year.
Turning to SG&A, we now expect fiscal 2023 SG&A of approximately $5, one $5 billion below our prior outlook of $5 2 billion.
Primarily driven by variable expense flow through on our narrow to fiscal 2023 sales.
SG&A in the third quarter is expected to be approximately $1 3 billion.
We continue to expect capital expenditures of approximately $500 million to $525 million for the year.
Okay.
In closing, we're pleased to drive meaningful margin expansion and strong cash flow generation in the quarter and remained focused on delivering our fiscal 2023 outlook. Despite what continues to be a choppy consumer environment.
I'm looking forward to working with Richard and the team as we unlock the value of our important an iconic brand and position gap, Inc. Back on its path towards sustainable profitable growth and delivering value for our shareholders over the long term.
With that we'll open up the call 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 queue.
Our first question will come from Matthew Boss with Jpmorgan. Your line is open.
Great. Thanks.
So maybe a two part question.
Richard could you elaborate on the encouraging signs of progress that you see across the organization and maybe just as we think about opportunity for your concepts to take market share overtime, and then Katrina, maybe just any way to elaborate on trends that you saw progress since the second quarter moved forward.
And maybe what youre seeing today in terms of consumer behavior in August and into back to school.
Well first off thank you Matthew for the question.
I'll start with saying again, how excited I am to be here on my third day.
What I can tell you in the context of where we are first and foremost is that these brands are incredible assets.
GAAP old Navy Banana Republic Athleta as these are truly some of the most iconic brands in the fashion industry, we serve such a broad based consumer which is such a strength as well generations and backgrounds. We've got incredible story legacies.
The four year old history, we've created massive trends when I look at the strengths across the portfolio as.
As I mentioned in my opening remarks.
The number one specialty apparel company in America.
The scale that we operate with 600 million store visits.
1 billion for online visits.
The scaled operations, we have from our DC network and logistics, our vendor partnerships, which can provide us incredible favorable rates and service.
Our production, we produced over 900 million units annually, the stats and strength of the fundamentals of this business.
Pretty incredible.
Clearly the transformation work that the team has done has put us on incredibly better financial footing as Katrina mentioned again, a 1 billion foreign cash on hand on the balance sheet $300 million of cash flow of 30% less inventory. These are metrics that matter and ultimately metrics that are incredibly encouraging in the context of our ability.
To build upon it and continue it and go forward as I also mentioned part to the question in terms of where are the opportunities.
These are brands that truly matter now as I also said they can matter more in the <unk>.
How to do that.
Talk about reigniting, the creative culture at gap.
We have extraordinary challenge here.
We're going to not only encourage the great talent to be unlocked in new and innovative ways, but we're also going to become a magnet for the industry's best talent, we're going to work very specifically with intent on creating distinctive brand purposes, and ultimately really driving our consumer proposition that sets us apart.
<unk> from the competition and really leveraging if you will the art and science of this business informed by consumer insights, but ultimately really obsessing over the consumer there's a lot of work ahead, but I'm incredibly encouraged with three days in around what we can offer and where we're going ahead.
And obviously in the days ahead quarters ahead, as well, we'll get more details and look forward to sharing that with you.
Thanks, Richard and Matthew I think on your other part of your question.
We saw sequential improvement throughout the quarter in Q2 were in.
In July we definitely saw more improvement than we had seen sort of in May and June I think that mirrored a lot of what apparel showed overall and.
And we've seen that improvement continue into August , which we're encouraged by.
And overall, what we're seeing is that the women's business, particularly at gap and old Navy has shown momentum shift and our kids and baby as we're in the important back to school period has also started off fairly well. So all of that is encouraging to see and then as I said in my prepared remarks.
We're mindful, though of the fact that we've seen that the consumer still be pressured, especially at the low income range.
And we're watchful of what I think is widely reported as the student loan repayment coming into the end of the quarter, which does primarily impact our old Navy consumer.
Okay.
That's great color welcome aboard Richard.
Thank you.
Our next question comes from Paul Lajoie with Citi. Your line is open.
Hey, Thanks, guys.
Richard.
On the board so obviously in touch with what's been going on.
Operationally.
To some extent so I'm curious what you think might be the lowest hanging fruit as you think about each of the brands.
So curious big organization talked about scale profitability.
Profitability doesn't quite match.
As you would expect with such scale. So I'm curious what you think are the biggest inefficiencies at the company.
Yes, Thanks Paul.
But broadly speaking, it's about really reigniting gapping culture to really empower creativity.
In my experience on the board.
Certainly on the ground for three days running fast our teams are incredibly creative and they're all in on this.
Differentiating and strengthening our brands.
Being design centric being customer obsessed and ultimately being culturally relevant.
These are not necessarily new phrases and their common language, but these are the areas that we need to work upon and reignite.
Ultimately really think about how our brands show up in store online with consumer experiences that really excite and attract drive demand.
And all of the variables that go into kind of balancing wants and needs that ultimately is kind of where fashion lives.
When I think about our brands in the context of opportunity.
Brands that have the kind of strengths that we view brands that matter.
Can be monetized, we need to make these brands matter more and ultimately that is going to be the pursuit.
When I look at the strengths of the business is incredibly encouraging that being said we have work to do we've started this transformation work under Bob's leadership and the team has worked tirelessly to make extraordinary progress.
But we will continue not only the transformation that we've begun but we will start to build upon it and.
And really unlock the value of these brands. We can all agree that there is greater value in the portfolio that is showing up in the stock today and with the consistent performance that we expect we're going to get rewarded for that and ultimately that's going to start with really driving demand exciting our consumers and mattering more.
And we will be back very shortly to share how we're going to reveal all of that and continue moving forward.
Okay. Thanks for Katrina can you just talk about what changed in your gross margin assumption.
For the back half of the year, which pieces moved as a result of what you've seen first half to date and what you're seeing thus far in the third quarter.
Yes, absolutely Paul so in second quarter overall, the gross margin in total came in very close to I think the words we've used.
Get you guys close to the margin. We just delivered there was a little bit of a shift between.
The inflationary pressure, which was better came in at about 140 basis points of headwind. We had thought it would be closer to 200 and that was really because we saw rates in the freight area get better through some negotiations. We just finished with some of our big suppliers.
And where we saw the margin and get a little worse within Rod, where we deleveraged more since we came in at the lower end of our sales range in the quarter.
So that dynamic plays through to the year, where again the overall guide on the full year margin is basically intact.
Are still about 200 basis points of benefit, but we now see less impact from inflation only 10 basis points versus we had prior said 50 basis points of headwind.
And then offset there as rod where we now expect 70 basis points of deleverage, whereas we had said somewhere between zero and 50. So it's really this inflationary benefit offset by rod deleverage, but overall the nominal guide is very similar.
And our promotional levels are different than what you expected.
You saw we came in very close and we came in very close in the second quarter to what we expected on promotions and overall, we're holding the full year to about 100 basis points of overall leverage coming out of that promotional.
<unk>.
And for third quarter, what we said is we expect promotions to be about flat. So we will see obviously, we came in with inventories down 29% markdown inventory well under control and the teams are excited to have chase capability back after the supply disruption that we experienced for so long. So we will aspire to do better but.
Right now Thats whats embedded in the guide.
Thanks, Good luck.
Ladies and gentlemen, as a reminder, please limit your questions to one per participant.
Your next question comes from Alex <unk> with Morgan Stanley . Your line is open.
Perfect. Thanks for taking my question and welcome Richard.
Maybe this is best for you.
It looks like old Navy has yet to run flat. So we are seeing some other value oriented businesses are pulling that off it seems in this quarter. So can you talk to you about what's going on there are you seeing any green shoots outside of women's I feel like we've had that maybe for a couple of quarters now.
And then how you think about the timeline to improvement thanks a lot.
Yes, it's a great question Alex so.
When I look at what's been happening at old Navy I think what's been consistent as what we've been calling out which is they do have a low income consumer that remains pressured.
So that dynamic hasnt necessarily changed when I look at what happened in Q2, though lapping last year's significant clearance of active product in particular really weighed on the performance. If you remember last year in old Navy. We were in the process of really right sizing the assortment away from cozy casual we had.
Lot of the sizing issues. So lapping that has has really weighed on the revenue side of things.
As we move into the second half we are seeing the active business improved modestly women's is getting better and kids is looking better as well, so we'll see where that all lands us.
But yeah, we are seeing green shoots at old Navy I think I think all of those categories really aspired to have getting better again, the consumer pressure is most acute at old Navy and Thats. The piece that I think we all remain cautious on is whether it's the low income consumer starting to get.
Real wage pressure from inflation or whether it's the new student loan dynamic, we'll see how that plays out for old Navy.
Thanks, a lot good luck.
Thanks, Alex.
Our next question comes from Lorraine Hutchinson with Bank of America. Your line is open.
Thank you good afternoon Catrina as you think about the mid single digit decline in sales guidance for the year. It does imply a nice improvement in fourth quarter can you just talk about how you've been thinking about that improvement what drives it outside of the 50 <unk> week of course, and how you're getting comfortable with that level of improvement.
<unk> from here.
Yes, so lorraine.
You are correct that the fourth quarter does have some benefit from the 50 <unk> week.
But in addition to that I know, we're all tired of looking back at 2019, but I just sort of look at the run rate in the business from the first half to the back half versus 2019.
In the quarter as Q3, and Q4 are very similar to what we just sort of went through.
So I think theres a lot of quarterly variation that we have seen over the last couple of years fourth quarter. When you look back to 2019 looks more similar to history.
Thank you.
Our next question comes from John Kim with TD Cowen Your line is open.
Thanks for taking my questions a question on a lot of sort of how you're thinking about turning around the brand and getting the brand back on growth overtime and be competitive in the market. Thank you so much.
Yeah, I'll take that and I mean, Richard of course I welcome your view as well, but maybe I'll start and then you can say a little bit more.
As I said in my prepared remarks, we feel really good about athletic positioning in the marketplace. The power of sheet positioning is incredibly strong and we feel like we have a lot of white space in that brand to win win.
We knew we had some near term product execution issues, which the team as I said it has been heads down working on.
For fall there is not a lot of change the product of the teams have been able to do but they have been re merchandising the stores.
The site and hopefully if you're a consumer you see that it looks much more in line with the brand aesthetic.
And then we were excited to welcome a few new players to the team, whether it's Chris or Julia.
Who we think will also bring that experience to bear on the brand starting in fourth quarter, and then really into next year. So we're very excited about athletic potential long term and we know we're just sort of going to get through the next quarter or two as we make the changes we can to the assortment, we have but Richard I'll, let you add if theres something else yeah. Thanks Katrina.
As a member of the board I had a chance to get to know Chris.
And to help select him for this role he is an exceptional talent broad based experience across the apparel retail and wholesale industries holding roles across multiple functions.
The recent president of Valor Yoga, he was really able to successfully and quickly grow that brand nearly doubling its year over year growth and with extraordinary expertise in performance apparel. So as Katrina called out we couldn't be more enthusiastic about the team that Chris is leading.
Their recent efforts.
And we're really looking forward to the accelerated progress that we intend on making with this brand.
Got it thank you.
Our next question comes from Bob durable with Guggenheim Securities. Your line is open.
Hi, good afternoon.
Richard Welcome.
I guess Richard for you when you look at the.
<unk> talked about Chris, but when you look at the team that you have in place.
Having been on the board.
As I think you understand their vision should we assume there are no further management changes necessary at a very senior level as you look at the portfolio.
Yes, I think thanks, Bob for the question.
I've been on the board since last year when much of the work began taking root.
And I feel I can really hit the ground running that said its early.
Focused on listening and learning, we really do have a very strong team I only see it getting stronger.
So in the context of let's call it <unk>.
Tenure.
And now obviously three days in.
From what I feel and see in the context of being on the ground I'm very encouraged that the work that the team has done around the transformation is really toiled. The soil. If you will in the context of my entrance.
And really feel like the baton being handed is strong so with that said, we'll share a lot more in the coming quarters around where we're headed and how we're going to get there and ultimately much more detail associated with it but early days I'm very encouraged.
Great and Katrina, if I could just sneak a second one in for you in terms of you made some progress on the SG&A.
I know theres been some discussion around potential for further cuts is there any sort of further idea on additional opportunities as you look at the SG&A line going forward.
Yes, it's a good question Bob I mean, when we look at the work we've done.
We've impacted about $550 million of our costs in the business, whether it's the actions we took early last fall.
That have helped to offset some of the <unk>.
Inflationary pressure this year or whether it's the overhead actions. We just took that we think will generate $300 million costs. So I think you've heard both Bobby and Richard say that we're happy with a lot of this work we've done to set the foundation.
The remaining SG&A work I think is to be seen a lot of it is on some of the demand generating investments, we've made marketing and technology, where I think Richard and I will really partner on assessing whether we think those are.
Adding the value that we think they need to add or whether there is some refinements. We can make there and that's the next leg of the journey for us to see how we would if we would.
Really moderate those in the next coming quarters, so more to come but those are the areas I think consistent with what we've been saying that we would look at.
Thank you.
Our next question comes from Cory <unk> with Jefferies. Your line is open.
Great. Thanks for taking my questions and welcome Richard.
You mentioned in your prepared remarks about how you're rethinking about how the brands show up in.
In stores and online so just be curious to kind of get your thoughts on again, having been on the board.
Since November <unk>.
That's around kind of the store fleet and how to profitably leverage the store fleet to drive.
Further sales ahead.
And then just Katrina just wanted to get your thoughts around I apologize if I missed it on promotions in the second half of this year.
Yes, I think thanks Corey.
There's a lot in my opening remarks remarks, and we can double click on many of them, but in the context of the areas that I see the.
The most opportunities specific to you.
Really working on this distinctive brand purpose that aligns with our customer values and really sets them apart.
As I talk about the brand and.
And their legacies I really these are brands that matter and when you have brands that matter. They can monetize that being said you have to make these brands matter more that has to have great product, great marketing, great execution, and we really need to understand and be obsessed with our customer I think that we.
Have elements of it, but where we're going to really work very very diligently on is creating meaningful differences in the context of our brands.
And making these brands matter more when you look at our stores.
They need to reflect if you will the right narrative in the context of products statements that we believe are heroic products that we believe will matter to our consumers the right balance between basics and fashion and an experience where details really come across to create an experience that.
Consumers will talk about want to return to and ultimately find if you will the value and quality and product experiences that.
Our required today for brands that win and that's what you're going to see us work much more diligently on.
As <unk>.
Transformations go. These these things take time, but we will start to test and roll and really learn.
Essentially what works and what doesn't in a more accelerated way so that we could do more of what works and do less of what doesn't.
Lots more to come with lots more examples and we'll share those as they evolve.
Yeah, that's great Richard and I think.
Corey to answer your second question.
We did see successful expansion of gross margin with lower promotional levels in the second quarter. So.
We saw about 200 basis points of margin expansion coming from lower discounting in the second quarter.
Now in our outlook, we have basically a flat level of promotional activity in Q3. So as we talked about we will aspire to do better with the lower inventory levels and chase that we have but we remain cautious on the consumer and so we definitely want to make sure that we're offering and our value to the consumer.
Heading into the third quarter, so, we'll see where that lands.
Great. Thank you very much.
Our next question comes from Adrienne <unk> with Barclays. Your line is open.
Great. Thank you very much Richard.
Richard This is sort of more of a philosophical question.
Given your only been there three days a year and then three days.
So your tenure at Mattel with sort of similar in concept sort of reinvigorate the core brands restore growth.
And then restarted positioned sort of as an industry leader. So I guess my question is oftentimes when you have a company that's been struggling the creative team and all of those assets get very safe right. So they become very risk averse and just wondering how do you create a culture of greater risk, taking and innovation such that that creates.
You can kind of come to the forefront.
Yeah.
Thank you for that question.
It's a great question that there are.
A lot of parallels with my experience.
At Mattel and gap, Inc business across many levels.
And I'm here to architect and orchestrate ultimately to lead and the parallel construction.
Of where Mattel was and where gap is.
It's very familiar.
Eight assets.
Great talent.
A moment where to some extent a lot of self inflicted challenges some within our control and some ultimately impacting our business and our industry and ultimately.
A phase that we are going to go through which is really about unlocking the value of our brands through reigniting a creative culture.
Balance of fundamental <unk> fiscal responsibility and operational rigor.
While you're driving a design centric and creative culture is the art and science of of the leadership that you need to have in this business. It is a very familiar language.
Actually a very familiar model.
And ultimately you've got to be able to take swings that are calculated.
Test roll learn and scale and accelerate very very quickly.
That is a muscle that we will begin to exercise and strengthen.
With the experience that I bring in the context of that type of leadership.
I believe that thats going to add value very very quickly. This is an organization that is.
Really excited to unlock and reignite, if you will creativity and so I feel incredibly.
Fortunate to be inheriting a business that from a transformational perspective has come through if you will a very heavy lift and is now delivering if you will a fertile ground for a design led culture creativity that ultimately will show up for consumers and the ability for us to make brands.
Matter matter more.
Thanks, that's super helpful.
Katrina one quick one.
Sorry, I did you talk about shrink when do you take your physicals.
I think it's mid year I may be wrong and is there anything to call out there of note. Thank you very much.
Yes, Thanks Adrian.
There is nothing notable to call out from us on shrink we do full counts once a year in the early part of the year first quarter.
Do do parcels in.
Second half of the year and as of now our shrink remains below pre pandemic levels and Theres really nothing to call out so shrink as is so far for us not anything of note.
Okay. Thank you very much and best of luck and welcome.
Thank you.
Yeah.
Our next question comes from Dana Telsey with Telsey Group. Your line is open.
Hi, Good afternoon, everyone and welcome Richard just following Richard in terms of some of the thoughts what you've done in the past I've read some of the articles about how you put together the thoughts on brand relevance of four points why do we exist design led innovation culture.
All event and execute with excellence, how do you look at those initiatives are those topics in comparison to GAAP and your initial thoughts on reinventing and re architected the business model in any way and then Katrina just wanted to follow up on as you think about 2024 and planning how are you.
Looking about inventories for the back half and into next year. Thank you.
Thank you.
Donna and thank you for the study of my.
My background in playbook at Mattel.
My experience in training brands around and accelerating performance. It goes beyond the development of a playbook, but really rallying teams to deliver on our plan, ensuring operational rigor and enabling a culture.
Execute with excellence.
In the context of that methodology when.
When you look at gap brand. These are beloved brands they have a real connection with consumers and we need to reignite that connection.
I am passionate about motivating teams to uncover what made a brand or a company iconic and special in the first place and then working together to reinvigorate them to new relevance. So the familiarity in the context of the work and legacy brands.
<unk> methodologies are.
Familiar and similar.
That being said the playbook that we will reveal that will be the strength in the consideration set to reignite. The GAAP portfolio will be one that we have collectively work on as a team as I listen learn spend time with our stores our headquarters Dcs partners.
And really start to understand ultimately what will be the GAAP playbook.
That will deliver ultimately to our consumers our people and our shareholders and we'll be back shortly to be able to share all of that.
And then Dana on inventory, we do expect that third quarter, ending inventory will be very similar to the first half trends.
And overall more to come as we head into next year, but we expect to be running more and more on leaner inventory with receipts left opened so that we can be more responsive to consumer demands closer in.
And a lot of the transformational activity that we're working on is.
Not only just reinstating the responsive levers that we've had but working closer with our vendor base to make sure that we have the right materials the right.
Logic with our vendors to be closer to the consumer so all of that helps us have leaner inventories and <unk> be more dynamic so more to come on what those levels are going forward.
Thank you.
Our last question comes from the line of Brooke Roach with Goldman Sachs. Your line is open.
Good afternoon, and thank you for taking my question and welcome Richard.
Wanted to follow up on old Navy can you elaborate on the competitive backdrop that you're seeing in the business today, particularly as old Navy competes for that value oriented customer who has options both online and with other discounters and are you seeing any benefits from a trade down customer in your stores.
Yeah Brook I mean, what we're seeing is that some of the brands that are really winning with our consumer our T. J Maxx Amazon Cheyenne, we're definitely seeing those those businesses gaining share.
And those compete with our customer we're also seeing strong brands like Nike in Lulu and audit us win which tells us that great brands win in any economic environment.
Old Navy has the benefit of being the number two brand behind Nike and so it is a big player in the branded space as well as being a retailer so.
I'm thrilled to have Richard on board with his experience in creating relevant brands in and that brand already has such a strong positioning I think we have a lot a lot to do there to keep winning in that space. So more to come there, but we're glad with their positioning for sure.
Thanks Katrina trade down benefit trade down benefit we're not currently seeing any trade down benefit.
That said, we're certainly positioned to add value to any consumer as we move forward. Since our goal is to have great fashion at a great value, so, but we're not seeing that yet.
Thanks Katrina, if I could just follow up on one other topic, we've heard a number of companies this week address credit and card portfolios amidst.
Some of the macro concerns that we're seeing in any environment broadly can you provide a brief update on how youre planning your credit business and what might be.
What might be planned in your outlook for the rest of the year. Thank you.
Yes, it's a good question Brook, and certainly we're watching that too so any trends in credit card income.
That we see from industry reports received within our own business are currently reflected in the outlook. We provided today we.
We do see same as the industry reports loss rates, increasing from the recent lows in 'twenty, one and 'twenty. Two however, ours are not.
Back to pre pandemic levels, yet and we're working with our credit card provider to adjust our underwriting strategies to make sure we're mitigating risk of higher delinquencies.
While still providing our customers with flexibility so we're.
We're actively monitoring the consumer environment, we are watching the impact to credit.
And all of the trends on the credit card customer again are in the outlook. We just provided.
Great Best of luck and thanks again.
Thanks Brook.
Thank you we've reached the end of the question and answer session and I'll now turn the call over to Richard Dickson for closing remarks.
Thank you I'd like to thank all of you for your time your interest and your questions and I just want to reiterate my belief and gap, Inc. Our people our brands and how truly thrilled I am to be the CEO of this extraordinary company I also just want to thank the people of gap Inc.
For this incredibly warm welcome and to thank Bobby in particular for his tireless leadership over the past year and for igniting transformative work that I really am eager to pick up and run with it.
And all of you who joined the call today I look forward to meeting all of you in the coming weeks and months and thank you all for joining.
Thank you.
To conclude our conference call you may now disconnect.
Coming weeks and months and thank you all for joining.
Thank you.
Include our conference call.