Q3 2023 Gap Inc Earnings Call
Good afternoon, ladies and gentlemen, my name is Brianna and I'll be your conference operator today I would like to welcome everyone to the Gap, Inc. Third quarter 'twenty twenty-three earnings conference call.
At this time all participants are in a listen only mode for.
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I would now like to introduce your host Emily Gurkha director of Investor Relations.
Good afternoon, everyone welcome to Gap, Inc. 's third 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 press release the risk factors described.
In the company's annual 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 November 16, 2023, and we assume no obligation to publicly update or revise our forward looking statements joining.
Joining me on the call today are Chief Executive Officer, Richard Dickson, and Chief Financial Officer Katrina O'connell with that I'll turn the call over to Richard.
Thank you for joining our third quarter earnings call.
In the nearly three months since I joined <unk> as CEO I've hit the ground running immersing myself in the business.
<unk> brands and functions and meeting people in every corner of the company I've met many of our customers and employees visiting stores across the country.
Also met with many of you our shareholders to hear your views and understand your perspectives.
All of this has been incredibly insightful.
Today I'll share my initial observations and priorities then I'll hand, it off to Katrina, who will walk you through more detailed financial results before we take questions.
The four areas I will discuss today are one maintaining and delivering operational and financial rigor to the reinvigoration of our brands three the strength and continued evolution of our operating platform and for reviving our culture.
Let's start with maintaining operational and financial rigor.
As you know this has been a core priority and we've made significant progress which has strengthened our financial footing.
Examples of this work include Actioning over $550 million in expected annualized cost savings.
Realizing margin expansion through lower air costs improved discounting and more effective sourcing strategies combined with recovery of commodity costs.
And we've reduced our inventory by nearly $800 million.
Versus last year's peak.
Our efforts to date have resulted in better working capital and a stronger balance sheet and this discipline of controlling the controllable will continue to be a priority for us as we aim to increase the consistency of our performance both near and long term.
Our focus on operational and financial rigor benefited our third quarter results, particularly in terms of improved margins expenses and cash flow.
And I'll briefly review highlights for the quarter.
Revenue was down 7% versus last year with comp sales down 2% ahead of expectations.
We grew market share both overall and in old Navy and gap brand.
We expanded adjusted gross margin by 260 basis points driven in part by improved promotional activity enabled by leaner inventory and better Assortments.
We maintained well controlled expenses, resulting in an improved adjusted operating margin at six 8%.
And we ended the quarter with a strong cash balance of $1 4 billion generating free cash flow of over $500 million year to date.
Old Navy delivered a positive 1% comp for the quarter with momentum in women's driven in part by our active business combined with strength in kids and baby during the back to school season.
Gap brand saw strength in women's and baby comp sales for GAAP were down 1% in the quarter. Despite anniversarying the final quarter of easy sales last year.
Banana Republic comps were down 8% for the quarter as the brand undergoes deliberate and ongoing repositioning.
Athletic performance in the quarter was disappointing with comps down 19% as we lap a period of heavy discounting last year.
I will provide a more detailed update on our brands in a few minutes.
Looking out to the full year as we enter the fourth quarter, we have a balanced view of the holiday season inventories are well controlled and our financial position is strong. However, we remain mindful of the uncertain consumer environment.
No the great brands can win regardless of the environment and execution is everything.
I'm working with our teams to react and respond in real time to consumer and competitive dynamics, ensuring our brands breakthrough this season with relevant campaigns and touch points that matter.
With the progress we achieved in the third quarter and our measured expectations for the holiday season, we are comfortable reaffirming our full year revenue outlook and expect strong progress in our margin recovery.
Katrina will provide more detail on the outlook in a moment.
Let's turn to brand reinvigoration.
Brand reinvigoration is about driving both relevance and revenue.
Now it's early days and our playbook is still in development, but I'll give you some insight into how we're thinking and where we're headed brand by brand.
Old Navy gap Banana Republic, and Atlanta are all brands with incredible heritage.
Reinvigoration will build on that heritage and will include a number of priorities.
We need to strengthen our portfolio of brands with crisp identities and purpose.
We need to create trend right product assortments with a clear point of view to deliver beyond just needs to also deliver on once.
We must consistently deliver merchandising presentations and product storytelling that excites our customers.
We have to create a better more engaging omnichannel experience with a clear and compelling pricing strategy.
We have to communicate to innovative marketing to regain a powerful ongoing voice in the cultural conversation and we need to do this while consistently executing with excellence at every touch point and interaction.
I've seen areas, where our brands do this well, but I've also seen opportunities where they can do significantly better it's.
It's not enough to get it right in one or two of these areas effective brand reinvigoration is about getting it right holistically and consistently.
Execution will differ brand by brand, but that's a good overview of how we're thinking.
And with that backdrop, let's take a look at where our brands are today some of the meaningful progress, we're making and also the work ahead.
Beginning with old Navy the number two apparel brand in the U S and the largest brand in our portfolio.
Maybe as a family destination with 94% U S brand awareness according to Hugo <unk>.
Multibillion dollars e-commerce business at an impressive retail footprint that includes more than 200 locations with 240 million customers entering our stores in the last year.
We have a loyal following and a great brand heritage rooted in fun fashion and value for the whole family.
Old Navy has a strong and distinctive brand positioning in the value space. However, the execution of that positioning is a significant opportunity.
We need to be more deliberate and consistent about how we express the brand through bold and breakthrough narratives something that brand is known for.
We also have to improve our product assortments balancing essentials with exciting new trends and.
And our pricing strategy that clearly communicate jaw dropping value.
All of this to remind customers why they level Navy and give them compelling reasons to love us even more.
As we begin to execute the work around these initiatives, we were encouraged to see signs of progress in the third quarter.
We created stronger product storytelling through a dedicated women's marketing campaign featuring on trend product.
We also improved site execution and online marketing with compelling creative and value messaging, all of which drove positive momentum and share gains in the quarter.
Looking ahead to holiday, we believe the brand is ready to compete with high quality inventory composition offering consumers great fashion at a great value.
Our efforts at old Navy come down to unlocking and reasserting a great brand.
Moving on to GAAP.
Gap brand as you know has tremendous heritage as a pop culture brand that delivers leads trends celebrates individuality and self expression.
The brand enjoys 90% brand awareness among U S consumers, but lately cap has been far too quiet in the cultural conversation.
We need to reignite that dialogue.
Offering confident trend right Assortments price right and express through big ideas and culturally relevant messaging.
Our holiday campaign, which debuted October 23 is an early example of this.
It demonstrates creative consistency building on brand heritage and championing originality with relevant individuals of style and substance and I encourage you to check it out.
A more inspiring and integrated creative narrative is also showing up online.
While we have much more work to do it's great to see progress taking place as we work to reignite this iconic brand.
Now turning to Banana Republic.
I'm encouraged by the team's vision aesthetic direction and enhanced focus on fabrication and quality in.
And our cashmere in leather product offering is translating well.
While this repositioning is the right direction for the brand there is work to do on execution.
Amps are down as we continue to refine our assortment architecture work on the brands price value equation, and improved marketing and merchandising effectiveness.
We think banana Republic has an opportunity to thrive in the quiet luxury space and represents a unique position in our portfolio.
This evolution will take time to manifest as we transition away from what was previously a highly promotional and transactional experience.
Now taking a look at athleta.
<unk> with significant growth potential and the number five brand in the highly attractive U S women's active segment.
More so than any of our other brands Athleta has a clear and distinctive brand positioning rooted in the power of she.
Stenting and highly differentiated platform that plays extremely well across performance outdoor and travel.
As you know the brand is gotten off track with challenged performance caused by a misfire on product marketing that didnt resonate and retail execution that didn't connect with customers.
In the first half of this year the team took action, marking down products and cleaning up the brand to pave the way for long term success.
We utilize the third quarter to reset the baseline of the brand by eliminating off brand fashion products and focusing on our key categories. At the same time, we began to refresh store presentations and the brand's website to better delineate our active segment with narrative based merchandising that pulls that lettuce focus back to its.
Performance routes and winning platform.
We are seeing early indications that customers are responding with positive NPS scores and positive sales growth in <unk>.
Certain key products that we marketed in the new brand voice.
Despite the favorable reaction to a cleaned up brand aesthetic lapping last year's heavy discounting is weighing on performance. We see this headwind continuing at least through the fourth quarter.
That said I am encouraged by the brand execution of new digital dialogue store experience and holiday product assortment.
While we are progressing each quarter, we know that a full brand reset will require a more comprehensive approach and we will take more time.
Moving onto the third discussion area, we are continuing to strengthen our operating platform.
We will build on and leverage operational capabilities to increase efficiency and support high performing brands.
In some areas we are in good shape, but we have more work to do.
Our supply chain is a pillar of strength at gap Inc.
Our scale gives us unique cost leverage, but we need to accelerate innovation.
Our financial strategy is driving early value, but we need to continue our focus on rigor and efficiency.
In technology, we've made strategic investments and now it's about optimizing those investments and driving adoption across the organization.
In addition to these existing capabilities media and marketing. It is another area, where we can up our game leveraging the scale of our media spend to derive greater efficiency and effectiveness overall and let me be clear, it's not about spending more it's about getting more value from what we spend.
The fourth area I would like to address today is culture color.
Culture is the bedrock of every successful company, particularly one that is creatively driven.
And that's why I'm laser focused on reviving our culture of creativity at Gap Inc.
One that embraces change is obsessed with our customer relentlessly curious highly collaborative and eager to imagine better led by the industry's best talent.
More than an objective culture is an everyday pursuit.
By shared values and a belief system that unites us as one company. The intention is there I see it but we've got a better articulate it and then one at building on our storied past to create an even more vibrant future.
In summary, it is impossible to ignore the impressive scale of gap Inc.
We have 4 billion dollar brands with nearly 2600 company operated stores and one 4 billion visits to our websites every year.
And we have 58 million known active customers, who rely on us for fashion that both functions and makes them feel good.
We also have an impressive team around the world and I want to take a moment to thank everyone for welcoming me and recognize the team's commitment to delivering a solid third quarter performance.
Among the insights gained in the last three months is a recognition that gap Inc. Has weathered a lot of disruption over the last several years, both external macro factors as well as execution missteps in strategically well intended initiatives have impacted the company.
All that said the opportunity is clear and I have conviction that we can reinvigorate our portfolio brands, while we lead a creative culture that attracts retains and develops the best talent in the industry.
I'm encouraged by the early progress we've made to date, but we have a long way to go and a lot of work to do and I'm looking forward to sharing updates with you on our progress in the quarters ahead.
Thank you and now I'll pass it to Katrina.
Katrina.
Thank you Richard we're pleased to report third quarter results ahead of our prior expectations gaining market share. Despite overall declines in the apparel market we remain.
<unk> focused on the discipline, we've created around margin recovery expense actions inventory management and maintaining a strong balance sheet.
As Richard noted, our operational and financial rigor will be foundational as we turn our attention to the reinvigoration and relevance of our storied and important brands.
Let me start with some highlights of our third quarter financial performance before going into more detail.
Net sales down, 7% and comparable sales of minus 2% drove market share gains in a challenged apparel market and exceeded our prior expectations with recovery at old Navy and consistent execution at gap brand.
Old Navy drove a positive 1% comp with strength in women's and kids and baby during back to school meaningful improvement from the first half resulting in market share gains.
Gap brand showed underlying strength in performance with women's resonating as the brand lapped the last quarter as the easy product sales last year with only a negative 1% comp for the quarter.
We drove 260 basis points of adjusted gross margin expansion, resulting from Assortments that resonated with customers, which combined with well managed inventories led to improved promotional activity.
Margins also benefited from the beginnings of lower commodity costs.
We delivered on our SG&A expectations at $1 3 billion, despite sales above our prior guidance.
All of which resulted in the Q3 adjusted operating margin of six 8%.
290 basis point improvement versus last year.
Inventories were down 22% year over year, and remain well controlled driving better profitability and working capital.
We ended with $1 4 billion of cash on the balance sheet up 99% to last year and we're pleased to have repaid our asset based line of credit as we previewed.
Year to date free cash flow is $544 million.
We are maintaining our competitive dividend and important part of returning cash to shareholders.
Let me now turn to our third quarter results.
Net sales of $3 8 billion decreased 7% versus last year with comparable sales down 2%.
As a reminder, the sale of gap, China last year had about a $70 million or two point negative impact to gap, Inc. Total net sales growth.
Let me now provide sales results by brand.
Starting with old Navy net sales in the third quarter were $2 $3 billion down 1% to last year comparable brand sales were up 1%.
For the third quarter in a row old Navy gained market share and encouraging early proof point that work to improve both product assortment and brand messaging are driving results on the path to unlocking old Navy's potential.
Turning to gap brand gap brand total sales of $887 million were down 15% versus last year.
Excluding the estimated negative impact of sales of seven points related to the sale of gap, China and two points due to the shutdown of easy GAAP net sales were down 6% versus last year <unk>.
Comparable sales were down 1% and we believe signs of progress and building momentum at gap are beginning to emerge.
Banana Republic third quarter sales of $460 million declined 11% versus last year comparable sales were down 8%.
As Richard noted in his prepared remarks, Banana Republic has made progress in elevating the brand aesthetic and product offering.
However, evolution takes time, and we know that there's work to be done to evaluate how to best engage and retain the premium customer.
Athletic sales of $279 million declined 18% from the prior year comparable sales were down 19% as we lapped elevated discount levels, while we work to reset the brand for the long term.
We will continue to lap elevated discounting that took place last year for at least the fourth quarter.
Now turning to gross margin in the quarter.
Gross margin was 41, 3% an increase of 390 basis points versus last year's reported gross margin.
Compared to last year's adjusted rate gross margin expanded 260 basis points.
Merchandise margin expanded approximately 340 basis points versus last year's adjusted rate in the quarter driven by approximately 180 basis points of leverage from improved commodity and lower air utilization with.
With the remaining 160 basis points of leverage primarily driven by improved promotional activity enabled by our better inventory position in stronger assortments.
It was better than our expectations, particularly as old Navy and gap outperformed in the quarter.
Rent occupancy and depreciation declined on a nominal dollar basis versus last year as a percentage of sales rod Deleveraged 80 basis points better than previously expected given the stronger sales.
Now, let me turn to SG&A reported SG&A of $1 $3 billion includes approximately $5 million in restructuring charges.
On an adjusted basis SG&A declined 7% compared to last year as a result of our organizational changes and other cost actions.
As a percent of sales adjusted SG&A of 34, 5% improved 30 basis points versus last year's adjusted rate.
Reported operating income was $250 million adjusted operating income, which excludes restructuring charges was $255 million in the quarter up $99 million versus last year.
Adjusted operating margin improved 290 basis points from last year to six 8% in the quarter driven primarily by the improvement in adjusted gross margin.
Third quarter net interest was flat as interest expense was offset by higher earned interest on cash deposits, which we expect to continue in the fourth quarter.
Our third quarter tax rate of 13% included a benefit from the impact of foreign operations.
Reported EPS was <unk> 58, adjusted EPS, which excludes restructuring charges was 59 sets share.
Share count ended at $371 million.
Turning to balance sheet and cash flow.
Starting with inventory.
Ending inventories declined 22% in the third quarter versus last year.
We will maintain this inventory discipline utilizing our responsive levers to chase trends and continue to expect that we will end the year with inventory down roughly 15% from the prior year.
Quarter end cash and equivalents were $1 4 billion.
An increase of 99% from the prior year.
Year to date net cash from operating a kick it was $832 million driven primarily by lower inventory levels.
Capital expenditures were $288 million.
We are pleased to have generated free cash flow of $544 million year to date.
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.
On November seven 2023, our board approved maintaining that 15 cent dividend for the fourth quarter of fiscal 2023.
And finally, we're pleased to have paid down the remaining $150 million balance and are now undrawn on our asset based line of credit.
Now turning to our outlook for the remainder of fiscal 2023, starting with sales. The following factors are considered in our outlook. One we are mindful of the mixed economic data and uncertain consumer trends in the marketplace and as a result, we continue to take a prudent approach to planning.
Business.
Two while we are encouraged by the improvement in performance at Old Navy and gap, we now anticipate a longer recovery timeline for Athleta and Banana Republic.
At Athleta, we're lapping elevated discounting and believe net sales for the brand could be down in the low double digit range for the fourth quarter.
And three as a reminder, we expect the 50 <unk> week to be worth approximately $150 million in sales.
These factors along with November month to date sales trends, which have modestly improved versus Q3 results have been contemplated in our outlook and we are estimating fourth quarter total company net sales growth inclusive of the 14th week to be flat to slightly negative.
We remain confident in and are maintaining our prior sales outlook for fiscal 2023 are down mid single digits compared to last year's net sales of $15 6 billion.
Turning to gross margin, we expect gross margin expansion for the fourth quarter compared to the 33, 6% gross margin in fiscal 2022, driven by merchandise margin expansion of approximately 280 basis points due to improved commodity costs and <unk>.
Air utilization with Rod deleverage of approximately 40 basis points.
We expect promotional levels to be roughly in line with last year as we take a measured view given the uncertain consumer environment.
For fiscal 2023, we expect gross margin expansion to exceed our prior expectations.
And compared to the 35% adjusted gross margin in fiscal 2022 can be driven by an estimated 200 basis points of leverage as we lap last year's elevated airfreight.
Approximately 10 basis points of inflationary cost deleverage versus last year.
At least 170 basis points of leverage from improved promotional activity versus last year enabled by lower inventories and better assortments.
And rod as a percentage of sales is now planned to deleverage roughly 60 basis points compared to last year.
Turning to SG&A and capital we continue to expect fiscal 2023, adjusted SG&A of approximately $5, one $5 billion and estimated fourth quarter SG&A of approximately $1 4 billion.
We now expect fiscal 2023 capital expenditures of about $475 million for the year below our prior range of $500 million to $525 million due in part to fewer store openings.
In closing we are pleased to deliver solid financial results during the third quarter.
Demonstrated through gross margin expansion expense discipline lean inventory and strong cash generation.
The operational and financial rigor that we have worked to develop and we will continue to pursue is enabling us to focus on reinvigorating our brands with the goal of generating 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 a question and answer session. After the presentation. You May now press star one to enter the Q&A queue.
Our first question comes from Adrienne <unk> with Barclays. Please go ahead.
Great. Thank you Wow.
I know I'm not supposed to accomplish.
But that was really a really great quarter.
Anyhow Okay.
So Richard.
Question I have for you.
I get where the brands are pretty well established old Navy banana athleta.
But the one that really for 20 years has sort of <unk>.
Wander at I would say like kind of moving up moving down as GAAP.
Been there 100 days or three months or so.
Can you give your sort of like initial kind of ceiling on what gaps down four.
And how do you corral sort of the entire gap brand organization get is sort of that 10 point target and then for Katrina. So are your inventory turns back to pre pandemic levels. If you are going to end the year at down 15% can you just structurally comp all year.
Are get by turning faster is that how we should think about that thank you very much.
Well Adrian first thank you for the.
Color commentary on our quarter I appreciate that.
And I do appreciate the question specifically on on the gap brand, which really is I.
An incredible heritage brand in our portfolio, let alone a heritage brand in pop culture.
And really to understand where we are with gap you really need to unpack all of the puts and takes.
We've taken serious steps to meaningfully change the health of gap brand and over time. This has created what we believe is a much healthier core from which we're now enable too to really reinvigorate the brand and grow.
We strategically moved to a more profitable model and we took action to optimize the retail footprint and we've closed hundreds of stores.
We've moved to a capital light International franchise model and partnered with our China and European markets.
We've also been growing our online presence, but we recognize that we have been not as prominent on top of key trends.
And we need to market, our core categories, and a much more relevant and meaningful way.
This is going to take time.
Third quarter results do provide some really early proof points that our healthy core is showing signs of strength.
We're going to continue to build upon this.
As we reignite the brand as we talked about and as you call out the recognition of our brand when we sum it up stands for relevance and revenue and each one of our brands is in a different place of reinvigoration, but the methodology to reinvigorate our brands is similar.
And in gaps case, we're really building upon that.
Defining a stronger more crisp identity.
Working on trend right product Assortments with a very clear point of view.
That will delivered not just on the needs, but also on once.
Our merchandising presentation have already improved in our stores. They are starting to deliver great storytelling that excites our customers with a real edited point of view.
If you go online today, and if you've been tracking our brand youll see a much more definitive creatively consistent marketing story.
Our online experience our storytelling is going to be much more prominent and we're going to start to really infuse gap in the cultural conversation so stay tuned and.
Keep watching all the touch points as we continue to reinvigorate the brand.
And then Adrian as it relates to inventory.
If we end down 15 at the end of this year that translates to be being down about 6% to 2019. So I would say we're back to having reasonable inventory levels for the company and as I said in my remarks, our goal will be to remain very disciplined on inventory I think.
We continue to see that that enables us to grow gross margins through lower promotions.
But it also allows us to utilize our responsive levers to chase trends closer into consumer demand, which also allows us to be more relevant and also allows us to then achieve higher gross margin. So we'll see where the inventories land for next year, but overall that inventory discipline will remain I think chasing.
Trends through inventory responsiveness will be the lever that helps us turn faster.
Great. Thank you very much and best of luck.
Thank you our next our next question comes from Ike <unk> with Wells Fargo. Please go ahead.
Hey, guys.
Alright, Thanks for let me ask the question. So I guess, one for Richard and then a follow up for Katrina, Okay. So Richard so.
You guys as a company and a posted your first positive comparable maybe.
In a few years, so without being overly specific on the fourth quarter of next year in regards to the guidance can you say at a high level do you feel that the businesses really turned to corner strategically do you believe this is back to positively comping share taking business. Once again as you look forward and then the follow up for Katrina.
On the credit side, there's been a lot of questions.
In retail on credit and delinquencies going up can you just give us some context on how you think about the potential headwinds to margins from here, maybe I don't know if you would be comfortable giving us what credit income was as a percent of sales and 19, where it's planned to be at the end of this year or how much margin pressure should we expect the credit transfer to fully referred to Mike and just something that would give us.
Little understanding of what the potential mean reversion could look like to the margins next year, we really helpful. Thank you.
Well.
Thanks, Mike and I'll start by saying, there's really no denying the strength of old Navy.
The number two apparel brand in the U S. We've got an incredibly impressive footprint with over 200 stores.
And we've got a very strong brand proposition delivering on fund fashion and value for the whole family.
We were really encouraged to see the progress that we made this quarter with the brand and the result of the learnings.
That we applied from a more muted first half is really what's delivering specifically.
Specifically, we focused on a dedicated women's marketing campaign.
We included on trend product and it drove positive momentum and market share gains.
We also spent a lot of time in the quarter, improving our site execution online marketing included in that and have designed a much more pointed compelling creative point of view with value messaging incur.
Encourage you to go online and take a look as we've been tracking the brand I think youll see that come across.
That being said we have work to do.
And we need to continue to execute with consistency.
As we look forward to the holiday, we're going to offer a really balanced product range from of course jingle Jammies to party inactive, but I really do believe the brand is ready to compete we have got a high quality inventory composition.
Concentrated on creating.
Great value presentations with great style.
And look as as I noted we are encouraged but we're focused on continuous improvement at old Navy and really for all of our brands as we look to reinvigorate our brands so one quarter.
Well done incredible team execution.
That consistency will be the name of the game.
And then on your credit question, it's a good one.
We don't disclose our credit card income, but to tell you. We are actively monitoring the consumer environment that includes the inflationary cost pressures that are on either a discretionary spending.
On consumer credit.
Maybe what I would say is.
The credit card income trends that were seeing today are all fully contemplated in the outlook. We provided today and of note. The biggest impact to date has been the change in interest rates, which has impacted the cost of funds and that impact is already in the outlook. We just provided.
And then as it relates to loss rates were obviously looking at those carefully.
Better than pre pandemic levels.
And I would add that our file is pretty high quality and we don't have significant some subprime exposure.
So maybe all of that helps you to understand that we are watching it carefully but the credit outlook that we see is embedded in the outlook we provided today.
Great. Thanks.
Thanks, Mike.
Our next question comes from Matthew Boss with Jpmorgan. Please go ahead.
Great Thanks, and congrats on a really nice quarter.
[laughter].
So Richard so Richard on the missteps at Athleta that you cited maybe whats the timeline you see for stabilization. When you look at that brand today, how best to think about changes.
Across the assortment and marketing messaging again relative to today, and then Katrina with inventory down more than 20%.
Just help us to think about constraints to recapturing the material headwind tied to discounting a year ago in the fourth quarter.
Yeah.
So thank you Matthew and specifically look at <unk>.
Better.
Had a disappointing quarter.
Struggled recently in the third quarter comps were very disappointing.
We have begun the reset of the brand we knew that we needed to make leadership changes in order to create a differential outcome for this powerful brand.
As you know, Chris Blakeslee joined Us.
90, maybe one or two days ago.
And has orchestrated appropriate changes, which we feel confident we'll get the brand back on track.
We're going to be progressing each quarter, we know that a full brand reset will require a more comprehensive approach it.
It will take more time it is early.
Quite commit to a timeline at this point what I can tell you is we are confident and excited about the long term potential of the athletic brand.
That's the number five brand in the U S Women's active segment, which is one of the largest segments in the industry.
It's got a clear and distinctive brand positioning rooted in the power of sheet.
Which is so authentic and highly differentiated as a platform and we know that we are lapping significant promotions and markdowns from last year, a dynamic that we expect to continue at least into the.
Into the fourth quarter, but we are confident that the work that we're doing.
Specifically on product that has a more distinct narrative.
Around performance based narrative measures and we've also begun to refresh store presentations.
The brand's website also I encourage you take a look at.
Really pulls the athletic focused back to its performance routes and of course, the power of sheet platform. So look these are early days, we're seeing early indications that customers are responding, but there is more work to do.
And then Matt on the inventory side of things and discounting I think in third quarter.
We're pleased to be able to deliver a 160 basis points of margin recovery in that.
Did the margin related to discounting which came from.
Much less discounting than we had prior year.
I think what I would say is there is two things first as we said that we have we have.
Brands performing at different levels right now so we have <unk>.
And GAAP that are really showing early signs of recovery and we are a little bit of a longer recovery timeline for banana and athleta and so certainly those are things to consider when thinking about margin recovery and then in addition to that we are.
Navigating a very interesting consumer environment as we said that that has mixed consumer performance and so we want to remain disciplined about also providing great value to our consumers and so we're also remaining prudent about that balance between.
Inventory is down, but also being able to recover gross margin.
Great can offer discount.
Thank you.
Thank you.
Our next question comes from Brooke Roach with Goldman Sachs. Please go ahead.
Good afternoon, and thank you for taking our question.
He has made a lot of progress this year on recovering gross margin and driving expense discipline can you elaborate on the opportunity to drive further margin expansion beyond this year and provide your thoughts on how best to balance reinvesting those funds back into the brands to drive the strategic initiatives, we've outlined today versus flowing those through to the bottom line.
Sure.
Brook I think as you say, we've really developed financial and operational rigor to control the controllable and as you say this is really showed up both in gross margins this year with our inventory levels.
<unk>, which has led to fewer promotions the disciplines around airfreight.
The commodity recovery in the second half.
As I think about the future, we're going to remain committed to healthy gross margins and well controlled inventories.
We're also going to remain committed to the discipline that we have around SG&A.
And ensuring that we have that level of inventory or excuse me rigor around that as well that's going to enable us to really turn to the brand reinvigoration.
That Richard articulated that is a big priority for the company as we aspire to return to consistent profitable revenue growth over time.
So more to come when we provide an outlook, but that discipline around the middle of the P&L. We believe is really critical so that we can really have the room to focus then on the reinvigoration of our brands.
And Brook I'll, just add that none of the.
Expansion on margin and the disciplines that Katrina mentioned compromise the integrity of the reinvigoration plans.
By no means so I think what we're experiencing right now is demonstrating the discipline of operating and financial rigor that is actually enabling.
The focus on the reinvigoration plan.
Thanks, So much I'll pass it on.
Thank you.
Our next question comes from Michael Binetti with Evercore ISI. Please go ahead.
Guys. Congrats on a really great quarter out of the gate here Richard.
Can I ask you.
I guess from time to time, even willing to share where old Navy margins are.
I don't know that we want to get into that now in much detail, but it seemed like the right time to ask if you could help us with a little bit of perspective, there as that business shifts back to positive comps surprisingly in the quarter pleasantly surprisingly.
And then I.
I guess I would ask on.
Athleta for a minute.
I hear you on the long timeframe and on the fourth quarter sales, but we did see quite a bit on sale.
That banner in the quarter it seemed like a fairly heavy purged is getting a lot of inventory out I assume that that's going to be even though the sales were down and thats going to be a positive contributor to merch margin here.
As we get into it into the holiday and then maybe just your outlook on the promotional outlets through holiday here, we heard your thought on the promos being flat to last year, but maybe just a handful were going to see as we watch the promotional environment through the holiday. Thanks guys.
Sure Michael we don't provide old Navy margins or margins for our portfolio.
But jumping to the Athleta question.
Look as I said before we did have a disappointing quarter.
Comps down 19% is not where we want to be that being said, we had significant promotions and markdowns.
We took proactively from last year to this year.
To clean up.
Assortment that had product misfires and marketing this virus and retail execution.
This dynamic we do expect to continue at least into the fourth quarter.
As you go into the stores and you look online you will already see a more distinctive narrative in both product and brand messaging.
As you go into our stores youre going to see a much more delineated refreshed store presentation.
The markdown assortment will get less and less as we move through it but ultimately we will be lapping a bit of a challenge here on the on the Misfires and product.
I will say that we are seeing early indications as I mentioned that what we are rolling out in terms of new product customers are responding.
Work that we've done in.
In marketing very quickly and the displays that we're seeing in our digital dialogues are also encouraging.
But we do have more work to do and as I said before out of our portfolio. This is a brand thats operating in one of the most exciting segments in the industry. The performance segment is incredibly rich with opportunity and while we are a number five player. We've got enormous potential to continue to grow this brand.
And then I think Michael you asked about the overall promotional outlook for the holiday season.
We were really pleased to enter with inventories down 22% I think that shows discipline around controlling the inventories.
We think that inventory is fresh and has good product offerings for the customer I think what you saw in the outlook. We provided was that we're planning for our promotions to be relatively flat year over year and honestly, we want to make sure that we're mindful of the somewhat choppy environment that we are heading into for the fourth quarter.
<unk> with the consumer still feeling pressures and so our top priority will be about executing well for holiday and offering the right price value equation for our customer.
Thanks, a lot guys.
Thank you.
Our next question comes from Lorraine Hutchinson with Bank of America. Please go ahead.
Thanks, Good afternoon Katrina I wanted to follow up on Ike's question on credit income would the CFPB proposal on late fees have a material effect on your operating income.
Okay.
Well Lorraine I know theres been a lot of speculation on that and sort of we have nothing to quantify specifically at this time at this point.
2024 will be the earliest impact of that and we're working with Barclays has our credit partner on ways to mitigate the potential impact. So we will provide more of an update when we know more about.
The timing of that regulatory impact.
Thank you and then as commodity costs go your way is this something that you'd expect to pass through to the bottom line or are there investments that you'll make in product in any of the brands that might offset that.
Okay.
I think at this point.
That's sort of a product by product discussion I would say universally we don't have plans to reinvest substantially the product cost back into the product I'm sure.
Certain brands in places, where we think the customer will appreciate that we might do that but overall I think just as we've been doing in the back half of this year, you're seeing that with the recovery in commodity costs, that's leading to expanded gross margins. So I think its logical that that will likely continue.
Thank you.
Thank you.
Our next question comes from Dana Telsey with Telsey Advisory Group. Please go ahead.
Hi, good afternoon, Kachina and Richard Congratulations on the nice progress.
The improvement that you've seen in all in old Navy and the focus on restoring growth to Athleta and banana Republic.
Any learnings from what you've done so far at old Navy that harkens to banana Republic, and and even gap with the other divisions that can accelerate that turn.
Yeah.
Yes, Dana Thank you for the question.
And the compliment on the quarter.
What I would tell you is when I speak about brand Reinvigoration I mentioned, the two words that we drive from that our relevance and revenue.
Each one of our brands is in a different stage of <unk>.
Reinvigoration process, but ultimately when I think about reinvigoration, it's really strengthening each brand's positioning statement and identities and purpose.
In the case of old Navy as we've talked about funds family fashion and value and I think even as an example, again I encourage you to go online you'll see that crisp identity start to come through it.
It has to be about trend right product assortments.
With a clear point of view.
But that I talk about delivering beyond just needs, but also deliver once the interesting piece is interesting segments, how we can create and amplify big ideas.
We're going to consistently deliver merchandising presentation that tell stories with our product that excites our customers when they see it online and where they see it in our stores.
And we will work on better and more engaged in omnichannel experiences.
With clear and compelling pricing strategies and again encouraging.
And the early reads on some of the work that we've done reflected in our online presence and in our stores around a much more compelling and surgical price strategy.
Last but not least as we talked about innovating through marketing campaigns that speak to cultural conversations creative consistently and execute all of these touch points and interaction with the with excellence.
You can't do one or two of these.
I think we've got a reinvigoration on our hand, you've really got to work in harmony and do all of these and so while I am very pleased with some of the progress.
That we're making in.
In particular brands like old Navy and gap, we do have work to do across the portfolio.
Following this reinvigoration roadmap and we will be updating you quarter to quarter on how we're doing.
Thank you.
Our next question comes from Mark at Swagger with Baird. Please go ahead.
Good afternoon, and thanks for taking the question.
I was hoping you could help us better understand or unpack the drivers of the improvement at old Navy this quarter.
Down six to a plus one really an impressive inflection in this backdrop. It did seem to be well ahead of your internal plans for the quarter. So was that just conservatism at the time you were guiding or was there a bigger shift and product acceptance with the fall product that you weren't anticipating.
Yes. Thanks for the question I think it's important to note.
We've been seeing market share gains in old Navy every quarter this year.
And certainly we're very pleased with the progress.
We have made in.
In the third quarter.
It is important also to note that.
These are the result of learnings that we've applied from a more muted first half I've mentioned, the dedicated women's marketing campaign with on trend product and I think that shows the deliberate intent of when we market with conviction and we associate that with great trend product and we carry through that message through online.
Execution and in store merchandising. These are muscles that we're going to be strengthening and we saw it drove positive momentum and market share gains and so when we look at the continuation of that reinvigoration process. We will continue to improve our site execution work on our marketing with.
Selling creative and value messaging.
Against sharp price points that expressed great style and great value are resonating and.
And we continue to believe that we've got the right progress and momentum, but we need to continue to deliver that consistently.
And so as we look to the back half.
Youre going to see a really balanced product range with offerings like jingle jammies in pardee inactive and ultimately.
Our high quality inventory composition.
That will drive to a successful year end for old Navy.
That's great and thank you for the color there maybe just to follow up.
The message on SG&A. This year has really been about costs cost savings and efficiencies.
What is marketing look like at old Navy is that up year over year end and what do you think how do you think about the right timeline to really lean into marketing at the old Navy brand given the momentum that youre seeing.
Yes, thanks for the question.
We don't share the specifics of our brand marketing investments.
What I would tell you. However is we do a lot of marketing that could be more effective and part of our.
Okay.
The operating and financial discipline applies to our marketing.
Media effectiveness.
And youll be seeing a lot more if you will creative consistent bold narrative breakthrough marketing.
That will drive conversion and compelling customer reactions in our omnichannel presentation, but it doesn't necessarily mean that we're going to be spending more it's about being more effective with what we spend.
Over the years I'd argue that our marketing execution has been very very tactical.
And in some cases on some brands, we've lost relevance and a narrative edge, but when you look at our company history.
Legendary marketing and I'm very confident that we will again, it's a critical part of our reinvigoration work.
And you will continue to see more effective brand presentations and communications throughout the quarters to come.
Best of luck. Thank you.
Thank you.
Our last question will come from the line of Alex <unk> with Morgan Stanley. Please go ahead.
Perfect. Thanks for taking the question and congrats on a nice quarter I wanted to ask a couple of follow ups wonderful on old Navy I don't think that you called out men's as a point of strength. So I'm just wondering what's going on there.
And what would you attribute it to and then second maybe Richard for you you've been speaking about the importance of having trend right product and assortments really across the banners can you speak to like what type of tactics or strategies, you used to implement that across the organization. Thanks a lot.
So.
First off.
Thanks for the call out on men's in fact men's had a weaker first half and we've been seeing the trend actually improve.
Improve.
In the third quarter and I think it will continue to find some strength in the back half year.
When you look at what we talk about in terms of trend right products I think that we've done a good job and arguably a very good job with providing what we call the needs and in that case, it's providing great basics and what we have to do a better job of is creating the wants and that's where the.
Interest comes as a fashion brand.
Complementing our assortments with interesting various different ways that we could leverage trend currently.
Currently we see <unk>.
<unk> like cozy, the sweater category working and so how we really prominently merchandise that in storytelling that brings that to the highlight of our consumer experience becomes.
Becomes an important part of the trend presentation.
The color Red is trending currently and we're starting to react and respond in real time to make sure that we edit our assortment both presentation wise and merchandising to feature where we do have the color red.
We're seeing occasion work.
Fabrications Shine sequined Velvet patents, so youre going to start to see.
<unk> and responding in real time to what we see happening in the marketplace and that may be in the kind of here and now as reaction and responsiveness, but as we look to the future being more pronounced driving more design and insight into our product narratives and thought process upfront is going to.
Part of where we had and reinvigoration for our brands and in this business absolutely product as hero and we're spending a lot of time, ensuring that we have exceptional product with exceptional value and exceptional quality.
We've got work to do but I'm encouraged by early early stage development.
Thanks, a lot good luck.
Thank you.
Thank you we've reached the end of our question and answer session that does conclude our conference call you may now disconnect.
Okay.
Yeah.
Okay.
Yeah.
Okay.