Q4 2024 The Gap Inc Earnings Call
Operator: Good afternoon, ladies and gentlemen. My name is Krista, and I'll be your conference operator. I would like to welcome everyone to the Gap Inc. 4th Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode.
Yes.
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Good afternoon, ladies and gentlemen, my name is.
Christa and I will be your conference operator today I.
Christa: I would like to welcome everyone.
Christa: Incorporated fourth quarter 2023 earnings conference call at this time, all participants are in a listen only mode for those analysts who wish to participate in the question and answer session. After the presentation. You May now press star one to enter the Q&A queue. As a reminder, please limit your.
Operator: For those analysts who wish to participate in the question-and-answer session after the presentation, you may now press star 1 to enter the Q&A queue. As a reminder, please limit your questions to one per participant. If anyone should require assistance during the call, please press star then zero on your touchtone phone.
Christa: <unk> to one per participant if anyone should require assistance during the call. Please press Star then zero on your Touchtone phone.
Emily Gacka: I would now like to introduce your host, Emily Gacka, Director of Investor Relations. Emily, please go ahead. Good afternoon, everyone, and welcome to Gap Inc.'s fourth 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.
I would now like to introduce your host Emily <unk> director of Investor Relations. Emily. Please go ahead.
Emily: Good afternoon, everyone and welcome to Gap, Inc. Fourth 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.
Emily: For information on factors that could cause our actual results to differ materially from any forward looking statements as well as the 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 Companys annual.
Emily Gacka: The risk factors described in the company's annual report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2023, and any subsequent filings with the SEC, all of which are available on gapinc.com. These forward-looking statements are based on information as of today, March 7, 2024, and we assume no obligation to publicly update or revise our forward-looking statements. 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.
Emily: Our report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2023, and any subsequent filings with the Securities and Exchange Commission all of which are available on gap, Inc. Dot com.
Emily: These forward looking statements are based on information as of today March seven 2024, and we assume no obligation to publicly update or revise our forward looking statements.
Emily: Turning 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.
Richard Dickson: Thank you for joining our call today I'll provide an update on our performance and progress in the context of our four strategic priorities then I'll pass the call to Katrina to walk you through our detailed financial results as well as our 2024 outlook before we take questions.
Richard Dickson: Thank you for joining our call today, where I'll provide an update on our performance and progress in the context of our four strategic priorities. Then I'll pass the call to Katrina to walk you through our detailed financial results as well as our 2024 outlook before we take questions. As a reminder, our four strategic priorities are, first, maintaining and delivering financial and operational rigor; second, the reinvigoration of our brands. Third, strengthening our platform, and fourth, energizing our culture. Before I start, I'd like to highlight three recent additions to our leadership team, each of whom will contribute meaningfully to the ongoing execution of our strategic priority. Eric Chan has joined us as Chief Business and Strategy Officer.
Richard Dickson: As a reminder, our four strategic priorities are first maintaining and delivering financial and operational rigor.
Katrina O'connell: Second the reinvigoration of our brands third strengthening our platform and fourth energizing our culture.
Katrina O'connell: Before I start I'd like to highlight three recent additions to our leadership team.
Katrina O'connell: Each of whom will contribute meaningfully to the ongoing execution of our strategic priorities.
Katrina O'connell: Eric Chan as joined US as Chief business and strategy Officer, Amy Thompson, as Chief people Officer, and Zac Posen as creative director of Gap, Inc, and Chief Creative Officer of Old Navy.
Richard Dickson: Amy Thompson as Chief People Officer and Zach Posen as Creative Director of Gap Inc. and Chief Creative Officer of Old Navy. I've been purposeful in thinking about the talent and skills these executives bring and how they complement our existing institutional knowledge. These new leaders will play critical roles in unlocking our full potential and solidifying our foundation as we redefine Gap Inc. for a new era, one where financial and operational rigor is a cornerstone of strength, bolstered by best-in-class talent and a culture of creativity, all paving the way for brand reinvigoration and greater cultural relevance. We are pleased with the results of the quarter as we exceed expectations on several key metrics driven Maintaining and delivering financial and operational rigor strengthened our financial footing in 2023, showing that we can drive more efficiency and productivity, enabling us to focus on brand reinvigoration. We've made a lot of progress delivering cost savings and gross margin expansion. And this work helped us deliver a meaningful improvement in adjusted operating margin of 410 basis points for 2023. Our focus on controlling the controllables also resulted in better working capital and a stronger balance sheet at year end.
Katrina O'connell: I had been purposeful and thinking about the talent and skill these executives bring and how they complement our existing institutional knowledge.
Katrina O'connell: These new leaders will play critical roles in unlocking our full potential and solidifying our foundation as we redefine gap, Inc. For a new era.
Katrina O'connell: One where financial and operational rigor is a cornerstone of strength bolstered by best in class talent and a culture of creativity.
Katrina O'connell: All paving the way for brand reinvigoration and greater cultural relevance.
Katrina O'connell: We are pleased with the results of the quarter as we exceeded expectations on several key metrics driven by our strategic priorities.
Katrina O'connell: Maintaining and delivering financial and operational rigor strengthened our financial footing in 2023, showing that we can drive more efficiency and productivity, enabling us to focus on Grand reinvigoration.
Katrina O'connell: We've made a lot of progress delivering cost savings and gross margin expansion and this work helped us deliver meaningful improvement in adjusted operating margin of 410 basis points or 2023.
Katrina O'connell: Our focus on controlling the controllable.
Katrina O'connell: So resulted in better working capital and a stronger balance sheet at year end.
Richard Dickson: This includes reducing our inventory levels by 16% year-over-year, building a strong cash balance of $1.9 billion, and generating over $1.1 billion in free cash flow. These proof points put us on strong financial footing as we begin 2024. Our results in the fourth quarter demonstrate strong progress, not only in terms of improved margins and well-controlled expenses but also with more stability in net sales. Net sales grew by 1%, and comps were flat, with Gap Inc. gaining market share.
Katrina O'connell: This includes reducing our inventory levels by 16% year over year building, a strong cash balance of $1 9 billion.
Katrina O'connell: Generating over $1 1 billion and free cash flow.
Katrina O'connell: These proof points put us on strong financial footing as we begin 2024.
Katrina O'connell: Our results in the fourth quarter demonstrates strong progress not only in terms of improved margins and well controlled expenses, but also with more stability in net sales.
Katrina O'connell: Net sales grew by 1% and comps were flat with gap, Inc, gaining market share.
Richard Dickson: The sequential improvement, which is noteworthy in a declining apparel market, reflects the team's responsiveness and nimbleness as we begin our brand reinvigoration work. Old Navy comps increased 2%, and we were pleased to gain share in women's for the fourth quarter, building on the success we saw in the third quarter. We are also encouraged that we have increased our foothold in two key categories, active and bottom. As the number five player in the active space, we are excited for Old Navy to accelerate in this leading category. The All Important Bottoms category creates additional opportunities because it's the gateway to the full wardrobe.
Katrina O'connell: The sequential improvement, which is noteworthy and a declining apparel market reflects the team's responsiveness and nimbleness as we begin our brand reinvigoration works.
Katrina O'connell: Old Navy comps increased 2% and we were pleased to gain share in women's for the fourth quarter building on the success, we saw in the third quarter.
Katrina O'connell: We are also encouraged that we increased our foothold in two key categories active and bottoms.
Katrina O'connell: As the number five player in the active space. We are excited for old Navy to accelerate in this leading category.
Katrina O'connell: The all important bottoms category creates additional opportunities because it's the gateway to the full wardrobe.
GAAP brands comps were up 4% driven by strength in womens, where we delivered our fifth consecutive quarter of market share gains.
Richard Dickson: Gap Brands comps were up 4% driven by strength in women's, where we delivered our fifth consecutive quarter of market share gains. This result was amplified by good performances in denim and sweaters supported by new marketing. Banana Republic comps were down 4% as we conduct deliberate and ongoing work to reestablish the brand, and Athletics comps were down 10% as we left a period of heavy discounting that we previewed last quarter, but improved sequentially driven by new holiday product, updated marketing, and improved in-store presentation.
Katrina O'connell: This result was amplified by good performances in denim and sweaters supported by new marketing campaigns.
Katrina O'connell: Banana Republic comps were down 4% as we conduct deliberate and ongoing work to reestablish the brand.
Katrina O'connell: And that's led US comps were down 10% as we lapped a period of heavy discounting that we previewed last quarter, but improved sequentially driven by new holiday product updated marketing and improved in store presentation.
Katrina O'connell: We expanded our company gross margin by 530 basis points ahead of expectations, driven by more effective sourcing strategies and lower commodity costs combined with improved promotional activities leaner inventories and better assortments.
Richard Dickson: We expanded our company's gross margin by 530 basis points ahead of expectations, driven by more effective sourcing strategies and lower commodity costs, combined with improved promotional activities, leaner inventories, and better assortment. We also increased our operating margin by 570 basis points to 5%. Our team is demonstrating the ability to do what we say we're going to do, and in some cases, even more. However, we're not where we need to be.
Katrina O'connell: We also increased our operating margin by 570 basis points to 5%.
Katrina O'connell: Our team is demonstrating the ability to do what we say, we're going to do and in some cases, even more however.
Katrina O'connell: However, we're not where we need to be our ongoing focus on financial and operational rigor will allow us to continue to elevate our performance improve execution consistency and set the foundation for our exciting brand reinvigoration work.
Richard Dickson: Our ongoing focus on financial and operational rigor will allow us to continue to elevate our performance, improve execution consistency, and set the foundation for our exciting grand reinvigoration work. Turning to our next priority, brand reinvigoration is about driving both relevance and revenue, inspired by our brand's incredible heritage. As a reminder, this strategic priority begins with strengthening the identities and purpose of each of our brands. We are striving for each brand to have trend-right product assortments rooted in customer-centric design thinking and a clear point of view that delivers on both wants and needs. From there, we need to execute several key ingredients.
Katrina O'connell: Turning to our next priority brand reinvigoration is about driving both relevance and revenue in <unk>.
Katrina O'connell: Fired by our brands incredible heritage as a reminder, this strategic priority begins with strengthening the identities and purpose of each of our brands.
Katrina O'connell: We are striving for each brand to have trend right product assortments rooted in customer centric design thinking and a clear point of view that delivers on both wants and needs.
Katrina O'connell: From there we need to execute several key ingredients, we must consistently deliver product storytelling that excites our customers supported by compelling merchandize we.
Richard Dickson: We must consistently deliver product storytelling that excites our customers, supported by compelling merchandise. We need to drive demand with innovative marketing to regain a powerful voice in the cultural conversation. And we must create better, more engaging omnichannel experiences with a clear and compelling pricing strategy. And most importantly, we must execute with excellence at every touchpoint and interaction.
Katrina O'connell: We need to drive demand with innovative marketing to regain a powerful voice in the cultural conversation.
Katrina O'connell: And we must create better more engaging omnichannel experiences with a clear and compelling pricing strategy.
Katrina O'connell: And most importantly, we must execute with excellence along every touch point and interaction.
Richard Dickson: These elements form the basis of our brand reinvigoration playbook. While specific execution will differ by brand, we are working with each of our brand teams to implement this playbook holistically and consistently. Now, I'd like to provide an update on the progress of each brand. Let's start with Old Navy.
Katrina O'connell: These elements form the basis of our brand reinvigoration playbook, while specific execution will differ by brand. We are working with each of our brand teams to implement this playbook holistically and consistently.
Katrina O'connell: Now I'd like to provide an update on the progress of each brand.
Katrina O'connell: Let's start with old Navy, we are encouraged by the sales performance. We saw in the back half of 2023 and the growth we delivered in the quarter.
Richard Dickson: We are encouraged by the sales performance we saw in the back half of 2023 and the growth we delivered in the quarter. We are reasserting Old Navy's authority as the number two apparel brand in the US. We delivered on-trend products, particularly in women's, active, bottoms, and knit, which performed well in the quarter. Supported by our campaign with Natasha Lyonne, we showcased and leveraged our authority in the bottoms business and saw great response, especially to the tailor pant, the refreshed pixie pant, and the cargo. We are celebrating fashion, family, and fun through more precise marketing and storytelling. Another example of reasserting our authority is Jingle Jam.
Katrina O'connell: We're reasserting old Navy's authority as the number two apparel brand in the U S.
Katrina O'connell: We delivered on trend products, particularly in women's active bottoms, and knit, which performed well in the quarter.
Katrina O'connell: Supported by our campaign with Natasha Leone, we showcased and leveraged our authority in the bottoms business and saw great response, especially to the Taylor pad, the refreshed Pixie pant and the cargo.
Katrina O'connell: We are celebrating fashion family and fund through more precise marketing and storytelling. Another example of reasserting our authority jingle Jammies.
Richard Dickson: We took our famous jingle jammies and created Jingle Glammy, supporting it through a compelling social media campaign where influencers pair jammies with going out. This demonstrates how we take a product and make it a trend by dialing it up in a relevant way through storytelling. Old Navy is reinforcing value by communicating to customers with more clarity on price and quality both in stores and online, highlighting the brand's value proposition. We're starting to see the strength of the brand identity evolving and coming alive through online and visual communication. The progress we are making at Old Navy gives us confidence in our ability to build consistency while we deliver against our priorities. Let's turn to Gap.
Katrina O'connell: We took our famous jingle jammies and created jingle Grammys supporting it through a compelling social media campaign, where influences pair jamie's with going out there.
Katrina O'connell: This demonstrates how we take our product and make it a trend by dialing it up in a relevant way through storytelling.
Katrina O'connell: Old Navy is reinforcing value by communicating to customers with more clarity on price and quality, both in stores and online highlighting the brand's value proposition.
Katrina O'connell: We're starting to see the strength of the brand identity evolving and coming alive through online and visual communications.
Katrina O'connell: The progress we are making at old Navy gives us confidence in our ability to build consistency, while we deliver against our priorities.
Speaker Change: Let's turn to gap brand.
Richard Dickson: We are driving continuous improvement, and Gap has exciting potential as we focus on reigniting the brand dialogue. Gap was built on strong product narratives with brilliant marketing expressed through big ideas. Gap, in its best days, was a storyteller who could take a product and create a trend using culturally relevant marketing. During the fourth quarter, our team took CashSoft, Gap's innovative, washable fabric that feels like cashmere, and turned it into a big idea through creative storytelling, supported by elevated marketing and an in-store design and digital presentation.
Speaker Change: We are driving continuous improvement and gap has exciting potential as we focus on reigniting the brand dialogue.
Speaker Change: <unk> was built on strong product narratives with brilliant marketing expressed through big ideas.
Speaker Change: GAAP and its best days was a storyteller, who could take a product and created trend using culturally relevant marketing.
Speaker Change: During the fourth quarter, our team to cash thoughts gaps innovative washable fabric that feels like cashmere and turned it into a big idea through creative storytelling supported by elevated marketing and an in store design and digital presentation.
Richard Dickson: We amplified this innovative product idea, and it became a key contributor to the strength and sweaters we saw during the quarter. Its success is an important proof point that shows we can reignite Gap with big ideas and deliver improved results. And now we're going to build on that example with relentless repetition. Our Lenin campaign, which launched in late February, is the big idea for spring.
Speaker Change: We amplified this innovative product idea and it became a key contributor to the strength in sweaters, we saw during the quarter.
Speaker Change: Its success is an important proof point that shows we can reignite gap with big ideas and deliver improved results.
Speaker Change: And now we're going to build on that example, with relentless repetition.
Speaker Change: Our lending campaign, which launched in late February is the big idea for spring. The campaign is running now and I encourage you to take a look this.
Richard Dickson: The campaign is running now, and I encourage you to take a look. This is a great example of the brand taking a trend right product and amplifying it, turning it into a big idea expressed through compelling in-store merchandising and strong digital execution with an innovative and culturally relevant marketing campaign entitled Linen Moves, featuring musical artists Tyla and Jungle. We struck a cultural accord on Instagram and TikTok.
Speaker Change: This is a great example of the brand taking trend right product and amplifying it turning it into a big idea expressed through compelling in store merchandising and strong digital execution with an innovative and culturally relevant marketing campaign entitled Linden moves featuring musical artist Tyler and <unk>.
Speaker Change: <unk>.
Speaker Change: We struck a cultural accord on Instagram and Tic Toc Linda.
Richard Dickson: Linen Moves was Gap Brand's highest-performing video on both platforms ever, and we're just getting started. Regarding Banana Republic, we are focused on reestablishing this brand to thrive in the premium lifestyle. As I've dug in with the Banana Republic team, I've realized that we are behind on the fundamentals, having the right product in the right place at the right price. 2024 will be about getting back to the basics, both for product and execution. This includes a focus on go-to wardrobe pieces and B.R. classics like sweaters, hocks, Suite Separates, and Kaki.
Speaker Change: Linden moves was gap brand's highest performing video on both platforms ever.
Speaker Change: And we're just getting started.
Speaker Change: Regarding banana Republic, we are focused on reestablishing this brand to thrive in the premium lifestyle space.
Speaker Change: As I've dug in with the Banana Republic team I've realized that we are behind on the fundamentals, having the right product in the right place with the right price.
Speaker Change: 2024, it will be about getting back to the basics both for product and execution.
This includes a focus on go to wardrobe pieces and BR classics like sweaters Oxfords suit separates and khakis those products that banana Republic has been known for and will be again.
Richard Dickson: Those products that Banana Republic has been known for and will be again. We're encouraged by the brand's aesthetic, but it will take some time to get this right and unlock the potential of this. Turning to Athleta, as we shared with you last quarter, the brand had missteps in prior years, and as a result, net sales for the brand remained muted in Q4 as we lapped markdowns, a challenge that we will continue to face through the first half of 2024. Athleta is a brand with significant growth potential and a clear and distinct positioning rooted in the power of she.
Speaker Change: We're encouraged by the brand aesthetic, but it will take some time to get this right and unlock the potential of this business.
Speaker Change: Turning to Athleta as we shared with you last quarter the brand had missteps in prior years and as a result net sales for the brand remained muted in Q4 as we lap markdowns a challenge that we will continue to pace through the first half of 2024.
Speaker Change: Athleta as a brand with significant growth potential and a clear and distinct positioning rooted in the power of sheet.
Speaker Change: Early holiday ideas like cold weather training and our Cheyenne sets sold well these great ideas, where ultimately bought too small, but they are good proof points that we are on the right track at Athleta.
Richard Dickson: Early holiday ideas like the cold weather train and our shine set sold well. These great ideas were ultimately bought too small, but they are good proof points that we are on the right track at Athleta. We're making progress in resetting this brand, returning to the core of athletics. We started the new year with a cleaner palette, and we've seen early successes in new arrivals.
We're making progress in resetting this brand returning to the core of that let us positioning we started the new year with a cleaner palette and we've seen early successes in new arrivals. Although the changes are small we are learning and encouraged by the customers early reactions.
Richard Dickson: Although the changes are small, we are learning and encouraged by the customers' early reaction. We're focused on resetting the brand for success and putting Athleta back at the center of the cultural wellness conversation while reengaging the brand's performance roots. Moving to the third strategic priority, strengthening our platform. We're focused on building and sharpening our operational capabilities to improve effectiveness and efficiency, which in turn will drive cost leverage and demand generation. I recently returned from a two-week trip to Asia, during which I immersed myself in our supply chain infrastructure. I spent time listening, learning, and understanding the facets of our supply chain network, and I have gained insight into the incredible, longstanding partnerships that we have built over the years. I also spend time in our Hyderabad office in India, studying our technology tools and capabilities.
Speaker Change: We're focused on resetting the brand for success and putting Athleta back at the center of the cultural wellness conversation, while re engaging the brand's performance routes.
Speaker Change: Moving to the third strategic priority strengthening our platform.
Speaker Change: We're focused on building and sharpening our operational capabilities to improve effectiveness and efficiency and in turn drive cost leverage and demand generation.
Speaker Change: I recently returned from a two week trip to Asia during which I immersed myself in our supply chain infrastructure.
Speaker Change: Spend time listening learning and understanding the facets of our supply chain network and I have gained insight into the incredible longstanding partnerships that we have built over the years.
Speaker Change: I also spent time in our Hyderabad office in India.
Speaker Change: Studying our technology tools and capabilities.
Richard Dickson: While encouraging, this is an area that we will be focused on elevating as part of our path to becoming a high-performance apparel company. We are still in the assessment phase. But my intent is to cultivate a digital-first organization and mindset that uses technology to enable business strategy, enhance the customer experience, and capture future opportunities. We are also beginning to evaluate how we can better leverage our media and marketing with the goal of developing more compelling, creative, and innovative media to support growth across the portfolio. I believe our platform gives us meaningful differentiation and has the potential to unlock additional value creation, and we will work to further build out our capabilities to drive efficiency and effectiveness. The fourth priority is culture; energizing our culture will fuel creativity and connectivity while driving accountability across our organization. As I mentioned earlier, the recent appointment of Amy Thompson has bolstered our leadership team and underscored our investment in building a culture where employees show up every day with purpose and a sense of belonging. Amy is a builder of highly effective cultures that integrate purpose, vision, mission, and values throughout an end-to-end employee experience, all dedicated to driving business success.
Speaker Change: While encouraging this is an area that we will be focused on elevating as part of our path to becoming a high performing apparel company.
Speaker Change: We are still in the assessment phase, but my intent is to cultivate a digital first organization and mindset that uses technology to enable business strategy enhance the customer experience and capture future opportunities.
Speaker Change: We are also beginning to evaluate how we can better leverage our media and marketing with the goal of developing more compelling creative and more innovative media to support growth across the portfolio.
Speaker Change: I believe our platform gives us meaningful differentiation and has the potential to unlock additional value creation.
Speaker Change: And we will work to further build out our capabilities to drive efficiency and effectiveness.
Speaker Change: The fourth priority is culture.
Speaker Change: Energizing, our culture will fuel creativity and connectivity, while driving accountability across our organization.
Speaker Change: As I mentioned earlier, the recent appointment of Amey Thompson has bolstered our leadership team and underscored our investment in building a culture, where employees show up every day with purpose and a sense of belonging.
Speaker Change: Amy is a builder of highly effective cultures that integrate purpose vision mission and values throughout an end to end employee experience all dedicated to driving business success.
Richard Dickson: This includes igniting a growth mindset with empowered leaders and aligned incentives. I'm confident she will help us build a winning culture at Gap Inc. Today, our company is on strong financial footing. In 2024, we will continue to strengthen our fundamentals as we focus on our four strategic priorities. While there is a lot of work to do, I am energized by the progress we have made so far, and I'm inspired by the team's commitment and talent. I want to take a moment to recognize our global team for their ongoing dedication.
Speaker Change: This includes igniting a growth mindset with empowered leaders and aligned incentives.
I am confident she will help us build a winning culture at gap Inc.
Speaker Change: Today, our company is on strong financial footing and.
Speaker Change: In 2024, we will continue to strengthen our fundamentals as we focus on our four strategic priorities.
Speaker Change: While there is a lot of work to do I am energized by the progress we have made so far and I am inspired by the team's commitment and talent.
Speaker Change: Wanted to take a moment to recognize our global team for their ongoing dedication and I look forward to continuing this work in partnership with them as we drive towards becoming a high performing apparel company.
Richard Dickson: And I look forward to continuing this work in partnership with them as we drive towards becoming a high-performance apparel company. Now, I will turn the call over to Katrina for a closer look at our financials and our outlook for 2024. Thank you, Richard.
And now I will turn the call to Katrina for a closer look at our financials and our outlook for 2024.
Katrina O'connell: Thank you Richard and thanks, everyone for joining us. This afternoon. We're pleased to report fourth quarter and full year 2023 results ahead of our expectations with market share gains.
Katrina O'connell: And thanks, everyone, for joining us this afternoon. We're pleased to report fourth quarter and full year 2023 results ahead of our expectations with market share gains. We remain focused on the discipline we've created around margin recovery, expense action, inventory management, and maintaining a strong balance. As Richard noted, our financial and operational rigor continues to be foundational as we turn our attention to the reinvigoration of our brands in 2024. Before we begin, I'll note that all results reported today are inclusive of the 53rd week, except for comparable sales methods. Some of the key highlights from the fourth quarter and fiscal 2023 include the following. Fourth-quarter comparable sales were flat, and net sales were up 1% ahead of our expectations, driven by Old Navy and Gap brand sales results during the important holiday season.
Katrina O'connell: We remain focused on the discipline, we've created around margin recovery expense actions inventory management and maintaining a strong balance sheet.
Katrina O'connell: As Richard noted, our financial and operational rigor continues to be foundational as we turn our attention to the reinvigoration of our brands in 2024.
Speaker Change: Before we begin I'll note that all results reported today are inclusive of the 50 <unk> week, except for comparable sales metrics.
Speaker Change: Some of the key highlights from fourth quarter and fiscal 2023 include the following.
Speaker Change: Fourth quarter comparable sales were flat and net sales were up 1% ahead of our expectations driven by old Navy and gap brand sales results during the important holiday season.
Katrina O'connell: And while full year 2023 comparable sales were down 2% and net sales declined 5% year over year, this performance was in line with the outlook we provided at the beginning of the year, as our financial and operational rigor began to deliver more consistent performance. Old Navy drove a positive 2% comparable sales in the quarter, building increased confidence in the consistent delivery of net sales growth. For the year, Old Navy comparable sales were down 1%, with positive comp performance in the second half of the year and market share gains in all four quarters.
Speaker Change: And while full year 2023 comparable sales were down 2% and net sales declined 5% year over year. This performance was in line with the outlook. We provided at the beginning of the year as our financial and operational rigor begins to deliver more consistent performance.
Speaker Change: Old Navy drove a positive 2% comparable sales in the quarter building increased confidence and consistent delivery of net sales growth.
Speaker Change: For the year old Navy comparable sales were down 1%.
Speaker Change: Positive comp performance in the second half of the year and market share gains in all four quarters.
Katrina O'connell: The Gap brand drove 4% quarterly comparable sales growth with a positive 1% comp for the year outpacing the market. We delivered 530 basis points of gross margin expansion in Q4 and 380 basis points of expansion for the year versus last year's adjusted gross margin. Resulting from TrendRite, which when combined with well-managed inventories led to improved promotional activity, margins also benefited from lower commodity costs. We reduced fiscal 2023 SG&A by over $300 million year-over-year on an adjusted basis as a result of our commitment to financial discipline. All of which resulted in an operating margin of 5% for Q4 and an adjusted operating margin of 4.1% for the year, a 410 Inventories ended down 16% year-over-year and remained well-controlled, driving better profitability and working capital.
Gap brand drove 4% quarterly comparable sales growth with a positive 1% comp for the year outpacing the market.
Speaker Change: We delivered 530 basis points of gross margin expansion in Q4, and 380 basis points of expansion for the year versus last year's adjusted gross margin, resulting from trend right product, which when combined with well managed inventory has led to improved promotional activity.
Speaker Change: Margins also benefited from lower commodity costs.
Speaker Change: We reduced fiscal 2023, SG&A by over $300 million year over year on an adjusted basis as a result of our commitment to financial discipline.
All of which resulted in an operating margin of 5% for Q4 and an adjusted operating margin of four 1% for the year of 410 basis point improvement versus last year's adjusted operating margin.
Speaker Change: Constraining meaningful progress on our path towards profitable sales growth.
Speaker Change: Inventories ended down 16% year over year, and remained well control driving better profitability and working capital and we ended the year with $1 $9 billion of cash on the balance sheet, delivering $1 $1 billion of free cash flow for the year.
Katrina O'connell: And we ended the year with $1.9 billion of cash on the balance sheet, delivering $1.1 billion of free cash flow for the year. While we enter fiscal 2024 encouraged by the financial progress we've made, we are taking a balanced view of 2024 while we shore up the foundation of our brand. I will discuss our outlook in more detail in a moment. But let me start with our fourth quarter results.
Speaker Change: While we enter fiscal 2024 encouraged by the financial progress. We've made we are taking a balanced view of 2024, while we shore up the foundation of our brands.
Speaker Change: I'll discuss our outlook in more detail in a moment.
Speaker Change: Let me start with fourth quarter results.
Katrina O'connell: Net sales for the quarter were up 1% to last year at $4.3 billion, exceeding our previously communicated guidance range, and comparable sales were flat. The 53rd week added approximately four percentage points of sales growth in the quarter. Also, the sale of Gap China last year had an estimated two-point negative impact on gapping total net sales growth.
Speaker Change: Net sales for the quarter were up 1% to last year at $4 3 billion exceeding our previously communicated guidance range and comparable sales were flat.
Speaker Change: The 50, <unk> week added approximately four percentage points of sales growth in the quarter.
Speaker Change: Also the sale of gap, China last year had an estimated two point negative impact to gapping total net sales growth.
Speaker Change: Now, let me provide fourth quarter sales results by brand.
Katrina O'connell: Now, let me provide fourth quarter sales results by brand. Starting with Old Navy, net sales were $2.3 billion, up 6% versus last year, with comparable sales up 2%. This represented the second consecutive quarter of positive comps at the brand. Turning to Gap, Gap Brand net sales of $1 billion were down 5% versus last year, excluding the estimated negative impact to sales of 8 percentage points related to the sale of Gap China.
Speaker Change: With old Navy net sales were $2 3 billion up 6% versus last year with comparable sales up 2%.
Speaker Change: This represented the second consecutive quarter of positive comps at the brand.
Speaker Change: Turning to gap brand gap brand net sales of $1 billion were down 5% versus last year, excluding the estimated negative impact to sales of eight percentage points related to the sale of gap, China net sales would have been up 3% versus last year.
Katrina O'connell: Net sales would have been up 3% versus last year. Comparable sales inflected positively, increasing 4% driven by continued strength in women's, which gained market share for the fifth quarter in a row. Banana Republic net sales of $567 million declined 2% year-over-year, with comparable sales down 4%.
Speaker Change: Comparable sales inflected positively increasing 4% driven by continued strength in womens which gained market share for the fifth quarter in a row.
Speaker Change: Nana Republic net sales of $567 million declined 2% year over year with comparable sales down 4%.
Katrina O'connell: Re-establishing Banana Republic will take time, and we know there's work to be done to better execute many of the fundamentals in 2024. Athleta's net sales of $419 million declined 4% versus last year. Comparable sales were down 10%. While the sales trend improved versus the prior quarter, net sales performance was still challenged due to tougher comparisons as we anniversary a period of elevated discounts. A dynamic which we expect will continue through the first half of fiscal 2024. While a bit of sales remained negative from the headwinds related to lapping last year's significant promotion, we're encouraged by the positive customer reaction to our new assortment, cleaner store presentations, improved online experiences, better marketing execution, and innovative new customer activations, which give us confidence that the brand's efforts are driving underlying benefits. Now turning to growth margin, gross margin of 38.9% expanded 530 basis points versus last year. Merchandise margin increased 500 basis points in the quarter compared to last year, driven by an estimated 300 basis points of leverage from lower commodity and air freight costs.
Reestablishing Banana Republic will take time, and we know there's work to be done to better execute many of the fundamentals in 2024.
Speaker Change: <unk> net sales of $419 million declined 4% versus last year.
Speaker Change: <unk> sales were down 10%, while the sales trend improved versus the prior quarter net sales performance was still challenged due to tougher comparisons as we anniversary a period of elevated discounting a dynamic which we expect will continue through the first half of fiscal 2024.
Speaker Change: But as sales remained negative from the headwinds related to lapping last year's significant promotions. We're encouraged by the positive customer reaction to our new Assortments cleaner store presentations improved online experiences better marketing execution and innovative new customer activations.
Speaker Change: Give us confidence that the brands efforts are driving underlying benefits.
Speaker Change: Now turning to gross margin in the quarter.
Speaker Change: Gross margin of 38, 9% expanded 530 basis points versus last year.
Speaker Change: Merchandise margin increased 500 basis points in the quarter compared to last year, driven by an estimated 300 basis points of leverage from lower commodity in airfreight costs.
Katrina O'connell: With the remaining leverage primarily driven by improved promotional activity, ahead of expectations, as strong holiday assortments and well-controlled inventory enabled lower discounting during the season, rent occupancy and depreciation modestly declined on a nominal dollar basis versus last year as a percentage of sales rod leveraged 30 basis. Now, let me turn to SG&A. SG&A was $1.46 billion in the quarter, largely in line with our prior outlook. As a percentage of sales, SG&A of 33.9% leveraged 40 basis points versus last year. Operating income was $214 million, up $244 million versus last year. Fourth quarter operating margin of 5% improved 570 basis points versus last year, driven primarily by gross margin expansion. Fourth quarter net interest income was $4 million, as higher interest earned on cash balances offset interest expense.
Speaker Change: With the remaining leverage primarily driven by improved promotional activity ahead of expectations as strong holiday assortments and well controlled inventory enabled lower discounting during the season.
Speaker Change: Rent occupancy and depreciation modestly declined on a nominal dollar basis versus last year as a percentage of sales rod leverage 30 basis points.
Speaker Change: Now, let me turn to SG&A SG&A was $1 $46 billion in the quarter largely in line with our prior outlook as a percentage of sales SG&A of 33, 9% leveraged 40 basis points versus last year.
Speaker Change: Operating income was $214 million up $244 million versus last year.
Speaker Change: Fourth quarter operating margin of 5% improved 570 basis points versus last year, driven primarily by gross margin expansion.
Speaker Change: Fourth quarter net interest income was $4 million as higher interest earned on cash balances offset interest expense.
Katrina O'connell: Our fourth-quarter tax rate was 15.1% and benefited from the release of certain reserves. Earnings per share in the quarter were 49 cents. Now turning to full year fiscal 2023 results, net sales were down 5% from last year at $14.9 billion, and comparable sales were down 2%. The addition of the 53rd week contributed approximately one point of sales growth to the full year, and the sale of Gap China in fiscal 2022 had an estimated two points negative impact on Gap Inc's total net sales growth. Gross margin was 38.8%, expanding 450 basis points versus last year's reported gross margin and 380 basis points versus last year's adjusted gross margin. Merchandise margin increased 420 basis points versus last year on an adjusted basis, driven by 200 basis points of benefit from lower air freight expense, with the remaining expansion primarily driven by improved promotional activity. Inflationary impacts from commodity costs were relatively neutral to the year, and Rod as a percentage of sales deleveraged 40 basis points versus last year.
Speaker Change: Our fourth quarter tax rate was 15, 1% and benefited from the release of certain reserves.
Speaker Change: Earnings per share in the quarter were 49.
Speaker Change: Now turning to full year fiscal 2023 results net sales were down 5% to last year at $14 9 billion and comparable sales were down 2%.
Speaker Change: The addition of the 50 <unk> week contributed approximately one point of sales growth for the full year and the sale of gap China in fiscal 2022 had an estimated two point negative impact to gap, Inc. Total net sales growth.
Speaker Change: Gross margin was 38, 8% expanding 450 basis points versus last year's reported gross margin and 380 basis points versus last year's adjusted gross margin.
Speaker Change: Merchandise margin increased 420 basis points versus last year on an adjusted basis, driven by 200 basis points of benefit from lower airfreight expense.
Speaker Change: The remaining expansion, primarily driven by improved promotional activity in.
Speaker Change: Inflationary impacts from commodity costs were relatively neutral to the year and.
Speaker Change: And rod as a percentage of sales deleveraged 40 basis points versus last year.
Katrina O'connell: Reported SG&A was $5.22 billion for the year, or 35% of sales. Excluding restructuring costs and a gain related to the sale of an office building, adjusted SG&A was $5.17 billion, down 6% versus last year, primarily driven by cost savings as a result of strategic action. The reported operating margin was 3.8%. Excluding $93 million in restructuring costs and $47 million related to the gain on sale of an office building, adjusted operating margin of 4.1% expanded 410 basis points versus last year. Fiscal year 2023 net interest expense was $4 million as interest expense was largely offset by interest earned on cash balances. The reported effective tax rate was 9.7% for the year, and the adjusted effective tax rate was 11%.
Speaker Change: Reported SG&A was $5 2 billion for the year or 35% of sales, excluding restructuring costs and a gain related to the sale of an office building adjusted SG&A was five $1 7 billion.
Speaker Change: <unk>, 6% versus last year, primarily driven by cost savings as a result of strategic actions.
Speaker Change: Reported operating margin was three 8% excluding.
Speaker Change: Excluding $93 million in restructuring costs and $47 million related to the gain on sale of an office building adjusted operating margin of four 1% expanded 410 basis points versus last year.
Speaker Change: Fiscal year 2023, net interest expense was $4 million as interest expense was largely offset by interest earned on cash balances.
Speaker Change: The reported effective tax rate was nine 7% for the year and the adjusted effective tax rate was 11%.
Katrina O'connell: During the year, we received discrete tax benefits from the impact of foreign operations, a transfer pricing settlement related to sourcing activities, and the release of certain reserves. Share count ended at 372 million. Reported earnings per share was $1.34. Excluding the impact of restructuring and the gain on the sale of the office building, adjusted earnings per share was $1.43.
Speaker Change: During the year, we received discrete tax benefits from the impact of foreign operations, a transfer pricing settlement related to sourcing activities and the release of certain reserves.
Speaker Change: Share count ended at $372 million.
Reported earnings per share was $1 34, excluding the impact of restructuring and the gain on sale of the office building adjusted earnings per share was $1 43.
Katrina O'connell: Adjusted earnings per share includes $0.29 of discrete tax benefits and a $0.05 benefit related to the 53rd week. Now turning to the balance sheet and cash flow, inventory levels were meaningfully below last year in all quarters, with fiscal 2023 ending inventory declining 16% year-over-year.
Speaker Change: Adjusted earnings per share includes 29 of discreet tax benefits and a <unk> <unk> benefit related to the 50 <unk> week.
Speaker Change: Now turning to the balance sheet and cash flow.
Speaker Change: Inventory levels were meaningfully below last year in all quarters with fiscal 2023, ending inventory declining 16% year over year. We ended the year with cash and equivalents of $1 9 billion, an increase of 54% from last year.
Katrina O'connell: We ended the year with cash and equivalents of $1.9 billion, an increase of 54% from last year. Full year net cash from operating activities was $1.5 billion as a result of our improved operating profit and lower inventory buys. Free cash flow with an inflow of $1.1 billion. We remain committed to delivering an attractive quarterly dividend as a core component of total shareholder return. During the year, we returned $222 million to shareholders in the form of dividends, representing annual dividends of 60 cents per share.
Speaker Change: Full year net cash from operating activities was $1 5 billion as a result of our improved operating profit and lower inventory bias free cash flow was an inflow of $1 1 billion.
Speaker Change: We remain committed to delivering an attractive quarterly dividend as a core component of total shareholder returns.
Speaker Change: During the year, we returned $222 million to shareholders in the form of dividend representing annual dividends of <unk> 60 per share on.
Katrina O'connell: On February 27th, our board approved maintaining a dividend of 15 cents per share for the first quarter of fiscal 2024. In summary, As I reflect on 2023, I'm proud of the discipline and rigor we brought back into our foundation, which has resulted in meaningful recovery and profits, as well as strong free cash flow. I'm also encouraged by the progress we made in the second half of the year, with sales stabilizing in the fourth quarter, led by progress at Old Navy and Gap, early proof points of brand reinvigoration. We remain committed in 2024 to delivering continued improved performance through maintaining our financial and operational rigor. Now, let me turn to our 2024 outlook. Our attention in 2024 remains on controlling the controllable, gross margin recovery, expense discipline, inventory management, and maintaining a strong balance sheet while we continue the foundational work related to our brands as we aspire to drive relevance and revenue. We expect this rigor to deliver roughly flat sales, excluding the 53rd week, while delivering low to mid-teens operating income growth.
Speaker Change: On February 27th our board approved maintaining a dividend of <unk> 15 per share for the first quarter of fiscal 2024.
Speaker Change: In summary.
Speaker Change: As I reflect on 2023, I'm proud of the discipline and rigor we brought back into our foundation, which has resulted in meaningful recovery in profits as well as strong free cash flow I'm also encouraged by the progress we made in the second half of the year with sales stabilizing in the fourth quarter led by progress at old Navy and gap.
Speaker Change: Early proof points of brand reinvigoration.
Speaker Change: Main committed in 2024 to delivering continued improved performance through maintaining our financial and operational rigor.
Speaker Change: Now, let me turn to our 2020 for outlook.
Speaker Change: Our attention in 2024 remains on controlling the controllable gross margin recovery expense disciplined inventory management and maintaining a strong balance sheet. While we continue the foundational work related to our brands as we aspire to drive relevance and revenue.
Speaker Change: We expect this rigor to deliver roughly flat sales, excluding the 50 <unk> week, while delivering low to mid teens operating income growth.
Katrina O'connell: Let me provide some details on our outlook, starting with the full year 2024. Our outlook of flat net sales year over year, excluding the 53rd week, assumes continued performance at Old Navy and Gap, offset by challenging comparisons for Athleta in the first half of the year as the brand laps elevated discounting from 2023 and a longer recovery timeline at Banana Republic. This net sales outlook also contemplates the following unique dynamic. First, as a reminder, 2024 is a 52-week year, but it will be compared in total to a 53-week year in 2023. The loss of the 53rd week results in a detrimental impact of approximately $160 million on fiscal 2024 net sales.
Speaker Change: Let me provide some details on our outlook.
Speaker Change: Starting with the full year of 2024.
Speaker Change: Our outlook of flat net sales year over year, excluding the 50 <unk> week assumes continued performance at old Navy and gap.
Speaker Change: Offset by challenging comparison froth letter in the first half of the year as the brand lapse elevated discounting from 2023 and a longer recovery timeline at Banana Republic.
Speaker Change: This net sales outlook also contemplates the following unique dynamics.
Speaker Change: First as a reminder, 2024 is a 52 week year, but will be compared in total to a 53 week year in 2023.
Speaker Change: Loss of the 50 <unk> week result in a detrimental impact of approximately $160 million to fiscal 2024 net sales.
Katrina O'connell: It's worth noting that the timing shifts associated with the 53rd week are expected to be impactful to both Q1 and Q4 in 2024. In the first quarter, we expect to benefit from the timing shifts as we lose a low volume week in February and add a modestly larger week in May. Additionally, the fourth quarter is expected to be negatively impacted by the loss of the 53rd week.
Speaker Change: It's worth noting that the timing shifts associated with the 50 <unk> week are expected to be impactful to both Q1, and Q4 and 2024 and.
Speaker Change: In the first quarter, we expect to benefit from the timing shifts as we lose a low volume week in February and add a modestly larger weaken may. Additionally.
Speaker Change: Additionally, the fourth quarter is expected to be negatively impacted by the loss of the 50 <unk> week.
Katrina O'connell: Second, we have embedded multiple scenarios that contemplate modest headwinds in the first half of the year related to late deliveries as a result of geopolitical issues in the Red Sea. We currently expect that impact to moderate in the second half of 2024, but we will monitor the situation closely as we move through the year. And third, we're not anticipating major changes in consumer dynamics and macroeconomic pressures in 2024. In addition, I'd like to comment on the potential impact of the recent CFPB ruling on late fees for credit card holders. Our outlook assumes a mid-year implementation of the ruling, which we expect to be largely offset in 2024 by other levers within our credit card program. Now, moving to gross margins.
Speaker Change: Second we have embedded multiple scenarios that contemplate modest headwinds in the first half of the year related to late deliveries as a result of geopolitical issues in the Red Sea.
Speaker Change: We currently expect that impact will moderate in the second half of 2024, but we will monitor the situation closely as we move through the year and third we're not anticipating major changes to consumer dynamics and macroeconomic pressures in 2024.
Speaker Change: In addition, I'd like to comment on the potential impact of the recent CFPB ruling on late fees for credit cardholders, our outlook assumes a mid year implementation of the ruling which we expect to be largely offset in 2024 by other levers within our credit card program.
Now moving to gross margin.
Katrina O'connell: We anticipate growth margin expansion of at least 50 basis points for the full year compared to fiscal 2023's gross margin of 38.8%. Our Gross Margin Outlook is driven by the following facts. We expect commodity cost tailwinds in the first half of the year, which we anticipate will become largely neutral in the second half of the year. We expect Rod to deleverage modestly on the lower sales volume resulting from the loss of the 53rd week.
Speaker Change: We anticipate gross margin expansion of at least 50 basis points for the full year compared to fiscal 2023% gross margin of 38, 8%.
Speaker Change: Our gross margin outlook is driven by the following factors.
Speaker Change: We expect commodity cost tailwind in the first half of the year, which we anticipate will become largely neutral in the second half of the year.
Speaker Change: We expect rod to deleverage modestly on the lower sales volume, resulting from the loss of the 50 <unk> week.
Katrina O'connell: And we continue to take a measured view of the consumer environment in fiscal 2024, particularly as we lap the significant improvements we delivered in promotional activity during 2023. Regarding SG&A, SG&A of $5.1 billion is expected to decline year-over-year as we benefit from $150 million in reductions related to last year's strategic actions and lower costs from the loss of the 53rd week, which are partially offset by wage contributions. We are committed to strong financial discipline, and we will continue to identify and pursue efficiencies as we drive our strategic plan. Considering the dynamics regarding sales, growth margin, and SG&A, we see a clear path toward delivering low to mid-teens operating income growth in fiscal 2024 versus the $606 million of adjusted operating income in 2023. We expect full-year net interest expense to be similar to fiscal 2023, with interest expense being largely offset by interest on cash balances. However, we will be watching Fed actions to determine if lower interest rates over time might impact this dynamic during the year.
Speaker Change: And we continue to take a measured view of the consumer environment in fiscal 2024, particularly as we lap significant improvements we delivered in promotional activity during 2023.
Speaker Change: Regarding SG&A SG&A of $5 $1 billion is expected to decline year over year as we benefit from a $150 million in reductions related to last year's strategic actions and lower costs from the loss of the 50, <unk> week, which are partially offset by wage inflation we.
Speaker Change: We are committed to strong financial discipline, and we will continue to identify and pursue efficiencies as we drive our strategic plan.
Speaker Change: Considering the dynamics regarding sales gross margin and SG&A, we see a clear path towards delivering low to mid teens operating income growth in fiscal 2024 versus the $606 million of adjusted operating income in 2023.
Speaker Change: We expect full year net interest expense to be similar to fiscal 2023 with interest expense being largely offset by interest on cash balances. However, we will be watching fed actions to determine if lower interest rates over time might impact this dynamic in the air.
Katrina O'connell: We are planning for a more normalized tax rate of 28% in 2024. This compares to 9.7% in fiscal 2023, as we benefited from several discrete tax items, which, as previously noted, added approximately 29 cents to fiscal 2023 earnings per share. We are planning capital expenditures of about $500 million for the year. Now, let me share some color on our outlook for the first quarter of fiscal 2024. We're pleased with the trend quarter to date and are planning for net sales in Q1 to be roughly flat versus Q1 2023. Consistent with our full year view, our first quarter outlook assumes continued performance at Old Navy and Gap, offset by challenging comparisons for Athleta and a longer recovery timeline at Banana Republic. As it relates to first quarter growth margin, we expect at least 100 basis points of expansion compared to the adjusted gross margin of 37.2% in the first quarter of fiscal 2023, driven by the commodity cost tailwind. We continue to take a prudent approach in relation to the promotional environment in the first quarter.
We are planning for a more normalized tax rate of 28% in 2024. This compares to nine 7% in fiscal 2023, as we benefited from several discrete tax items, which as previously noted added approximately 29 to fiscal 2023 earnings per share.
Speaker Change: We are planning capital expenditures of about $500 million for the year.
Speaker Change: Now, let me share some color on our outlook for the first quarter of fiscal 2024.
Speaker Change: We're pleased with the trends quarter to date and are planning for net sales in Q1 to be roughly flat versus Q1 2023.
Speaker Change: Consistent with our full year view, our first quarter outlook assumes continued performance at old Navy and gap.
Speaker Change: Offset by challenging comparisons for Athleta, and a longer recovery timeline of Banana Republic.
Speaker Change: As it relates to first quarter gross margin, we expect at least 100 basis points of expansion compared to the adjusted gross margin of 37, 2% in the first quarter of fiscal 2023, driven by commodity cost tailwind.
We continue to take a prudent approach in relation to the promotional environment in the first quarter and we're planning SG&A of approximately $1 2 billion in the first quarter of fiscal 2024.
Operator: And we're planning SG&A of approximately $1.2 billion in the first quarter of fiscal 2024. In closing, we're pleased to deliver strong financial results during both the fourth quarter and the full year, demonstrated through gross margin expansion, expense discipline, lean inventory, and strong cash generation. The financial and operational rigor that we've worked to develop and 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 line for questions. Operator?
Speaker Change: In closing, we're pleased to deliver strong financial results during both the fourth quarter and the full year demonstrated through gross margin expansion expense discipline lean inventory and strong cash generation the financial and operational rigor that we've worked to develop and will continue to pursue is enabling us to <unk>.
<unk> on reinvigorating, our brands with the goal of generating sustainable profitable growth and delivering value for our shareholders over the long term.
Speaker Change: With that we'll open up the line for questions operator.
Adrienne Eugenia Yih: 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 comes from the line of Adrienne Yih from Barclays. Please go ahead.
Speaker Change: 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 comes from the line of Adrianne E from Barclays. Please go ahead.
Richard Dickson: Great. Thank you very much. Good afternoon, and congratulations to everybody on the Gap team. Richard, my first question is, you know, the hiring of Zac Posen as chief creative officer of Gap Inc. and also chief creative officer of Old Navy. The number one sort of where his focus obviously is going to be on Old Navy, but how are you expecting him to be used more broadly across Gap Inc.? And then, historically, Gap has had designers in the fold before. And we always say you design for the one, and merchandise for the masses. So I just want to, you know, get your philosophy on how you kind of expect to keep the guardrails on that. And then Katrina, if you could just help us with the $5.1 billion OPEC, it seems very flattish, but you had mentioned that there were opportunities. It seems a little bit, it seems a little bit high, I guess is the way I would put it. So any color there would be great.
Adrienne Eugenia Yih: Great. Thank you very much and good afternoon, and congratulations to everybody on the gap team.
Adrienne Eugenia Yih: Richard My first question is.
Adrienne Eugenia Yih: The hiring of Zac Posen as key creative of Gap, Inc. But also creative and old Navy. The number one sort of where his focus obviously is going to be on old Navy, but how are you expecting them to be used more broadly across gap Inc.
Adrienne Eugenia Yih: And then historically gap has had designers in the fold before I always say you designed for the one in merchandise for the masses. So I just wanted to.
Adrienne Eugenia Yih: Get your philosophy on how you kind of expect to keep the guardrails on that.
And then Katrina if you could just help us with the $5 1 billion dollar Opex seems very flattish, but you had mentioned that there was there were opportunities it seemed a little bit it.
Adrienne Eugenia Yih: It seemed a little bit high I guess it is.
Katrina O'connell: The way I would put it so any color there would be great. Thank you very much.
Richard Dickson: Thank you very much. Sure. Thanks, Adrienne. I appreciate the question. And we're very excited to welcome Zach to the company, and in particular to our largest brand, Old Navy, where he's going to be serving as Chief Creative Officer. Zach is one of America's most celebrated designers.
Katrina O'connell: Sure. Thanks, Adrian I appreciate the question.
Katrina O'connell: We're very excited to welcome back to the company.
Katrina O'connell: And in particular to our largest brand old Navy, where he is going to be serving as chief Creative officer. Zach is one of Americas, most celebrated designers his creative expertise.
Richard Dickson: His creative expertise, his cultural clarity, has consistently evolved American fashion, making him really a great fit for the company as we engage our culture and look to reinvigorate our storied brand. Zach's role as Chief Creative Officer at Old Navy is really designed to harmonize, orchestrate, and dial up the storytelling across product and market, um looking at how we create brand relevance and chariot experiences that ultimately celebrate the brand's ownable attributes fun fashion and value for the whole family, Now, as Zach gets more immersed in the business, his influence will be really well considered to enhance the continuity of the brand's reinvigoration, which we've already started to see show up on the scoreboards. And his leadership across the portfolio will add a new dimension of relevance. And I'm really looking forward to Zach on the team and having him get immersed in our portfolio and our brand. Fantastic.
Katrina O'connell: His cultural clarity.
Katrina O'connell: Has consistently evolved American fashion, making him really a great fit for the company as we engage our culture and look to reinvigorate our storied brands <unk>.
Katrina O'connell: <unk> role as Chief Creative Officer at Old Navy is really designed to harmonize orchestrate and dial up the storytelling across product and marketing.
Katrina O'connell: Looking at how we create brand relevance and sharing experiences.
Katrina O'connell: Ultimately celebrate the brands <unk> attributes fun fashion and value for the whole family.
Katrina O'connell: Now as that gets more immersed in the business his influence will be really well considered to enhance the continuity of the brand's reinvigoration, which we've already started to see show up on the scoreboard and his leadership across the portfolio will add a new dimension of relevance and I'm really.
Katrina O'connell: Looking forward to Zack on the team and having them get immersed in our portfolio at our brands.
Speaker Change: Fantastic then Adrian.
Katrina O'connell: Thank you. Yeah, let me take on the SG&A question. It's a great one.
Speaker Change: Let me take on the SG&A question.
It's a great one and I think you'd agree that our we are committed to maintaining financial and operational rigor, which has really strengthened our financial footing 2023 reflected the benefits of the ongoing work, particularly in terms of margins expenses inventory cash flow.
Katrina O'connell: And I think you'd agree that we're committed to maintaining financial and operational rigor, which has really strengthened our financial footing. 2023 reflected the benefits of the ongoing work, particularly in terms of margins, expenses, inventory, and cash flow. And we just delivered a year with SG&A reductions of approximately $300 million. The outlook we've provided today does reflect another $70 million of reductions. That's really driven by the remaining $150 million reduction from last year's strategic actions, partially offset by inflationary pressures from wages and other headwinds.
Speaker Change: We just delivered a year with SG&A reductions of approximately $300 million. The outlook. We provided today does reflect another $70 million of reductions that's really driven by the remaining $150 million reduction from last year's strategic strategic actions par.
Speaker Change: Partially offset by inflationary pressures from wages and other headwinds.
Katrina O'connell: I believe we can make our cost structure more efficient and drive operating margin expansion, but we have work to do to get back to historical levels. So our outlook today reflects our current point of view, but we'll continue to assess the efficiency of our investments and look for opportunities for reduction or redeployment where it makes sense. So, more to come as we move through the year.
Speaker Change: I believe we can make our cost structure more efficient and drive operating margin expansion, but we have work to do to get back to historical leverage levels.
Speaker Change: Our outlook today reflects our current point of view, but we'll continue to assess the efficiency of our investments and look for opportunities for reduction of redeployment, where it makes sense so more to come as we move through the year.
Speaker Change: Fantastic Best of luck. Thank you.
Adrienne Eugenia Yih: Best of luck. Thank you. Your next question comes from the line of Bob Durbel from Guggenheim Securities. Please go ahead. Hi, good afternoon.
Speaker Change: Your next question comes from the line of Bob durable from Guggenheim Securities. Please go ahead.
Hi, good afternoon.
Operator: Um, Richard, I was wondering if you could spend some more time on the marketing initiatives that are underway. You know, I've seen some changes within Athleta, but I've also seen, you know, the gap campaign. Transcripts provided by Transcription Outsourcing, LLC. Sure. Yeah, Bob. Thank you for the question. But marketing is a much more complex function today than it was in the past, and our brands need to show up where consumers are, but they need to show up in relevant ways. And the media mix to create relevant demand creation has changed vastly, and we're approaching it very differently than in the past.
Bobby L. Martin: Richard I was wondering if you could spend some more time on the marketing initiatives that are underway I've seen.
Bobby L. Martin: Changes within Athleta, but I've also seen the gap campaign, it's been really highly visible. So I guess, if you could just talk about how you're approaching it and I guess the.
Richard Dickson: The level of expense that you're there and sort of the commitment to sort of reinvesting in the marketing I think there'll be pretty helpful. For us. Thanks sure Yes, Bob Thank you for the question.
Richard Dickson: With marketing is a much more complex function today than it was in the past and our brands need to show up where consumers are but they need to show up in relevant ways and the media mix to create relevant demand creation has changed fastly and we're approaching it very differently than in the past.
Richard Dickson: There really is an art and a science to creating demand today, and Gap Inc.'s brands have been lagging behind, but we are working on delivering more efficiency with our marketing and media dollars to have more specific and significant impact. And what I would say is, while we don't share marketing spend by brand, it's really not about spending more; it's about spending more efficiently. And I think you can take the Gap Linen campaign, as you mentioned, as an example. Gap's probably the furthest along in this new approach, using a holistic approach, social, influencers, streaming, linear, throughout all the way through our stores' site to amplify this big idea.
Richard Dickson: There really is an art and science to creating demand today and gap Inc. Brands have been behind but we are working on delivering more efficiency with our marketing and media dollars to have more specific and significant impact what I would say is while we don't share marketing spend by brand it's really not.
Richard Dickson: About spending more it's.
Richard Dickson: Spending more efficiently and I think you can take the GAAP Linden campaign as you mentioned as an example, thats probably furthest along in this new approach using a holistic approach social influencers streaming linear.
Richard Dickson: Throughout all the way.
Through our stores site to amplify this big idea and I think as Youll see you need to be driving a message consistently from the top to the bottom of the marketing funnel and historically, we have not done a good job of keeping the message consistent throughout the bundle and this is a great example of our new marketing methodology.
Richard Dickson: And I think, as you'll see, you need to be driving a consistent message from the top to the bottom of the marketing funnel. And historically, we've not done a good job of keeping the message consistent throughout the funnel. And this is a great example of our new marketing methodology. Now, on Athleto, which you mentioned specifically, which again, is another great example that we have a really significant opportunity with this important brand. The power of she is a compelling brand platform, and we know the Athleta brand resonates with consumers, but our missteps in executing product marketing experiences have ultimately weighed heavily on the performance of the brand in recent years. Chris, as you know, Blakeslee joined us in 2023, leading a team that is driving the brand reinvigoration. And I think you're starting to see some of that reinvigoration playbook through marketing, great storytelling executed through social media, and our stores. We're very excited about the tremendous potential of Athleta.
Richard Dickson: Now on Athleta, which you mentioned, specifically, which again is another great example.
Richard Dickson: Have a really significant opportunity with this important brand the power of she is a compelling brand platforms and we know the athletic brand resonates with consumers, but our missteps in executing product marketing experience as ultimately weighed heavily on the performance of the brand in recent years, Chris as you know Blake.
Richard Dickson: He joined US in 2023, leading a team that is driving the brand reinvigoration and I think as you start to see some of that reinvigoration playbook.
Richard Dickson: Through marketing and great storytelling executed through social media in our stores, we're very excited about.
Richard Dickson: Really the tremendous potential of Athleta and gap as well as I mentioned before incredible storytelling brand historically, a pop culture brands that truly does more than sell clothes and today, we're really moving again the current campaign Linden moves. It is a great example of GAAP, having a voice again in the <unk>.
Richard Dickson: And Gap, as I mentioned before, an incredible storytelling brand, historically a pop culture brand that truly does more than sell clothes. And today, we're really moving again. The current campaign, Linen Moves, is a great example of Gap having a voice again in the cultural conversation, taking linen as an amplified big idea and doing it and owning it only the way Gap can. Music, leverage has always been synonymous with Gap. We've teamed up with Grammy award winner Tyla and the recent Brit award winner Jungle and created a credible storytelling campaign that's culturally relevant and responding.
Richard Dickson: Actual conversation, taking linen is the amplified big idea and doing it in owning it only the way GAAP 10 music leverage always been synonymous with gap. We've teamed up with Grammy Award winner Tyler and recent Brit Award winner Jungle and created Accretable.
Richard Dickson: Retelling campaign, that's culturally relevant and resonating in my last point.
Richard Dickson: And my last point, particularly in the marketing metrics that matter. Places like TikTok and Instagram are new platforms for Gap in the context of being more relevant to our consumer. Linen Moves is currently Gap Brand's highest performing video on both of these platforms ever.
Richard Dickson: Particularly in the marketing.
Richard Dickson: Metrics that matter places like tick tock, and Instagram or new platforms for the gap in the context of being more relevant to our consumer Linden moves is currently gap brand's highest performing video on both of these platforms ever.
Richard Dickson: So in these early days, we're encouraged by the momentum that we're seeing. The playbook is in action, and there'll be a lot more to come. Thank you very much. Your next question comes from the line of Ike Boruchow from Wells Fargo. Please go ahead.
Richard Dickson: So early days, we're encouraged with the momentum that we're seeing the playbook is in action and there'll be a lot more to come.
Speaker Change: Thank you very much.
Speaker Change: Your next question comes from the line of Ike borrow Chow from Wells Fargo. Please go ahead.
Irwin Bernard Boruchow: Hey, everyone, congrats on the quarter. Two questions. Richard, maybe first for you, just, I hate to put you in a tough spot. But you know, there's, let's leave Atleta and Banana alone.
Speaker Change: Hey, everyone congrats on the quarter two.
Ike Chow: Two questions.
Richard maybe first for you.
Ike Chow: I hate to put you in a tough spot but.
Ike Chow: Let's leave Athleta and banana.
Ike Chow: <unk>.
Richard Dickson: Ongoing outperformance, I think, was the wording for the guidance for Old Navy and Gap. If you have to look at both of those brands, which one do you feel like you have your arms around the best in terms of branding and marketing and sustainability of positive comps? And then just the follow-up question would be for Katrina, just, I think, based on your guidance, you're around four and a half percent margin. If we kind of go back pre-COVID, you were kind of consistently in the high single digits.
Ike Chow: The ongoing outperformance I think was the it was where the words for the guidance for old Navy and gap. If you have to look at both of those brands, which ones do you feel like you have your arms around the bus in terms of branding and marketing and sustainable sustainability of positive comps and then the follow up question would be for Katrina I think based on your guidance.
Ike Chow: You were around 455% margin, if we kind of go back pre Covid you were kind of consistently in the high single digits.
Irwin Bernard Boruchow: How are we thinking about multi-year, the building of the foundation that you guys are doing if you can sustain, you know, low single-digit growth? Like, how should we think about the ultimate margin structure of the company over time? Thanks, Ike. First off, I'd say my arms are everywhere in the context of, you know, what we're trying to achieve here.
Ike Chow: Are we thinking about multiyear.
Ike Chow: The building and the foundation that you guys are doing if you can sustain.
Ike Chow: Low single digit growth.
Ike Chow: How should we think about the ultimate margin structure of the company over time.
Speaker Change: Thanks Ike.
Ike Chow: First off I'd say my arms are everywhere.
Ike Chow: In the context of what we're trying to achieve here and I think again speaking for the quarter results, we exceeded expectations on both top and bottom line gaining market shares and the strength was really driven by the two largest brands in our portfolio.
Richard Dickson: And I think, again, speaking for the quarter results, we exceeded expectations on both the top and bottom lines, gaining market share, and the strength was really driven by the two largest brands in our portfolio, Old Navy and Gap. And more specifically, you know, Old Navy is the largest brand in our portfolio, and we've been working on reasserting the brand's authority as the number two apparel brand in the country. We have a strong retail presence; we have over 1200 stores and an incredible online presence, which I would encourage you to take a look at today in the context of its clarity and new relevant persona. We did have a strong quarter, you know; our sales were up 6%, with comps up 2%.
Ike Chow: Avi and gap.
Ike Chow: No.
Ike Chow: More specifically old Navy is the largest brand in our portfolio and we've been working on reasserting. The brand's authority as the number two apparel brand in the country and we have a strong retail presence we have over 200 stores at an incredible online presence, which I would encourage you to take a look at today in the context of its clarity.
Ike Chow: <unk> and new relevant persona, we did have a strong quarter, our sales were up 6% with comps up 2%. We gained share in all segments, but did particularly well in women's which we dialed up from a marketing perspective, and I will say the team has done a great job driving the financial and operational rigor.
Richard Dickson: We gained share in all segments but did particularly well in women's, which we dialed up from a marketing perspective. And I will say the team has done a great job driving the financial and operational rigor, and Old Navy is really starting to see early signs of that brand reinvigoration. In particular, we know Old Navy has a reference that reinforces style authority, but with more clarity on price and quality, both in stores and online. And again, we're very encouraged with those early results and the consistency that we expect to have throughout the year in 2024 as we build upon that discipline. I talked about Gap in the previous question, but it's similar.
And old Navy is really starting to see early signs of that brand reinvigoration. In particular, we know old Navy has a reference reinforcing style authority, but with more clarity on price and quality both in stores and online and again, we're very encouraged with those early results.
Ike Chow: The consistency that we expect to have throughout the year in 2024, as we build upon that disciplined I talked about gap in the previous question, but similar.
Katrina O'connell: You know, we've had a great quarter with Gap and Year. We were very happy with the positive comps, and we've been working to reignite Gap and drawing on what made this brand so special in the first place. And ultimately, I think this campaign that you're seeing in the market today, again, go online, take a look. I think it's a great example of the playbook in action and Gap having a voice in culture again, taking an idea in our storytelling and amplifying it in the way that only Gap can.
Ike Chow: Had a great.
Ike Chow: Quarter with GAAP and year, we were very happy with the positive comps and we've been working to reignite gap and drawing on what made this brand so special in the first place.
Ike Chow: And ultimately I think this campaign that you're seeing in market. Today again go online take a look I think it's a great example of the playbook in action and GAAP, having a voice and culture again, taking an idea in our storytelling and amplify in a way that only GAAP cap.
Matthew Robert Boss: And then I could talk more specifically about the margin structure. I would say I do see a path to delivering operating margin expansion in the long term. But we have work to do to get back to historical levels. I think first and foremost, you know, this business leverages nicely when we get the top line moving, and it hasn't been growing regularly. And that's really what the brand reinvigoration work that Richard's been referencing is all about getting our businesses back to relevance and revenue and driving the top line, which will, in itself, drive operating margin expansion. And in the meantime, we've been through several years of transformation, partnering with international markets, closing our unprofitable stores, divesting of smaller brands, all of which have reduced the fixed cost base. And then recently, we've been doing other cost actions, all of which have that discipline taken out about $550 million of costs.
Ike Chow: And then I have to talk more specifically to the margin structure I would say I do see a path to delivering operating margin expansion in the long term.
Ike Chow: We have work to do to get back to historical levels, I think first and foremost.
Ike Chow: This business Leverages nicely when we get the top line moving and it hasn't been growing regularly and Thats really what the brand reinvigoration work that Richard has been referencing is all about getting our businesses back to relevance and revenue and driving the top line that unto itself will drive operating margin expansion and in the meantime, we've been through.
Several years of transformation partnering international markets closing unprofitable stores divesting of smaller brands all of that reduced our fixed cost base.
Ike Chow: And then recently you had been doing other cost actions all of which have that discipline has taken out about $550 million of cost and that led to this cost structure that leverages, so nicely on sales growth.
Richard Dickson: And that led to this cost structure that leverages so nicely on sales growth. And, as we just talked about, it will consistently evaluate the cost structure to identify additional opportunities. So, you know, again, to sort of end where I started, there's a path to delivering operating margin expansion in the long term as we get back to delivering consistent sales growth. Thanks, Your next question comes from the line of Matthew Boss from JP Morgan. Please go ahead.
Ike Chow: And we just talked about it will consistently evaluate the cost structure to identify additional opportunities. So.
Ike Chow: Again to sort of end, where I started there's a path to delivering operating margin expansion and long term as we get back to delivering consistent sales growth.
Ike Chow: Yeah.
Speaker Change: Thanks, so much.
Speaker Change: Your next question comes from the line of Matthew Boss from J P. Morgan. Please go ahead.
Katrina O'connell: Thanks and congrats on a nice presentation. Could you elaborate on the market share gains that you cited that you're seeing at Old Navy and the Gap if you break them down maybe by some of the destination categories for each of those brands? Any change in momentum that you're seeing at Old Navy or Gap as we think about early spring and some of the maybe early trends? And then Katrina, so you're coming off 500 basis points of merchandise margin expansion, and inventories are down mid-team? I guess it helps us to think about the magnitude of the merchandise margin opportunity in 2024.
Matthew Robert Boss: Thanks, and congrats on a nice quarter.
Matthew Robert Boss: Thank you.
Matthew Robert Boss: Richard could you elaborate on the market share gains that you cited that you are seeing at old Navy and the gap. If you break down maybe by some of the destination categories for each of those brands than any change in momentum that youre seeing at old Navy or GAAP as we think about early spring and some of the maybe early trends and then.
Matthew Robert Boss: Katrina.
Matthew Robert Boss: Coming off a 500 basis points of merchandise margin expansion inventories are down mid teens, I guess, how best to think about the magnitude of merchandise margin opportunity in 2024, just considering some of the product cost tailwind and maybe your view on the promotional landscape.
Richard Dickson: Just considering some of the product cost tailwinds and maybe your view on the promotional. Absolutely, Matt. Thanks for the question. As mentioned, Gap Inc. gained market share in the quarter year over year, which we were very pleased with. And that is on the backdrop of a declining overall industry. So even more credit to the strength of these two particular brands at this particular time. It was driven, of course, by Old Navy and Gap, as mentioned. And frankly, what we've seen in particular is, you know, at Gap Inc., we gained share in literally all segments. The story's game share was driven by Old Navy and Gap and also Outerwear, Sleep, Pants, Wovens, and Topped also gained. Kids and Baby, as it's fair to mention, is a really important segment of our business. The Old Navy is the number one kids and baby brand in the US.
Richard Dickson: Absolutely Matt. Thanks for the question as mentioned Gap, Inc gained market share in the quarter.
Richard Dickson: Year over year, which we were very pleased with and that is on the backdrop of a declining overall industry. So even more credit to the strength of these two particular brands at this particular time. It was driven of course by old Navy and gap as mentioned and frankly, what we've seen in particular is.
In gap, Inc. We gained share in literally all segments.
Richard Dickson: The stores gained share driven by old Navy and gap and also outerwear sleep.
Richard Dickson: Hence woven tops also gained.
Richard Dickson: Kids and baby as well.
Richard Dickson: Is it fair to mentioned is a really important segment of our business. The old Navy is the number one kids and baby brand in the U S Gap, Inc. Owns 9% of the total market, we'd have proven capabilities and brands that resonate in this category and so over time, it's also an opportunity for us to accelerate.
Richard Dickson: Gap Inc. owns 9% of the total market. We've got proven capabilities and brands that resonate in this category. And so over time, it's also an opportunity for us to accelerate and become even more important a player in this segment. And as you'll see, and as we evolve our dialogue going forward, we have opportunities in several key categories of strength. Denim, Active, Kids, and Baby: these will all be really good conversations for us to have as we move forward with our reinvigoration plan. And then on gross margin, I just provided guidance for the full year of at least 50 basis points of margin expansion for the full year and at least 100 basis points of expansion for Q1. So, let me talk to you a little bit about that.
Richard Dickson: And become even more important of a player in this segment and as you'll see and we evolve R. R.
Richard Dickson: Our dialog going forward, we have opportunities in several key categories of strength denim active kids and baby. These will all be <unk>.
Richard Dickson: Really good conversations for us to have as we move forward with our reinvigoration plans.
Richard Dickson: And then on gross margin.
Richard Dickson: I just.
Richard Dickson: <unk> guidance for the full year of at least 50 basis points of margin expansion.
Richard Dickson: For the full year and at least 100 basis points of expansion for Q1. So let me talk to you a little bit about that I think as you noted the rigor we utilized in 2023 drove 380 basis points of expansion year over year.
Katrina O'connell: I think, as you noted, the rigor we utilized in 2023 drove 380 basis points of expansion year over year, and as we recaptured a lot of inflation in the back half of the year, and we had stronger assortments with the tighter inventories that we had overall, we're really maintaining that rigor and committed to that as we head into 2024. I think you saw that we ended with 16% less inventory year over year. We expect similar inventories coming out of Q1, and so that inventory rigor will allow us to lap the about 200 basis points of improvement from less promotions last year this year as we head into the year. So commodity cost tailwinds in the first half of this year will become largely neutral in the back half, and we are maintaining the rigor so that we can continue to lap last year's outsized promotion improvement. Thanks a lot.
Richard Dickson: And as we recaptured a lot of inflation in the back half of the year and we had stronger assortments with the tighter inventories that we had overall.
Richard Dickson: We're really maintaining that rigor and committed to that as we head into 2024 I think you saw that we ended with 16% less inventory year over year, and we expect similar inventories coming out of Q1.
Richard Dickson: So that inventory rigor will allow us to lap the about 200 basis points of improvement from less promotions last year.
Richard Dickson: This year as we head into that year. So.
Commodity cost tailwind in the first half this year will become largely neutral in the back half.
Richard Dickson: And we are maintaining the rigor so that we can continue to lap last year's outsized promotion.
Richard Dickson: Improvement.
Speaker Change: Thanks, Matt.
Michael Benetti: Your next question comes from the line of Michael Benetti from Evercore ISI; please go ahead. Congratulations on a great court. I'm just, I guess I'm just following a little bit of math here. You've got the merchandise margins up nicely to 2019 in the quarter, but I don't, I don't know if all the brands are back above 2019 margins. So I know, I know you were asked about merchandise margins a little while ago. I, you know, I don't think all the brands are above. Can you speak through a brand lens where you see the opportunity for the most merchandise margin from here and how you're attacking that opportunity and the plan you gave us today? And then, I think if I heard you right, you said that Rod, you mentioned that Rod would leverage.
Speaker Change: Your next question comes from the line of Michael Binetti from Evercore ISI. Please go ahead.
Michael Binetti: Congrats on a great quarter.
Michael Binetti: I'm just I guess, just following a little bit of math here, you've got the merch margins up nicely to 2019 in the quarter, but I don't I don't know that all the brands are back above 2019 margins. So I know I know you were asked about merch margins a little while ago.
Michael Binetti: Thank all of the brands are above can you speak through a brand lens, where do you see.
Michael Binetti: The opportunity the most on on merchandise margins from here and how you're attacking that opportunity Mcclenny gave us today and then I think if I heard you right.
Michael Binetti: <unk> said that.
Michael Binetti: Rod you mentioned that Rod wood.
Leverage.
Katrina O'connell: Do you think rod leverage is excluding the 53rd week this year, maybe the cadence of rod through the airplane? Sure. So I think if I think about the performance for 2024, our outlook includes the fact that our brands are in sort of different places as it relates to brand reinvigoration. And similar to the performance we just put up for 2023, we're seeing early proof points of the brand reinvigoration at Old Navy and Gap, our two largest brands, which really gives us more confidence in the brands' ability to be delivering consistent performance going forward. And so while we don't guide by brand, we would expect Old Navy and Gap to deliver positive sales in the year. We continue to reset Athleta, I think we talked about that.
Do you think rod Leverages, excluding the 50 <unk> week this year and maybe the cadence of rod through the year. Please.
Michael Binetti: Sure.
Rod: I think if I think about the performance for 2024. Our outlook include the fact that our brands are in sort of different places as it relates to brand reinvigoration.
Rod: And similar to the performance, we just put up for 2023.
Rod: We're seeing early proof points of the brand reinvigoration at old Navy and gap, our two largest brands, which really gives us more confidence in the brand's ability to be delivering consistent performance going forward.
Rod: And so while we don't guide by brand, we would expect old Navy and gap to deliver positive sales in the year. We continue to reset Athleta I think we've talked about that.
Katrina O'connell: And as we lap the brand's missteps made in the prior year, that will weigh on revenue in the front half of the year. But we're encouraged, as we talked about, by the underlying progress in some of the early changes, and longer term, we see lots of growth potential at that brand. And lastly, the recovery of Banana will take more time as the brand works on better execution of the fundamentals. However, we don't disclose margins by brand.
Rod: And as we lap the brand's missteps made in the prior year that will weigh on our revenue in the front half of the year.
Rod: But we're encouraged as we talked about by the underlying progress in some of the early changes and longer term, we see lots of growth potential at that brand.
Rod: And then lastly, the recovery of Banana will take more time as the brand works on better execution of the fundamentals, but we don't disclose margins by brand.
Katrina O'connell: We're just encouraged by the outlook we provided today of overall operating income growth, and we're just going to continue to apply rigor in the middle of the P&L that will result in the low to mid-teens operating income growth that we gave today on roughly flat sales growth. As it relates to Rod, our principle for Rod generally on the year is that Rod leverages on flat to slightly positive sales. So when you think about excluding the 53rd week, Rod is very slightly deleveraging on the year. And that's just, you know, some dynamics related to the 53rd week. But that's how we think about Rod.
Rod: We're just encouraged by the outlook, we provided today of overall operating income growth and we're just going to continue to use rigor in the middle of the P&L that will result in low to mid teens operating income growth that we gave today.
Rod: <unk> on roughly flat sales growth.
Rod: As it relates to ride our principal for Rod generally on the year is that rod leverages on flat to slightly positive sales.
Rod: So when you think about excluding the 50 <unk> week, a rod is very slightly deleveraging on the year and Thats just some dynamics related to the 50 <unk> week, but.
That's how we think about rod.
Lorraine Corrine Maikis Hutchinson: Your next question comes from the line, Lorraine Hutchinson from Bank of America. Please go ahead. Thank you. Good afternoon.
Speaker Change: Hey, Bob.
Speaker Change: Your next question comes from the line of Lorraine Hutchinson from Bank of America. Please go ahead.
Lorraine Corrine Maikis Hutchinson: Thank you good afternoon I wanted to follow up on Bobs question about marketing and can you quantify how much you spent on marketing in 2023 and do you have aspirations to reduce this expense going forward or just deploy redeploy it at current levels.
Lorraine Corrine Maikis Hutchinson: I wanted to follow up on Bob's question about marketing. Can you quantify how much you will spend on marketing in 2023? And do you have aspirations to reduce this expense going forward or just deploy it, or redeploy it at current levels?
Lorraine Corrine Maikis Hutchinson: Yeah, we don't disclose how we spend or what we spend on in the context of marketing we invest in advertising over time and our AD spend has grown to support our brands as a result of elevated costs.
Richard Dickson: Yeah, we don't disclose how we spend or what we spend on in the context of marketing. We invest in advertising over time, and our ad spend has grown to support our brands as a result of elevated costs. But in general, you know, ultimately, our mission is to drive more effective and more efficient use of our dollars. However, marketing dollars are continuing to come down year over year.
Lorraine Corrine Maikis Hutchinson: But in general ultimately our mission is to drive more effective and more efficient use of our dollars marketing dollars are continuing to come down year over year.
Katrina O'connell: And that is a direct function of more innovative medium metrics that are sort of driving a more innovative approach to how we market. We're continuing to evaluate our marketing comprehensively as part of the brand reinvigoration work, as well as part of the media efficiency work. Whether that results in lower spend in 2024 or better effectiveness of the current spend, we're going to continue to see how that plays out. But regardless, we have plenty of marketing investments and do not need to be spending any more. And we're going to continue to look for opportunities to be more efficient and save where appropriate. And Lorraine, to be helpful, as Richard said, marketing dollars were down year over year in 2023. On our lower sales volume, marketing was about 5.9% of sales, which is below the prior year's 6.7%.
Lorraine Corrine Maikis Hutchinson: And that is a direct function of in more innovative medium metrics that is driving a more innovative.
Lorraine Corrine Maikis Hutchinson: <unk> approach to how we market we are continuing to evaluate our marketing comprehensively as part of the brand reinvigoration work as well as part of media efficiency work, whether that results in lower spend in 2024 or better effectiveness of the current spend we're going to continue to see how that plays out but regardless.
Lorraine Corrine Maikis Hutchinson: We have plenty of marketing investments do not need to be spending anymore, and we're going to continue to look for opportunities to be more efficient and save where appropriate.
Lorraine Corrine Maikis Hutchinson: And Lorraine to be helpful.
Lorraine Corrine Maikis Hutchinson: As Richard said marketing dollars were down year over year in 2023 on our lower sales volume marketing was about five 9% of sales, which is below the prior year of six 7%. So.
Brooke Siler Roach: So as we have slowly been pulling marketing down, as Richard said, we really are more focused on effectiveness and efficiency, and we'll see how that plays out in 2024. Thank you. Your next question comes from Brooke Roach from Goldman Sachs. Please go ahead.
As we have slowly been pulling marketing down as Richard said, we really are more focused on effectiveness and efficiency and we will see how that plays out in place on the floor.
Speaker Change: Thank you.
Speaker Change: Your next question. Your next question comes from the line of Brooke Roach from Goldman Sachs. Please go ahead.
Brooke Siler Roach: Good afternoon, and thank you for taking my question I was hoping you can elaborate a bit more on the athleta business. It sounds like some nice underlying proof points and some of the changes have been delivered in the fourth quarter, but.
Richard Dickson: Unknown Speaker, Unknown Speaker, found to have a tough first half on Comparison, talk a little bit about the Unknown, Transcripts provided by Transcription Outsourcing, LLC, back to growth this year for, Yeah, thanks, Brooke, for the question. And Athleta is a really important brand in our portfolio. We believe that it has significant long-term potential. The Power of She, as I've talked about, is just an incredibly compelling brand platform. And we know the brand resonates with consumers. Our missteps are very public, you know; we've executed poorly in product marketing and experience. And that's weighed on the performance of the brand in recent years. But resetting the brand will take time.
Brooke Siler Roach: Speaking to a tough first half on compares can you talk a little bit about the outlook that you see on any key line items that we should be looking out for in the second half across new product initiatives marketing and merchandise and whether or not the underlying outlook provided today assumes an inflection back to growth this year for the brand.
Speaker Change: Yeah. Thanks, Brett for the question and Athleta is a really important brand in our portfolio. We believe that it has significant long term potential and power of sheet as I've talked about is just an incredibly compelling brand platform and we know the brand resonates with consumers are missteps are very <unk>.
Speaker Change: <unk>.
Speaker Change: Executed poorly in product marketing and experienced and Thats weighed on the performance of the brand in recent years, but resetting the brand will take time, we expect the tougher promotional volume comparisons to improve by the second half of 2024. The team is focused incredibly well on.
Richard Dickson: We expect the tougher promotional volume comparisons to improve by the second half of 2024. The team is focused incredibly well on executing the brand reinvigoration playbook. They're leveraging the brand purpose and identity with a great new product and exciting storytelling. It's supported by compelling marketing, and really executed with excellence. I would encourage you to take a look at our sites, take a look at the social dialogue that we currently have on Athleta, even our stores. We started the new year with a very clean palette in our stores, and we've seen early successes with some of the new arrivals.
Speaker Change: The brand reinvigoration playbook, they're leveraging the brand purpose identity with great new products exciting storytelling is supported by compelling marketing and really executed with excellence I would encourage you to take a look at our sites take a look at the social dialogue that we currently have a lot flatter even our store.
Speaker Change: Or is that we started the new year with a very clean pallet in our stores and we've seen early successes in some of the new arrivals.
Richard Dickson: And again, encouraged by the customers' early reaction, I'm really liking where the team is going with the new drop strategy, innovation, color, and new customer activations. And we'll, of course, provide updates as we move through the year and assess the brand's continued progress in executing the playbook. But suffice it to say, we are very excited about the tremendous potential of Athleta, a follow-up for Katrina. Following the strong success in inventory management you've seen this year, can you provide an update on how you're planning inventory for this year and your outlook for improved inventory turns going forward? Sure.
Speaker Change: And again encouraged by the customers early reaction I'm really liking where the team is going with the new dropped strategy innovation color.
Speaker Change: New customer Activations and we'll of course provide updates as we move through the year and assess the brand's continued progress in executing the playbook, but suffice it to say we are very excited about the tremendous potential of Atlanta.
Speaker Change: Great. Thanks, and just one follow up for Katrina.
Speaker Change: Following the strong success in inventory management, you've seen this year can you provide an update on how youre planning inventory for this year and your outlook for improved inventory turns going forward.
Speaker Change: Sure.
Katrina O'connell: So for inventory as we talked about we ended with inventories down 16% on a year over year basis, and we expect end of Q1 inventories to be at about similar I would say as we start to lap. These significant declines in inventory by the time, we get to the end of Q2, we'll start to see a more normalized year over year.
Katrina O'connell: So for inventory, as we talked about, we ended with inventories down 16% on a year-over-year basis, and we expect end-of-Q1 inventories to be about similar. I would say as we start to lap these significant declines in inventory, by the time we get to the end of Q2, we'll start to see a more normalized year-over-year inventory dynamic where inventories are down below sales growth, but still lean We're going to maintain the rigor we have around inventories, and I think we're at our best. We learn when we are reading and reacting to the consumer and chasing trends. So that's sort of how we're thinking about inventory for the balance of the year. Thank you so much. Our last question will come from Alex Stratton from Morgan Stanley. Please go ahead.
Inventory dynamic where inventories are down below sales growth, but still.
Still lean were going to maintain the rigor we have around inventories and I think we're at our best we've learned when we are reading and reacting to the consumer and chasing into trends.
Katrina O'connell: So that's sort of how we're thinking about inventory for the balance of the year.
Speaker Change: Thanks, So much I'll pass it on.
Speaker Change: Thank you our last question.
Speaker Change: Our last question will come from Alex Stratton from Morgan Stanley. Please go ahead.
Alexandra Ann Straton: Perfect. Thanks a lot for taking the time to answer the question. Congratulations on a nice quarter. Just on your comments about this continuation of the trend that Old Navy and Gap have on the top line, I'm just trying to understand what that means as it relates to sales growth. Should Gap continue to bleed, or what's the right size of that business over time? And then can Old Navy return to growth? And then I have a quick follow-up. Thank you.
Alexandra Ann Straton: Perfect. Thanks, all for taking the question and congrats on a nice quarter just on your comments for this continuation of the trend that old Navy and gap on the on the top line I'm just trying to understand what that means as it relates to sales growth.
Alexandra Ann Straton: Sure gap continued to bleed or what's the right size of that business over time, and then can old Navy returned to growth and then I have a quick follow up thank you.
Alexandra Ann Straton: Yes.
Speaker Change: Yes look I think as we've said our brands are all in different stages.
Richard Dickson: Yeah, look, I think, as we've said, our brands are all in different stages of reinvigoration. And ultimately, as we see the performance of Old Navy and Gap, in particular, we're incredibly encouraged. I mean, as you've seen with Gap, the continuation of our reinvention is working well. Again, you know, we had a great quarter in Gap comp up for Old Navy up to, as we described, these are not necessarily overnight fixes. It will take time, but as a high-performance company, we want to do what we say we're going to do. And that is also setting up expectations that we believe we can meet.
Speaker Change: Reinvigoration and ultimately as we as we see the performance on old Navy and gap in particular, we're incredibly encouraged I mean as you've seen with GAAP. The continuation of our re ignition is working well.
Speaker Change: We had a great quarter and GAAP comp up for old Navy up too.
We've described these are not necessarily overnight fixes it will take time, but as a high performing company. We want to do what we say we're going to do and that is also setting up expectations that we believe that we can meet where of course aspiring always to outperform and we believe that our outlook really.
Richard Dickson: We're, of course, always aspiring to outperform, and we believe that our outlook really reflects that each one of our brands is at a different point of reinvigoration. Again, I am very encouraged by the comps on Old Navy and Gap, and the early work on reinvigoration, which, again, is supported by financial and operational discipline, is really showing up on the scoreboards. I have noted that Banana Republic has more foundational work to do to recover. The brand is a great brand. It's got great potential. The new aesthetic is responding well. But the product architecture, pricing, and availability, really the fundamentals need continued work and effort, and the brand will take some time to reestablish. And as mentioned, Athleta is making good underlying progress, but tougher comparisons from last year as the brand is lapping significant promotional volume, and it's weighing on revenue performance.
Speaker Change: Flat that each one of our brands is in a different point of reinvigoration.
Speaker Change: Again, very encouraged with the comps on old Navy and gap and the early work on reinvigoration, which again is supported by financial and operational discipline.
Speaker Change: Is really showing up on the scoreboard.
Speaker Change: Have noted banana Republic has more foundational work to do to recover the brand is a great brand. It's got great potential the newest authentic is resonating, but the product architecture pricing in stock really the fundamental need continued work and the effort and the brand will take some time to reestablish it.
As mentioned Atlanta is making good underlying progress, but tougher comparisons from last year as the brand's lapping significant promotional volume and it's weighing on the revenue performance now we're going to continue to do this probably through the first half of 2024 and as the headwinds from the promotions last year abate in the second half.
Richard Dickson: Now, we're going to continue to do this probably through the first half of 2024. And as the headwinds from the promotions last year abate in the second half, we're energized by the potential of the brand and its brand reinvigoration work and the ability to see that brand show up better in performance. That's helpful. Thanks a lot. Maybe Katrina, one for you.
Speaker Change: We're energized by the potential of the brand and its brand reinvigoration work and the ability to see that brands show up better in performance.
Speaker Change: That's helpful. Thanks, a lot maybe 301 for you just on the guidance for the year. It looks like you have margin improvement following the first quarter or can you just talk about what enables that.
Katrina O'connell: Just on the guidance for the year, it looks like you have margin improvement following the first quarter. Can you just talk about what enables that? Yeah, I would say broadly, as I think about margins for 2024, we have commodity benefits that come in the first half of the year, and those become largely neutral. And then really, we're just anniversarying the benefits from last year in the significant improvement that we saw in promotions. So we'll see where everything lands. But the guidance, as you say, was 50, at least 50 basis points of expansion versus last year for the year and at least 100 basis points of expansion for the first quarter.
Speaker Change: Yeah, I would say broadly as I think about margins for 2024.
Speaker Change: We have commodity benefits that come in the first half of the year those become largely neutral.
Speaker Change: And then really we're just anniversarying the benefits from last year in the significant improvement that we saw in promotions. So, we'll see where everything lands, but the guidance. As you say was 50 at least 50 basis points of expansion versus last year for the year.
Speaker Change: And at least 100 basis points of expansion for first quarter.
Speaker Change: Yeah.
Speaker Change: Thanks, a lot.
Speaker Change: Thank you. We've reached we've reached the end of the question and answer session that does conclude today's conference call. Thank you for your participation and you may now disconnect.
Alexandra Ann Straton: Thanks a lot. Thank you. We've reached the end of the question and answer session. That does conclude today's conference call. Thank you for your participation, and you may now disconnect. Thanks for watching!
Speaker Change: [noise].