Q4 2024 Gap Inc Earnings Call
Speaker Change: [music].
Yeah.
Speaker Change: Good afternoon, ladies and gentlemen, I would like to welcome everyone to the gap, Inc. Fourth quarter 'twenty 'twenty four earnings conference call.
Speaker Change: At this time all participants are in a listen only mode.
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 as.
Speaker Change: As a reminder, please limit your questions to one per participant if anyone should require assistance during the call. Please press the star key followed by the zero key on your Touchtone phone.
Speaker Change: I would now like to introduce your host Whitney Notaro head of Investor Relations.
Speaker Change: Good afternoon, everyone welcome to Gap, Inc. 's fourth quarter fiscal 'twenty 'twenty four 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.
Speaker Change: For information on factors that could cause our actual results to differ materially from any forward looking statements. Please refer to the cautionary statements contained in our latest earnings release. The risk factors described in the company's annual report on Form 10-K filed with the Securities and Exchange Commission on March 19th 'twenty, 'twenty, four and any subsequent filings.
Speaker Change: The Securities and Exchange Commission, all of which are available on <unk> Dot com.
Speaker Change: These forward looking statements are based on information as of today March six 2025, and we assume no obligation to publicly update or revise our forward looking statements.
Speaker Change: Our latest earnings release, and the accompanying materials available on <unk> Dot Com also include descriptions and reconciliations of any financial measures not consistent with generally accepted accounting principles.
Speaker Change: Joining me today on the call are Chief Executive Officer, Richard Dickson, and Chief Financial Officer Katrina, O'connell with that I'll turn over the call to Richard.
Speaker Change: Good afternoon, and thank you for joining us today I'm excited to share with you our strong fourth quarter results, which rounded out an exceptional year for gap, Inc. We continued to perform while we transform delivering another quarter that exceeded financial expectations and underscored the meaningful progress we're driving across our strategic priorities.
Speaker Change: Operational and financial rigor is the fabric of how we work and has delivered solid metrics that Katrina and I will discuss during this call.
Speaker Change: This discipline has enabled us to execute effectively against our brand reinvigoration playbook and at the same time strengthen our platform by building and sharpening our operational capabilities with highlights on supply chain and technology and we continue to energize our culture empower our global team.
Speaker Change: <unk> and attract great talent.
Speaker Change: I do wanted to begin by taking a moment to thank our global team for their partnership and collaboration this past year.
Speaker Change: Their relentless dedication to our transformation has been instrumental in driving the progress that we've made.
Speaker Change: Let me share some highlights and the progress we achieved in 2024.
Speaker Change: Gap, Inc. Delivered positive comps in all four quarters with all four of our brands Comping flat to positive for the year.
Speaker Change: Demonstrating consistency and strength across the portfolio.
Speaker Change: Gap, Inc gained market share for the eighth consecutive quarter, reflecting that our brands are resonating with consumers.
Speaker Change: We achieved one of the highest gross margins in the last 20 years, a clear result of our focus on financial and operational rigor.
Speaker Change: We increased operating income by more than $500 million and operating margin by 330 basis points versus last year's adjusted rate, while we continue to drive efficiencies in our cost structure.
Speaker Change: And we delivered a full year EPS of $2 20.
The highest since 2018, demonstrating our earnings power.
Speaker Change: As we drive towards becoming a high performing company that generates sustainable and profitable growth.
Speaker Change: Looking ahead, we have more work to do but we are building on a much stronger foundation.
Speaker Change: 2025 represents an exciting step in our ongoing transformation as we begin to transition our focus from fixing the fundamentals to continuous improvement through innovation and paved the way for momentum in the years ahead.
Speaker Change: Since this is our year end call our remarks today will be a little longer than usual as we have a lot to cover.
Speaker Change: I'll begin by providing an update on our fourth quarter performance and progress in the context of our strategic priorities. Then Katrina will walk you through our detailed financial results and share our outlook before we open the call for questions.
Speaker Change: Let's start with our first strategic priority financial and operational rigor.
Katrina: Gap, Inc. Comparable sales were up 3% in the quarter with comps at old Navy, our largest brand also up 3%.
Katrina: This is the brand's eighth consecutive quarter of market share gains reinforcing its leadership position as the number one specialty apparel brand and retailer in the U S.
Katrina: GAAP comps accelerated to 7% the fifth consecutive quarter of positive comps and the brand delivered its seventh consecutive quarter of market share gains.
Katrina: Banana Republic comps were up 4% and gained share as a result of our focus on reestablishing this premium brand in our portfolio.
Katrina: Athleta had a more challenging quarter with comps down 2%, while maintaining market share with more work to do as we continue to reset the brand.
Katrina: We delivered SG&A in line with our expectations and expanded operating margin 120 basis points versus last year.
Katrina: EPS was <unk> 54 cents up 10% versus the fourth quarter of last year.
Katrina: We ended the year with strong cash balances of approximately $2 6 billion and generated $1 billion in free cash flow in fiscal 'twenty 'twenty four.
Katrina: Turning to our next strategic priority, we remain focused on driving relevance and revenue by executing on our brand reinvigoration playbook. Each brand is at a different point in the process and I'm encouraged by the improvements we've driven across the portfolio.
Katrina: Let's start with old Navy.
Katrina: In 2020 for old Navy delivered one of the highest annual net sales in the brand's history and was the number one specialty apparel brand and retailer in the U S.
Katrina: We've been connecting our customers with products, they want through compelling storytelling and executing with clarity in pricing and in store navigation.
Katrina: The brand is gaining more relevance as demonstrated by our digital dialogue, notably our strong social and Influencer engagement.
Katrina: As a result, we finished the year strong with a 3% comp in the quarter and the eighth consecutive quarter of market share gains are.
Katrina: Our strategic pursuit in both denim and active this year led to a consistent drumbeat of innovation and newness across these key categories, we've been putting insights into action with product innovation, leveraging our scale and expertise and executing with excellence and the results are showing up on the scoreboard.
Katrina: Old Navy leaned into denim with an expanded offering of dynamic in store and online experience supported by a fall campaign expressing our evolving brand identity work.
Katrina: In the fourth quarter, we increased share in denim driven by our on trend assortment in wide and loose bits as well as barrel.
Katrina: On our third quarter earnings call, we spoke about the exciting opportunity that we see for old Navy to become the destination for the family as the value player in the active category.
Katrina: During the year the brand grew to be the number five player in the category and the only brand among the top five to gain share.
And we are not stopping there in the fourth quarter dynamic fleece and Powersoft were great. Examples of innovation that drove old Navy strengthen the active category and we are bringing more innovation style and value and 2025 with our recently launched studio smooth collection.
Katrina: This new fabrication brings exceptional comfort and value to consumers and marks another step forward in our expansion within the active category.
Katrina: Old Navy's merchandising narratives and style are presenting better and our in store and online communication has improved with more clarity around pricing and more compelling marketing promoting great value.
Katrina: This evolution of the customer experience has resulted in higher NPS scores for both stores and online with.
Katrina: With the foundational elements. We've established we are a stronger old Navy than we were a year ago and are positioned well for 2025.
Katrina: In the year ahead old Navy will be focused on ongoing innovation in key categories, driving big ideas with storytelling, while mobilizing and enhanced customer experience.
Katrina: Recognizing the work achieved and the metrics delivered shows the powerful position old Navy holds in our portfolio and in our industry and we continue to believe there is significant growth potential ahead for the brand.
Katrina: Now, let's turn to gap.
GAAP is back in the cultural conversation. This brand was built on strong product narratives with brilliant marketing expressed through big ideas and over the past year. Each of these were reignited.
Katrina: The team has been executing the brand reinvigoration playbook with excellence and it's showing up in the results gaps.
Katrina: Gap's comp accelerated to 7% in the quarter, marking the fifth consecutive quarter of positive comps and the highest quarterly comp in three years.
Katrina: In the fourth quarter. The brand also achieved the seventh consecutive quarter of share gains as the brand continued to resonate with consumers.
Katrina: This strong performance was fueled by innovation product newness and compelling marketing with a social first approach.
Katrina: The momentum in women's continued in the fourth quarter men's also performed well and we began to see improvement in kids and baby.
Katrina: Our focus on big ideas resonated with strength in key categories like fleece, denim and sweaters driven by the performance of cash soft our innovative fabric all of which were amplified by our give you a gift holiday campaign.
Katrina: The brand campaigns and collaborations are attracting a new generation to gap, while reinforcing the brand to those who loved us for years.
Katrina: In 'twenty 'twenty four we expanded our customer base and we saw increased engagement with the brand as a result of our trend right product and culturally relevant messaging and.
Katrina: And we're building on that momentum in 2025 with our latest fashion attainment moment released last week, featuring Parker Posey dancing to matters Moms is a celebration of the confidence that comes from feeling comfortable in your clothes and in your own skin, which is resonating and bridging the generation gap all over again.
Katrina: Our legacy inspires us to pursue the significant potential this brand has.
And with consistent execution of our playbook, we are excited about the brands growth potential in the years ahead.
Katrina: Now moving on to Banana Republic.
Katrina: There's been a lot of progress at Banana Republic, as we continue to focus on reestablishing the brand to thrive in the premium lifestyle space the.
Katrina: The brand successfully implemented fundamental fixes throughout the year.
Leaning into classics more precise assortments, focusing on fit and rebuilding trust and we're beginning to see signs of stabilization with the early results showing up in the fourth quarter.
Katrina: Comps were up 4% with market share gains.
Katrina: Women's drove the acceleration of the brand with better fundamentals across pricing product and design, which translated incredibly well most notably for holiday occasion dressing.
The brand continued to build on the strength in the men's division and lean into classics with a stronger cashmere point of view, which resonated with consumers.
Katrina: The work the Banana Republic team has done to improve women's and strategically redeploy marketing to more culturally relevant storytelling is starting to deliver results and.
Katrina: I am confident banana Republic is positioned well for continued progress in 2025 and beyond.
Katrina: Shifting to Athleta.
Katrina: In 2020 for athletic stabilized revenue, delivering a flat comp and improvements across several key metrics.
The brand re entered the cultural wellness and sports conversation through major Activations that engaged key brand partners like Simone Biles, and Katie Le Deci on the world stage, and Paris, and most recently Lexi Hull and Cape Martin and.
Katrina: In addition, we meaningfully increased the number of new and reactivated customers.
Katrina: I am encouraged by athletic ability to maintain its rank as the number three brand in the womens active category this year and the only brand in the top three to gain share.
Katrina: Despite this progress the year was not without challenges and volatility. This was reflected in the fourth quarter when the brand delivered a negative 2% comp missing our expectations.
Despite a strong start to the holiday season, Athleta struggled to keep up its core loyal customers engagement during the peak holiday shopping moments.
Katrina: In 2025, we will be strengthening our product and ensuring newness to excite our core customer base, while continuing to inspire new customers.
Speaker Change: Atlanta has made progress in a number of areas. This past year. However, we are still in the process of resetting the brand, which in the near term May result in choppy quarterly performance, we have more work to do to implement a reinvigoration playbook and realize the brand's full potential our ambitions for Athleta remain high.
Katrina: Hi.
Katrina: Moving to our third strategic priority strengthening the platform.
Katrina: Today Gap, Inc platform creates significant value with the benefit of scale across our global supply chain supporting our fleet of more than 3500 stores a technology platform that enables one of the largest E com businesses in the U S as well as an active customer file of over 55.
Katrina: $5 million.
Katrina: I was impressed with the resilience and the agility of our supply chain as we successfully navigated a number of disruptions during the year.
Katrina: This will serve us well as we continue to navigate a highly dynamic environment top of mind being tariffs, which Katrina will address in her remarks.
Katrina: In 2024, we began to cultivate a digital first organization and mindset building and sharpening our operating capabilities to improve effectiveness and efficiency and in turn drive increased cost leverage and demand creation spur.
Katrina: <unk> <unk>, our Chief Technology Officer, who joined US last summer began pursuing plans to leverage technology to enable both our business performance and our transformation.
Speaker Change: This included standing up an office of AI focused on driving AI innovation across our strategic priorities over time with early use cases, primarily related to employee enablement.
In 2025, we will be developing AI monetization opportunities relative to the consumer experience product to market as well as organizational productivity.
Speaker Change: Now having organized the various ways, we can use AI to enable value creation, we're prepared to mobilize against this framework with intention.
Speaker Change: Our financial and operational rigor is allowing us to find efficiencies and cost savings that we plan to reallocate to invest in new platform capabilities to support the ongoing success of our brands.
Speaker Change: As our focus shifts towards continuous improvement in 2025, we will be optimizing for growth by cutting low value projects to fuel high value opportunities we.
Speaker Change: We see significant organic growth potential through smart and targeted investments in areas like design consumer insights and store operations that deep in the execution of our playbook and seed new avenues for future growth.
Speaker Change: Reflecting on our fourth priority I am proud of how our teams have stepped out of their comfort zones to embrace new ways of working getting comfortable with the uncomfortable creates resilience and the resilience of this organization is showing up as we continue to perform while we transform.
Speaker Change: Great strategy can only go so far without a culture that is United and mobilized behind it and the energy of our people is impressive and it's fueling creativity and driving execution excellence.
Speaker Change: Transformations of this scale take time, and we've been deliberate about taking a phased approach in 'twenty 'twenty. Four we were focused on fixing the fundamentals and made significant progress as we look ahead. We are beginning to focus on continuous improvement through innovation to pave the way for momentum in the years ahead.
Speaker Change: We are stronger today and have consistently proven our ability to navigate a highly dynamic macro environment, while delivering results.
Speaker Change: GAAP, Inc has a powerful portfolio of brands that matter and we're proving that they can matter more.
Speaker Change: Our playbook is working and showing up in comp growth and share gains and we are well positioned for organic growth over time.
Speaker Change: We continue to unlock efficiencies in the business and deploy savings into high potential growth opportunities.
Speaker Change: Our financial and operational rigor is driving operating margin expansion and generating significant cash flow, allowing us to invest in the business.
Speaker Change: While returning cash to shareholders through dividends and share repurchases.
Speaker Change: I am pleased with what we've been able to accomplish so far but our aspirations are high and we have more work to do we remain focused on controlling the controllable and successfully executing our strategic priorities continuing to be market share winners in any environment.
Katrina: I'll now turn the call to Katrina for a closer look at our financials.
Katrina: Thank you Richard and thanks, everyone for joining us this afternoon, our strong finish to the year reinforces the power of our portfolio of iconic American brands that shape culture, and our confidence that our transformation is taking hold.
Katrina: The meaningful progress we've made on our strategic priorities is showing up in the results with a return to topline sales growth for the year, resulting in share gains in all brands showing signs of reinvigoration.
The discipline, we have developed has enabled significant margin expansion and earnings growth.
Katrina: And our rigor and expense and inventory management drove substantial operating and free cash flow generation, resulting in a strong balance sheet.
Katrina: The reinvigoration of our brands combined with our financial and operational rigor is enabling us to perform while we transform consistently delivering on our commitments as we continue to strengthen our performance.
Katrina: Some key highlights from fiscal 2024 include the following.
Katrina: It's exciting to see the brand reinvigoration driving results with gap, Inc. Comparable sales up 3% and all four of our brands Comping flat to positive for the year, which is notable as we execute on our reinvigoration playbook.
Katrina: This was gap inc's second consecutive year of market share gains driven by wins across our brand portfolio.
Katrina: Gross margin in fiscal 2024 expanded 250 basis points versus last year. This.
Katrina: This progress reflects both the increased relevance of our product and brands and our disciplined inventory management.
Katrina: We tightly managed SG&A dollars below the prior year and in line with our beginning of year outlook.
Katrina: With our focus on expense management and financial rigor, we realized efficiencies in our cost structure that more than offset variable cost from higher sales as well as wage inflation.
Katrina: This resulted in operating income of $1 $1 billion growing 83% compared to last years, adjusted operating income and an operating margin of seven 4% for fiscal 'twenty 'twenty, four or 330 basis point improvement versus last year's adjusted operating.
Katrina: Margin.
Katrina: And we achieved over 50% growth in full year earnings per share to $2.20.
Katrina: We ended the year with $2 $6 billion of cash cash equivalents and short term investments on the balance sheet net.
Katrina: Net cash from operating activities of one $5 billion.
Katrina: <unk> generated $1 billion in free cash flow.
Katrina: And we returned approximately $300 million in cash to shareholders through dividends and share repurchases.
Katrina: This strong performance gives us confidence in the 2025 outlook. We provided today, which reflects continued sales growth with gross margin expansion and SG&A leverage resulting in another year of operating income growth.
Katrina: So turning to our detailed results for the fourth quarter net.
Katrina: Net sales of $4, one $5 billion decreased 3% year over year inclusive of the seven percentage point negative impact related to the loss of the 50 <unk> week.
Katrina: Net sales for the quarter were negatively impacted by the weekly shift related to the 50 <unk> week dynamic as well as the loss of the extra week.
Katrina: For that reason I'll be referencing comparable sales by brand as we believe it's more indicative of each brand's underlying performance.
Katrina: Gap, Inc. Comparable sales were up 3% in the quarter by.
Katrina: By brand starting with old Navy comparable sales were up 3%. The brand continued to win in key categories like active in denim with innovation and newness driving strength and market share gains.
Katrina: Turning to gap brand comparable sales meaningfully accelerated up 7%.
Katrina: Gap has been reignited and is executing the brand reinvigoration playbook with excellence driving relevance and revenue.
Katrina: Banana Republic comparable sales were up 4% the brand saw a notable improvement in its women's business during the quarter and continues to build on its strength in mens.
Athletic comparable sales were down 2%, while the brand maintained market share in the fourth quarter. It did not meet our expectations and the team will be taking away important learnings and insights for 2025 as we continue to reset the brand.
Katrina: Gross margin of 38, 9% was flat year over year as merchandise margins expanded 20 basis points and Rod Deleveraged 20 basis points in the quarter.
Katrina: SG&A was $1.35 billion in the quarter $105 million below last year and in line with our outlook as we demonstrated continued rigor and expense management.
Katrina: SG&A as a percentage of net sales was 32, 6% leveraging 130 basis points versus last year, primarily due to the timing of incentive compensation accruals as well as lower advertising costs in the quarter.
Katrina: Fourth quarter operating margin of six 2% improved 120 basis points compared to last year's operating margin.
Katrina: Earnings per share in the quarter were 54 cents up 10% versus last year's earning per share of <unk> 49 cents.
Katrina: Now turning to full year fiscal 2024 results.
Katrina: Net sales of $15 $1 billion increased 1% year over year up about 2% on a 52 week basis at the high end of our guidance range we provided.
Katrina: Gross margin of 41, 3% expanded 250 basis points versus last year ahead of our expectations.
Katrina: Merchandise margin expanded 210 basis points, and Rod leveraged 40 basis points, primarily due to higher sales in the air.
Katrina: SG&A was $5 $1 billion $100 million below last year and in line with our outlook.
Katrina: As a percentage of net sales SG&A was 33, 9% leveraging 110 basis points versus last year's reported rate and 80 basis points versus last year's adjusted rate.
Katrina: Fiscal 'twenty 'twenty four operating income was $1 $1 billion growing 83% compared to prior year's adjusted operating income of $606 million and ahead of our guidance of mid to high 60% growth.
Katrina: Operating margin expanded 330 basis points versus last year's adjusted rate to seven 4% our highest annual operating margin since 2018.
Katrina: Earnings per share for the year were $2.20 up 64% versus last year's reported EPS of $1 34.
Katrina: And up 54% versus last year's adjusted EPS of $1 43.
Katrina: This demonstrates the value creation, we've begun to unlock in this early stage of transformation and indicates the earnings power of Gap, Inc. As we continued to perform while we transform.
Katrina: Now turning to the balance sheet and cash flow, we maintained disciplined inventory management ending the year with levels up three 6% year over year.
Katrina: The increase was primarily due to the timing of in transit inventory as we navigated macroeconomic conditions exclude.
Katrina: Excluding the higher in transit, we maintained our inventory principal managing a healthy stock to sales ratio.
Katrina: With inventory lagging sales growth and we were able to finish the year with what we believe is the right inventory composition going into fiscal 2025.
Katrina: With the rigor and discipline that is now core to how we operate we expect our 2025 inventory to continue to align with this principle.
Katrina: We ended the year with cash cash equivalents and short term investments of $2 $6 billion, an increase of 38% from last year.
Katrina: Full year net cash from operating activities was $1 $5 billion.
Katrina: Free cash flow of $1 billion for the year demonstrates the rigor we put into managing the business.
Katrina: Capital expenditures for the year were $447 million.
Katrina: During the year, we returned $225 million to shareholders in the form of dividends, representing annual dividends of <unk> 60 per share.
Katrina: And during the fourth quarter, we repurchased 3 million shares for approximately $75 million.
Katrina: With a strong balance sheet, we and the board consistently evaluate capital allocation as we strive to maximize shareholder value.
Katrina: Our balanced capital allocation framework is as follows our.
Katrina: Our number one priority is to invest organically in the business through capital expenditures to the degree we believe we can drive a strong return.
Katrina: Capital expenditures in 2025 are expected to be about $600 million for the year.
Katrina: Up 34% as we utilize our strong balance sheet to invest in organic opportunities for value creation that we see in our business.
Katrina: Second we believe in paying an attractive dividend as a key component of shareholder return. Our goal is to increase the dividend as net income grows and we evaluate both the payout ratio as well as the yield.
Katrina: In line with that principle on February 20th Theft, Our board authorized a 10% increase to our first quarter fiscal year 2025 dividend per share.
Katrina: Third our principal regarding repurchasing shares is to offset dilution over time, our fourth quarter share repurchase of $75 million marked our first repurchase since 2022 reflecting our confidence in the business and our future.
Katrina: As a reminder, we have approximately $400 million remaining under our current share repurchase authorization.
Katrina: Our strong balance sheet gives us the foundation to focus on capital allocation with the goal of enhancing long term shareholder value.
Katrina: This is been an incredible year in which our four strategic priorities have resulted in a return to profitable sales growth.
Katrina: I want to thank our teams for their commitment and tremendous contributions that fueled the strong results.
Katrina: With our momentum and the clear opportunities to drive continuous improvement across the business. We are confident in our ability to strengthen our performance in the year ahead.
Katrina: Now turning to our outlook for fiscal 2025, we've been operating in a highly dynamic backdrop for the last few years and we're expecting the same for fiscal 2025.
Katrina: As a result, we've taken a balanced view with our guidance and remain focused on controlling the controllable spin.
Katrina: Specific to tariffs in fiscal 2024, we sourced the less than 10% of our product from China and less than 1% of our products from Canada and Mexico combined.
Katrina: Our fiscal 2025 outlook is informed by what we know today regarding tariff policy and includes any expected margin the impact, albeit small from current actions related to those countries.
Katrina: Starting with full year 2025 revenue, we expect net sales for the year to grow approximately 1% to 2% year over year, including an estimated 30 basis point unfavorable impact from foreign currency due to a stronger U S dollar.
Katrina: Our outlook assumes ongoing strength at old Navy and gap stabilizing performance at Banana Republic, and a longer recovery timeline at Athleta.
Katrina: An important note regarding the quarterly cadence for the year in the second quarter, we will be lapping the two percentage point benefit we saw last year from the incremental revenue related to our credit card agreement, which we do not expect to recur this year.
Katrina: Moving to gross margin we are proud of the significant gross margin gains we achieved in 2024 as we returned to historically high levels. Our goal in 2025 is to sustain these gains and build upon them through continued rigor and execution excellence.
With that we expect gross margins to expand slightly for the year with roughly equal amounts coming from rod leverage and merchandise margin.
Katrina: Turning to SG&A.
Katrina: We are driving continuous improvement in the cost structure of the company as we rigorously drive savings in our core operations through efficiency and effectiveness.
Katrina: Our outlook reflects approximately $150 million in cost savings and efficiencies through better operations.
Katrina: A portion of which will be reinvested for future growth with the balance offsetting continued inflation.
Katrina: With this in mind, we expect SG&A to leverage slightly for the full year.
Katrina: Considering our expectations for approximately 1% to 2% net sales growth combined with slight gross margin expansion and SG&A leverage we see a clear path towards delivering 8% to 10% operating income growth in fiscal 2020 five.
Katrina: This growth rate includes an estimated two percentage point unfavorable impact from foreign currency due to a stronger U S dollar.
Katrina: We expect net interest income to be approximately $15 million for the year with a quarterly cadence that reflects seasonality as similar to fiscal 2024.
Katrina: We are planning for a 2025 tax rate of approximately 26%.
Katrina: We are expecting approximately 35 net store closures during the year with the majority of closures at Banana Republic.
Katrina: Now, let me share some color on our outlook for the first quarter of fiscal 2025, we expect net sales in Q1 to be flat to up slightly year over year. This includes an estimated 50 basis point headwind related to foreign currency due to a stronger U S dollar and contemplates our quarter to date.
Katrina: Performance.
Katrina: While the cold start to February with somewhat unfavorable we are pleased with what we've seen as the weather has normalized as it relates to first quarter gross margin, we expect gross margins to expand slightly compared to last year's gross margin of 41, 2%.
Katrina: And we are planning for SG&A to leverage slightly versus last year in the first quarter.
Katrina: As I reflect on the year I'm proud of the significant progress we've made across our strategic priorities. The reinvigoration of our brands is driving sales growth and consecutive market share gains.
Katrina: Which when combined with our rigor is delivering meaningfully improved financial performance.
Katrina: We look forward to building on the success of 2024 in the year ahead, as we drive towards becoming a high performing company to generate sustainable profitable growth and delivers long term value for our shareholders.
With that we'll open up the line for questions operator.
Katrina: Thank you.
Katrina: As a reminder, for those analysts who wish to participate in the question and answer session. You May now press star one to enter the Q&A queue.
Speaker Change: Our first question will come from Alex Straighten Morgan Stanley.
Alex: Great. Thanks for taking my question and congrats on another great quarter here.
Speaker Change: I have one for Richard and then a quick one for Katrina.
Speaker Change: Well, Richard just the gap banner delivered monster fourth quarter comps highest in a number of years.
Speaker Change: Well costs are super helpful. But can you dig in further on what exactly is driving that momentum.
Speaker Change: The new customer area or clothing, and then perhaps how big that banner could grow to be and a quick one for Katrina just on the full year operating margin expansion, you're guiding to it sounds like thats pretty evenly split between gross margin and SG&A.
Speaker Change: Let me know if I'm misunderstanding that in one pieces edging out the other thanks a lot.
Speaker Change: Alex. Thank you for the question just lettering up obviously in Q4, we delivered a really another exceptional quarter exceeding financial expectations.
Speaker Change: And ultimately continuing to perform while we transform comps as we shared or up 3% for the quarter. It's the fourth consecutive quarter of positive comps, we gained market share for the eighth consecutive quarter and it really indicates that collectively our brands are really resonating with consumers.
Speaker Change: It rounds out an exceptional year for gap, Inc. All four brands gained market share in the year really demonstrating the strength in the industry as you call out gap brand had what you call a monster performance, which we really appreciate gap is back in the cultural conversation and it's truly a team.
Speaker Change: Testament to the gap team who's been executing the brand playbook with excellence and this is a great example, I'd say of how the playbook can really drive relevance and revenue comps accelerated to 7% in the fourth quarter, we achieved our seventh consecutive quarter of market share gains.
Speaker Change: We climbed the ranks also in the apparel market. This year GAAP ranks now as number 11 is the largest brand in the U S and we intend this brand to get back into the top 10, I would say the strong performance in Q4. It was really fueled by innovation product newness, we had extraordinarily compelling.
Speaker Change: Marketing and we took a social first approach this strategic intent that we've been sharing around driving the women's business is truly showing up in the results. We've got continued momentum in mens.
Speaker Change: And we're also seeing improvement in kids and baby the.
Speaker Change: The brand campaigns and the collaborations that we have been driving are attracting a new generation to gap, but at the same time really importantly is and reinforcing the brand to those who loved us for years.
Speaker Change: The latest release that we have right now with Parker Posey.
Speaker Change: It's really resonating and it's a unique creative format I would say that's a great example of bridging the generation gap. We know it's working our organic Google searches have been up 6% on the year holiday, we actually saw 25% increase in new customer visits online.
Speaker Change: And ultimately what I can tell you is we are really looking forward to continuing the trend.
Speaker Change: <unk> amplified by compelling storytelling enhancing the customer experience as gap continues to advance I couldnt be more excited about the future of gap and its more of a question of how high is high.
Speaker Change: And then Alex as it relates to the operating margin guidance I think the way you are interpreting it is pretty correct, we do see sales, increasing 1% to 2% and as you said, 8% to 10% operating income growth, which is building on the significant progress we made on margins with <unk>.
Speaker Change: Expansion in 2025, and then the dynamic we described around the SG&A, where we're finding $150 million of savings and then purposely reinvesting a portion of those into growth drivers and so those two dynamics when combined do get you to the 8% to 10% operating income growth.
Thanks, So much good luck thanks, Alex.
Lorraine Hutchinson: Ladies and gentlemen, as a reminder, please limit your questions to one to participant per participant. Our next question comes from Lorraine Hutchinson Bank of America.
Lorraine Hutchinson: Thank you good afternoon.
Speaker Change: He has managed SG&A very closely in recent years is there an opportunity for further expense cuts beyond the $150 million that you discussed and what are the key buckets that youre focused on.
Speaker Change: Yeah. Thanks, Loraine I mean, we have rigorously manage the cost structure of the last few years as you said, including this past year, we delivered the $5 1 billion in SG&A, which was $100 million below the prior year and leveraged and that showed that the team was able to find efficiencies throughout the year to offset costs that were associated with.
Speaker Change: With delivering higher sales the inflation as well as higher incentive comp accruals and so we have the discipline now in the business and we remain committed to that as Richard said in 2025. This continuous improvement as we become a high performing company is focused on really eliminating low.
Speaker Change: Value work as we aspired to really redeploy that into higher value projects. So the $150 million that we're going after in 2025 is across technology marketing overhead and stores expenses and as we think about Reinvestments you know Richard spoke about some of those examples.
Speaker Change: In his speech.
Speaker Change: Speech, we're leveraging AI to create more elevated experiences for our customers with things like personalization, we're looking at empowering our design and development processes are we're modernizing our supply chain and we're looking at productivity and strengthening our employee experience. So those are a few of the things we're investing in we will continue.
Speaker Change: This discipline around SG&A and if we see beyond $150 million will certainly go after it but that's our first view as far as what we have line of sight to right now.
Speaker Change: Thank you.
Speaker Change: Your next question comes from Matthew Boss Jpmorgan.
Matthew Boss: Thanks, and congrats on a great quarter.
Matthew Boss: So Richard on the inflection to continuous improvement that you cited I guess what inning do you see your work on the gap and old Navy as we think about today could you speak to new customer acquisition and category market share gains that youre seeing as we head into 'twenty five and then.
Trina just relative to the 2025 top and bottom line guidance I guess could you speak to continued drivers of operating income dollar growth multi year. If the portfolio is able to post consistent low single digit top line growth.
Matthew Boss: Okay, Matt we're going to try and tackle that one I appreciate the question.
Matthew Boss: The efforts that we've been making.
Matthew Boss: Executing our playbook essentially reinvigorating our brands is working and as you call out. It's evidence is really market share, we talked about gaining market share for the eighth consecutive quarter.
Matthew Boss: It really is indicating that our brands are really resonating with consumers and so we are building stronger brand identities.
Matthew Boss: It's been supported by trend right products, we're amplifying these products with more compelling storytelling with a media mix model that social first and it is translating into cultural relevance now I would say that each brand is at a different stage of progress, but the progress we're making is real.
Matthew Boss: And we're driving to become a high performing house of iconic brands that shaped culture. So the continuous improvement of that.
Matthew Boss: Is sequential we could talk about old Navy, obviously, you know that the largest brand our portfolio. It finished the year with strong results comping the comp in the fourth quarter up 3% and delivering eight consecutive quarters of market share gains categorically, we've been focus on active and denim.
Matthew Boss: Where we've been really pursuing a leadership position and its showing up in the results I.
Matthew Boss: I think I mentioned on the last call our pursuit inactive in the brand grew to be the number five player in the category and it was the only brand among the top five to gain share.
Matthew Boss: I mentioned denim, it's another winning category in 2024, we gained share in denim. We are now the fourth largest adult denim brand in the U S. So the continued strength in the brands financial and operational rigor is really enabling us to dial up the merchandising narratives style quotient quality that are.
Matthew Boss: Customers expect and the brand is really presenting better that I talked about GAAP, specifically, so I don't think we need to belabor that point, but we couldn't be more excited about where we're headed for gap and similarly, there share gains and cultural relevance, that's really resonating I mentioned the attraction with new consumers.
Google search up 25% increase in new customer visits. We also have banana Republic that showed great progress in the quarter with 4% comp we continue to work on that brand.
Matthew Boss: Focusing on leaning into classics as we've shared more precise assortments, we've been working on fit and ultimately there. It's about rebuilding trust and lastly, resetting Athleta is still top of mind with very ambitious with athleta, despite having a challenging quarter, we delivered a flat comp for the year. So we.
Matthew Boss: <unk> seen improvements across several key metrics and we also gained share. So all in all I would say I'm feeling really optimistic and proud of the team's results. We are moving into a continuous improvement model and we expect and anticipate another exciting 2025.
Matthew Boss: And then Matt as it relates to sort of operating margin long term, we're very proud of the progress. We made this year, we reported the operating margin for this year of seven 4% as we said, it's a 330 basis point improvement and we expect to make more progress in 2025 with eight to 10.
Matthew Boss: <unk> operating income growth and we do continue to aspire to return to more historical levels over time as it is specific to the P&L. We've made a lot of progress in the cost structure of the company.
Matthew Boss: So rod on an annual basis Leverages on any positive sales and SG&A leverages on slightly positive sales. So as we return the model to sales growth. We do expect to continue to see operating income growth over the long term.
Matthew Boss: That's great color congrats again.
Matthew Boss: Thanks, Matt.
Speaker Change: As a reminder, please limit yourself to one question per participant and our next question is from Brooke Roach Goldman Sachs.
Brooke Roach: Good afternoon, and thank you for taking our question.
Brooke Roach: Richard I was hoping you could elaborate on the plans to strengthen the athletic brand what are the most important initiatives you're focused on this year and how are you thinking about bridging that brand back to sustainable comp growth similar to the other reinvigorated brands in your portfolio. Thank you Brook.
Brooke Roach: Brook I'm happy you asked the question I think first off it's important to recognize athletic is the number three brand in the women's active space.
Brooke Roach: It's an important brand in the industry and it's an important Brennan our portfolio. It's also important as I mentioned on an annual basis Athleta delivered a flat comp for the year, that's up against the double digit decrease from the year. Prior so we've seen improvements across several key metrics and most notably we gained market share.
Brooke Roach: The progress we've been making around the brand's identity, we launched new Activations, we've been re entering the cultural conversation. It is reinforcing our confidence in the long term opportunity and we do acknowledge that we have continued work to do to continue to reset the brand in.
Brooke Roach: In the quarter, we didn't meet our expectations and specifically we need to do more to excite our core customer during the holiday period now we did use promotions at that time as a lever to engage the customer during the quarter. The good news is that we successfully managed our inventory and we're starting the year with <unk>.
Brooke Roach: Better inventory composition in comparison to the same time last year, we have seen the drops that we've had in our color drops our fashion dropped they've attracted new customers. We've done a great job reactivating customers, but ultimately we lacked the depth of product interest for our core customer.
Brooke Roach: And now we're going to find that right balance as we move into our focus for 2025.
Brooke Roach: We'll reiterate our ambitions remain high for this brand we love the category, it's the largest category in India in the industry, but we have more work to do.
Brooke Roach: Thanks, So much I'll pass it on thanks Brook.
Speaker Change: Next up is Adrian <unk> from Barclays.
Adrian: Great. Thank you very much let me add my congratulations what a great way to end the year.
Speaker Change: Richard about a year ago, you hired that person.
Adrian: I think.
It can be creative director of old Navy and gap and Lo and Behold.
Adrian: Businesses are kind of turning ahead of plan.
Adrian: So what is it that he was able to do in such a short period of time, what is it that he's able to do kind of building on that continuous improvement philosophy.
Adrian: And then Katrina, if you could just help us kind of with the brands, we're sitting at 40% gross margins.
Speaker Change: Super High end, having recovered can you help us give some color and context in terms of where the brands are in that merch margin journey, which of them are kind of closer to peak and then where the opportunity really lies with a couple of maybe athleta and banana specifically thank you.
Alright, Adrian Thank you for the question.
Adrian: Zac is lapping his first year with US and has been an incredible addition, overall to the company and we're really pleased thus far with the progress that we're making on several fronts, but ultimately just thrilled with obviously his contribution he's been bringing significant impact.
Adrian: On many creative aspects and I would say, it's both inside the company and beyond.
Adrian: Truly elevating the creative conversation across our brands uniting us with a design led thought process.
Adrian: And igniting the creative spirit of the company, we've been Curating cultural moments, where our brands and products have been really taking center stage.
And of course, we've been attracting talent to our portfolio.
Adrian: Besides what you've already seen I would say and of course, most recently by the way with Timmy Timothy shallow MA are wearing GAAP studios really first custom men's look at the Academy Awards event Zacks focus I would say an attention to detail on fit is really showing up across our brands with some exciting work.
Adrian: On product, there's a lot more to share I would also mentioned that we have an extraordinary group of talented creative designers across the company.
Adrian: And the work that they have been collectively doing to reinvigorate our brands is really impressive and obviously, we're really excited to continue in 2000 and twenty-five igniting the creative spirit and of course with Zach at the helm.
Adrian: And then the Adrian on on margin as you say I mean, we're very proud of the significant gross margin gains that we've made we were up 250 basis points year over year and then you know as you noted these are historically high levels. Our brands are resonating and we continue to gain relevance in market share.
Adrian: Which we think gives us pricing power in the market and then you combine that with the rigor that we've developed around inventory management, we still have confidence that we can build upon the progress we've made in margins as we move forward. The color I would say by brand is that our AUR ours are up meaningfully higher.
Adrian: Here than pre pandemic levels, and that's true across all of our banners with the exception of Athleta.
Speaker Change: Thank you very much best of luck.
Speaker Change: Thank you Adrian.
Speaker Change: Just to reminder, everyone. Please limit yourself to one question well go next to Dana Telsey Telsey group.
Dana Telsey: Hi, good afternoon, everyone and very nice to see the great progress as you look at the stores channel on the online channel I think the online channel, but a little bit better than the stores channel. What did you see there this quarter, how you're planning for the year and with some of the new formats and refreshes that you've done what kind of productivity gains have you see.
Speaker Change: And any more thoughts on what you see as the appropriate store base for each concept. Thank you.
Dana Telsey: Thank you Dana I'll.
Speaker Change: I'll start and if Katrina wants to chime in at any moment more than happy to have her join me on this one.
Speaker Change: First off we approach our channel strategy from an omni channel point of view clearly that is how the consumer journey.
Speaker Change: Arts and stops today, and our size and scale is a strategic asset that we continue to evaluate and optimize as we continue to optimize our retail footprint customers are expecting to have an omnichannel experience, especially with our brands and we have the number two apparel e-commerce site in the country we have.
Speaker Change: Been working to optimize the customer experience, we are working to integrate that experience with our stores.
Speaker Change: And we're doing so with a digital first mindset. We do believe there are areas that we can better leverage technology and technology to automate reduce the customer pain points, we're continuing to evaluate and optimize our retail footprint in conjunction with the evolving consumer landscape and we believe collectively that we have a great advair.
Speaker Change: <unk> based on our scale you did mention is we will also gap Inc. Online sales were up 4% in 2020 for.
Speaker Change: It represents about 38% of our total net sales, whereas our store sales were flat.
And in Q4, our online business outpaced our soar store sells.
Speaker Change: As well as representing just over 40% of our total sales.
Speaker Change: Yeah, maybe the only add on on that is that as Richard said, we we have a company operated fleet of about 2500 stores and we're sort of always optimizing that footprint.
Repositioning opening stores and more relevant locations.
Speaker Change: And we still believe stores are really important for the customers to experience our brands and being in the right locations is critical we are excited about some of the new experiences that we're testing across the portfolio, which is you talk about dollars per square foot square foot I think overtime, we believe will start to add value.
Speaker Change: So we've talked about gap in flat iron in New York City, and banana in Soho, both of which are good examples of how we're starting to really make progress around thinking about store experiences in a different way and more to come as we start to evaluate the performance of those.
Speaker Change: Thank you.
Speaker Change: Dana and the next question. The next question comes from Ike Borough Child Wells Fargo.
Speaker Change: Okay.
Speaker Change: Let me add my congrats.
Speaker Change: Richard I wanted to ask you broadly about just your view of the consumer behavior as you kind of saw maybe not necessarily in Q4, but kind of January February online.
Speaker Change: Are there things you point to that makes you believe this is just a weather moment with some weakness is there anything that gives you more concern are you putting enough guardrails around your plan for the year and just a quick follow up for Katrina, the cash balance and how you guys are generating a lot of cash again.
Speaker Change: Bought back a little stock for the first time in a while in Q4 should this become a larger part of the plan or are you guys planning.
Speaker Change: Further buybacks because your stock is very cheap and you guys were talking about the <unk>.
Speaker Change: Business with a lot of momentum so I wanted to come out.
Speaker Change: Square that circle. Thanks.
Speaker Change: Okay. Thank you for the question.
Speaker Change: First off from a macro perspective.
Speaker Change: We've we've all been operating in a highly dynamic backdrop for the last several years and we're expecting the same for 2025, we always study the consumer and we saw growth across all income cohorts in the fourth quarter now our share gains were led by the lower income.
Speaker Change: This was with strength in the old Navy brand, whereas GAAP bran outsized share gains were led by the strength in both the top and the middle cohorts.
Speaker Change: What's really unique about this is our portfolio of brands appeals to such a wide range of consumers, which is where we see a real distinct advantage I mean in a declining apparel market, we've been gaining share for eight quarters in a row and I think it's really reflecting the resonance of our brands with the consumer.
Speaker Change: And our relative strength in the industry and as we look at the future with a stronger portfolio of brands today that are resonating with consumers as evidenced by share gains. It's our job to just continue to focus on executing with excellence with great product great style, great quality and exceptional value.
Speaker Change: And as long as we focus on that as the center on a backdrop of what has been a declining market. We are going to be the winners in any challenging market.
Speaker Change: And I guess it relates to cash the rigor in the business is driving significant cash flow generation, which is really exciting to see and as you say cash at 2.6 billion is pretty.
Speaker Change: Pretty high we laid out the capital allocation framework on the call. We are taking up capital investments by about 36, 34% and so that shows our confidence in investing in the business. The board did raise the dividend for first quarter by about 10% as we align.
Speaker Change: Our principle of growing the dividend as net income grows and then you're right. We got back into the market in fourth quarter and purchased $75 million worth of stock as I said on the call. We do have about a $400 million remaining under our authorization and will remain opportunistic as we look to balance value.
Speaker Change: Creation with our objective of offsetting dilution over time.
Speaker Change: Great. Good luck. Thanks Ike.
Speaker Change: And ladies and gentlemen that does conclude our question and answer session that does also conclude our conference for today you may now disconnect.