Q1 2025 Gap Inc Earnings Call
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Speaker Change: Good afternoon, ladies and gentlemen, I would like to welcome everyone to the Gap, Inc. First quarter 2025 earnings conference call.
Speaker Change: 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 queue and Ecu <unk>.
As a reminder, please limit your questions to one per participant.
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Speaker Change: I would now like to introduce your host Whitney Notaro head of Investor Relations. Good afternoon, everyone. Welcome to Gap, Inc. 's first quarter fiscal 2025 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.
Speaker Change: 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 18th 2025, and any subsequent filer.
Speaker Change: <unk> with 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 May 29, 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 financial measure is not consistent with generally accepted accounting principles.
Speaker Change: 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.
Richard Dickson: Thank you Whitney and good afternoon, everyone.
Richard Dickson: The first quarter was another great quarter during which we delivered what we said we were going to do exceeding expectations across key financial metrics. We.
Richard Dickson: We had positive comp sales for the fifth consecutive quarter expanded both gross margin and operating margin and gain market share for the ninth consecutive quarter.
Richard Dickson: We are lapping the early stages of our transformation and our two largest brands gap and old Navy are winning in the marketplace and demonstrating the potential of our brand reinvigoration playbook.
Richard Dickson: Old Navy and gap saw growth across all income cohorts with old Navy gaining share in both top and bottom cohorts and GAAP gaining share in top and middle cohorts showing our strategic intent is working.
Richard Dickson: During the quarter, we increased our year over year E Commerce penetration with gap, Inc. Ranking as the number one apparel e-commerce business in the U S, reflecting our ability to meet customers where they are.
Richard Dickson: We remain focused on controlling the controllable driving continuous improvement and pursuing exciting opportunities as we operate and build this company for long term growth.
Richard Dickson: Our strategic priorities are clear our intent is unwavering and despite a dynamic environment, we're staying firmly on course and it's showing in our results.
Richard Dickson: Tariffs are understandably top of mind, So let me take a moment to share how we are approaching this topic based on what we know today, we are working to develop plans to mitigate as much of the anticipated tariff impact as possible taking actions in the short term without compromising the long term integrity of our strategy.
Richard Dickson: We have been successfully diversifying our sourcing footprint for several years, demonstrating the agility and resilience of our supply chain, China. As an example used to be one of the top sourcing countries for our product in 2024, it represented less than 10% of our sourcing and exiting 2012.
Richard Dickson: Five we now expected to be less than 3% most.
Richard Dickson: Most other countries represent less than 10%.
Richard Dickson: Vietnam, and Indonesia represented 27% and 19% of our sourcing last year, respectively, and our goal is for no country to account for more than 25% by the end of 2026.
Richard Dickson: We are taking a collaborative approach with our global sourcing partners to maintain and build on our long term relationships, we have across our supply chain.
Richard Dickson: Diversification also means near shoring as well as domestic investment.
Richard Dickson: We're planning to double our vendor sourcing of American grown cotton in 2026 with about 90% of our sales in the quarter in the U S. At an American workforce of over 65000 investing in the U S is an important priority for our business.
Richard Dickson: Today, we are much better equipped to handle complex headwinds because we have a stronger financial foundation and we are operating with greater discipline growing brand momentum and improved platform capabilities.
Richard Dickson: The first quarter was yet another proof point that our strategy is working and I remain optimistic yet realistic about the opportunities ahead as we navigate a highly dynamic environment.
Richard Dickson: On today's call as usual I'll provide an update on our first quarter performance and progress in the context of our four strategic priorities.
Richard Dickson: Then Katrina will walk you through our detailed financial results and our financial outlook after which we will open the call for questions.
Richard Dickson: Let's start with our first strategic priority financial and operational rigor.
Richard Dickson: Gap, Inc. Comparable sales were up 2% in the quarter comps at old Navy. Our largest brand were up 3%. This is the brand's ninth consecutive quarter of market share gains reinforcing its leadership position as the number one specialty apparel brand and retailer in the U S.
Richard Dickson: GAAP comps were up 5% the sixth consecutive quarter of positive comps and the brand delivered its eighth consecutive quarter of market share gains.
Richard Dickson: Banana Republic comps were flat as we continue to focus on reestablishing this premium brand in our portfolio and as we expected athletic comps had been challenging down 8% and we remain focused on resetting the brand for the long term.
Richard Dickson: We expanded operating margin 140 basis points versus last year EPS was <unk> 51 up 24% versus the first quarter of last year and we ended the quarter with a strong cash balance of approximately $2 2 billion.
Richard Dickson: The rigor and discipline, we have put into managing the business is serving us well.
Richard Dickson: Turning to our next strategic priority driving relevance and revenue by executing on our brand reinvigoration playbook.
Richard Dickson: Our portfolio consists of iconic trusted brands each in a different stage of the brand reinvigoration journey.
Richard Dickson: Let's begin.
Richard Dickson: Again with old Navy.
Richard Dickson: Old Navy is off to a strong start outperforming in the first quarter with a 3% comp and the ninth consecutive quarter of market share gains this momentum underscores old Navy's growing relevance with customers and the team's continued rigor of execution.
Richard Dickson: We are bringing more innovation style and value in 2025, and the brands category leadership drove its Q1 performance led by active and denim, which are both strategic growth categories for the brand.
Richard Dickson: During the quarter, we continued to advance our strategic pursuit to become the destination for the family as the value player in the active category.
Richard Dickson: Notably old Navy continued to gain share and active as the number five player in the category.
Richard Dickson: The launch of our studio smoothed collection outperformed our expectations delivering exceptional comfort and value to consumers and marking another step forward in our expansion in the category.
Richard Dickson: And we're not stopping there with our active product resonating we're amping up the storytelling earlier. This week, we launched the brand's first major active campaign in years old Navy, new moves, which is getting great reception.
Richard Dickson: The Brands' Q1 performance was also fueled by the success of our trend rate crafted denim collection with styles and loose and barrel fits embroidery and greater details. This is another great proof point that great style at great value wins across the family.
Richard Dickson: During the quarter old Navy grew share in denim ranking number four in the category.
Richard Dickson: In womens we launched a new occasion dress collection supported by a marketing campaign that drove some of the highest reach and engagement on social media to date.
Richard Dickson: An encouraging sign that our product and storytelling are landing with impact.
Richard Dickson: The inspiration for the occasion line was born from customer insight and then informed by Zac Posen expertise, an occasion, where ultimately creating a versatile collection were standout style meat unbelievable value.
Richard Dickson: Customers responded well to the collections design and quality reinforcing the strength of old Navy's value with strong full price sell through.
Richard Dickson: Kids also had a great quarter reinforcing our position as a top kids and baby brand in the U S with strength in licensing and graphics.
Richard Dickson: We are continuing to lean into the strategic category with the recent launch of our Iconix Summer Americana collection for the family, bringing the brand's first partnership with Disney to life in key markets in June.
Richard Dickson: We are intently focused on enhancing the customer experience at old Navy, which is driving higher NPS scores for both stores and online.
Richard Dickson: We're investing in technology that elevates the customer experience and our phase rollout of AI powered RFID is a great example of how we're bringing smarter operations and sharper service to our stores.
We also recently announced plans for old Navy's next generation flagship in New York's Herald square and iconic location for an iconic brand.
Richard Dickson: Opening in 2026, the new store will be a modern expression of old Navy, bringing our creativity to life through curated assortments and interactive moments designed to better engage customers.
Richard Dickson: We entered the second quarter, well positioned with pricing clarity consistent messaging and leadership in key categories as.
Richard Dickson: As we lap last year's strongest quarterly comp in Q2, we do so with sharper execution, a focus playbook and a brand that's meeting the customer where they are and where theyre going.
Richard Dickson: Now, let's turn to gap.
Richard Dickson: <unk> continues to execute a reinvigoration playbook with clarity and consistency delivering a standout 5% comp in Q1. This marks the brand's sixth consecutive quarter of positive comps and its eighth consecutive quarter of market share gains clear indications that gap is resonating with consumers and gaining relative.
Richard Dickson: Momentum in women's continued to build quarter over quarter fueling the brand's strong Q1 performance.
Richard Dickson: We are building a consistent brand narrative that we're applying with relentless repetition in Q1. This was exemplified through our exciting deals like gap campaign that leveraged music by Mehta with a timely feature of Parker Posey.
Richard Dickson: We continue to advance our authority in denim in Q1. This is a foundational category for gap that has been a key pillar of the brand's reinvigoration.
Richard Dickson: We gained share in the category with on trend styles like wide leg barrel relax silhouettes and ponds all of which are exciting our customers.
Richard Dickson: Taking insights from our Flatiron store, we're now rolling out an enhanced denim experienced top locations a great example of how we're turning insights into action.
Richard Dickson: We also saw strength in key categories like fleece, sweaters, and sleepwear essentials that are building deeper loyalty and driving brand affinity with our customer.
Richard Dickson: The brand strategy, including collaborations is attracting a new generation gap, while reinforcing the brand to those who have loved us for years, we are bridging the generation gap cala.
Richard Dickson: Collaborations continue to drive relevance and revenue for the brand in the quarter with Harlem's fashion ROE and Doe in contributing to strong new customer response increased engagement and meaningful buying beyond the clouds.
Richard Dickson: The GAAP studio collection designed by Zappos and launched last month and is also bringing excitement and buzz to the brand as gap brand's highest expression of style craftsmanship and quality gap studio showcases expertise rating intricate details and a modern take on American style. Initial response has been positive.
Richard Dickson: With strong sell through at full price demonstrating the brand's elevated design direction and generating over $1 3 billion impressions so far.
Richard Dickson: All of these collabs are showing strong attachment rates with customers, adding other GAAP products to their basket.
Richard Dickson: We are testing the brand's elasticity as we push the boundaries of our pricing power through some of these programs.
Richard Dickson: The strength of the gap brand is clear and reflects increasing brand relevance and growing connection with our customers.
Richard Dickson: With its strong execution of our playbook, we believe GAAP is well positioned to continue this momentum.
Richard Dickson: At Banana Republic, we continue to focus on reestablishing the brand and we are encouraged by the ongoing progress we delivered a flat comp for the quarter with fundamentals, improving and new proof points emerging.
Richard Dickson: The underlying health of the business is strengthening with a pricing architecture that is taking hold.
Richard Dickson: Men's continue to perform well driven by key items and we are pleased by improving performance in womens, particularly in coats skirts and pants.
Richard Dickson: Having made progress on fit and style, we are now focusing on greater alignment and design and merchandising across mens and womens, which we believe will cultivate broader appeal.
Richard Dickson: The white Lotus collaboration was a standout generating over 3 billion impressions and bringing new customers into the brand while staying true to the brand's aesthetic.
Richard Dickson: This has been one of banana republics, most impactful collaborations yet.
Richard Dickson: Bananas narrative based storytelling is personifying the brand well through the lens of travel adventure and modern exploration.
Richard Dickson: And the brand's marketing is becoming more efficient and effective as we continue to lean into our social influencer.
Richard Dickson: This strategy.
Richard Dickson: We continue to strengthen the foundation of Banana Republic, and with each quarter, we are seeing clear signs of brand progress and customer engagement.
Richard Dickson: Shifting to Atlanta as.
Richard Dickson: As we shared last quarter, we are resetting the brand and we know that we have more work to do in Q1, we continued to work through the over rotation, we discussed last quarter towards new more trend forward customers. While we were successful in bringing new customers in the quarter, we still did not have enough compelling products to appeal to our existing <unk>.
Richard Dickson: Customer base and that showed in the brand's performance as we said on our fourth quarter call. We expect this year to be choppy as we focus on fixing the fundamentals and this is reflected in our outlook.
Richard Dickson: Athletic is a purpose driven women centric brand rooted in the power of she is a valuable place in both our portfolio and the industry.
Richard Dickson: We are investing in design talent and as we build out the team we are working to find the right balance across the assortment delivering product that blends fashion function and brand relevance, but this will take time.
Richard Dickson: There's more work to do and we are committed to taking the necessary steps to reset the brand.
Richard Dickson: Moving to our third strategic priority strengthening the platform.
Richard Dickson: As we shared on our last earnings call. We continue to prioritize technology investments as a key lever to drive efficiency elevate the customer experience and position us for long term growth.
Richard Dickson: We aspire to be a human centered digitally enabled organization and we're fortunate to be operating in close proximity to the bay areas World Class Tech community.
Richard Dickson: We're actively engaging with leading tech companies as we continue to modernize our organization with exciting opportunities to drive innovation across our business and we look forward to sharing more as these initiatives progress.
Richard Dickson: We're focused on building the right tools to power growth.
Richard Dickson: Advancing inventory management digital product creation, AI enabled capabilities to powered customer and employee experiences and strengthening our e-commerce engine with a sharper focus on customer insights and loyalty.
Richard Dickson: Our rigor and the strength of our balance sheet allows us to go on offense investing in the capabilities infrastructure and our brands that will fuel growth for years to come.
Richard Dickson: Behind every great strategy is a strong culture gap, Inc. Is a 55 year old company that has navigated its fair share of disruption and at the heart of that endurance is our culture.
Richard Dickson: It's one defined by creativity resilience and a deep sense of purpose. These are driving impactful outcomes for our business.
Richard Dickson: Today, we are much stronger company, not just operationally, but culturally we're building a more United focused and energized organization, one thats rooted in values driven by talent and inspired by the belief that great brands can shape culture and connect deeply with consumers.
Richard Dickson: We've made real progress on the fundamentals of the business, but what sets us apart is our people their dedication agility and belief in what we're building together.
Richard Dickson: That culture is our superpower and it's what will carry us forward.
Richard Dickson: We delivered the first quarter with the same clarity of purpose and operational discipline, that's becoming a hallmark of how we run the business.
Richard Dickson: The rigor we have embedded across the organization continues to serve US well, we have a powerful portfolio of brands that matter and we're proving that they can matter even more.
Richard Dickson: Our strong supply chain resilient teens and sharp focus on controlling the controllable has enabled us to manage expenses effectively and meet our bottom line objectives.
Richard Dickson: Looking ahead I am confident in our path forward not just because of the results that we've achieved but because of the team that's delivering them I want to thank our employees for their ongoing commitment and our partners for their continued collaboration with a strong financial foundation and a more United culture. We believe we are well.
Richard Dickson: Ill equipped to navigate this complex dynamic environment, we are making steady progress executing our strategy and we remain focused on building a high performing company that drive shareholder value creation over the long term.
Katrina O'connell: I'll now turn the call to Katrina for a closer look at our financials.
Katrina O'connell: Richard and thanks, everyone for joining us this afternoon in the first quarter, we once again exceeded financial expectations demonstrating that the meaningful progress. We've made on our strategic priorities is translating into strong results the disciplined.
Katrina O'connell: <unk> approach, we've implemented throughout the business lead to sales growth gross margin improvement SG&A efficiency and earnings gains in the quarter further strengthening our solid balance sheet.
Richard Dickson: The revitalization of our brands combined with continued financial and operational discipline is enabling us to perform while we transform consistently delivering on our commitments and strengthening overall performance.
Richard Dickson: Our strong first quarter results reinforce our confidence in the fundamentals of the business, which is enabling us to reaffirm the net sales outlook for fiscal year 2025.
Richard Dickson: That said as trade policy evolves, we remain mindful of the impact of tariffs on our financial outlook for the remainder of the year.
Richard Dickson: In a moment I will share more details on our guidance, which reflects both the strength of our execution and brand momentum while separately, providing our view on the new headwinds from shifting trade policy.
Richard Dickson: First I'll share some key highlights from the quarter.
Richard Dickson: It's been energizing to see our brand reinvigoration continued to drive results with net sales and comparable sales both up 2%.
Richard Dickson: Our brands demonstrated progress in driving relevance and revenue, especially old Navy and gap with strong market share gains.
Richard Dickson: We expanded gross margin by 60 basis points and leveraged SG&A 90 basis points versus last year.
Richard Dickson: This resulted in an operating margin of seven 5% for Q1 of 140 basis point improvement compared to last year.
Richard Dickson: And we achieved 24% growth in earnings per share to 51.
Richard Dickson: Highlighting the earnings power of our business.
Richard Dickson: We returned approximately $131 million to shareholders in Q1 through share repurchases and dividends demonstrating our commitment to our balanced capital deployment framework.
Richard Dickson: We ended the quarter with $2 $2 billion of cash cash equivalents and short term investments, giving us the financial flexibility to continue executing with confidence.
Richard Dickson: We are reiterating our fiscal 2025 outlook of net sales up 1% to 2% and are still expecting operating income growth in the 8% to 10% range, excluding any tariff impact.
Richard Dickson: We are currently estimating and that impact of approximately $100 million to $150 million to fiscal 2025 operating margin based on current tariff policy.
Richard Dickson: I'll take you through the details of our outlook shortly.
Richard Dickson: Now turning to first quarter results.
Richard Dickson: Net sales of $3 5 billion increased 2% year over year with comparable sales up 2% as well bye.
Richard Dickson: By brand starting with old Navy net sales were $2 billion up 3% versus last year with comparable sales up 3%.
Richard Dickson: Old Navy's consistent delivery and execution with notable as they continued to win in key categories like active and denim and gained share.
Richard Dickson: Turning to gap brand net sales of $724 million were up 5% versus last year and comparable sales were up 5%.
Richard Dickson: Gap continued to execute the brand reinvigoration playbook with excellence driving continued momentum in achieving positive comp sales for the last six quarters.
Richard Dickson: Banana Republic net sales of $428 million were down 3% year over year with comparable sales flat.
Richard Dickson: We are encouraged by the early signs of progress in our women's performance.
Richard Dickson: Athleta net sales of $308 million decreased 6% versus last year and comparable sales were down 8%.
Speaker Change: As Richard mentioned, we're working to reset the brand this year and have work to do to improve product and marketing, which will take some time.
Speaker Change: Let's continue to the balance of the P&L gross margin of 41, 8% increased 60 basis points versus last year ahead of our expectations.
Speaker Change: Merchandise margin was flat with the remaining 60 basis points of expansion driven by Rod leverage.
Speaker Change: SG&A was $1 2 billion in the quarter flat to last year as we demonstrate continued rigor in our expense management.
Speaker Change: SG&A as a percentage of net sales was 34, 3% leveraging 90 basis points versus last year ahead of our expectations.
Speaker Change: First quarter operating margin of seven 5% improved 140 basis points compared to last year.
Speaker Change: Earnings per share in the quarter were 51 cents up 24% versus last year's earnings per share of 41.
Speaker Change: Now turning to the balance sheet and cash flow.
Speaker Change: End of quarter inventory levels were up 7% year over year, primarily as a result of earlier receipts and faster transit times.
Speaker Change: We remain committed to our disciplined inventory management principles and we believe we ended the quarter with the right inventory composition.
Speaker Change: We ended the quarter with cash cash equivalents and short term investments of $2 $2 billion, an increase of 28% from last year further demonstrating the rigor we put into managing the business.
Speaker Change: Capital expenditures in the quarter were $83 million.
Speaker Change: In line with the capital allocation framework I outlined on our fourth quarter call. We returned approximately $131 million to shareholders in Q1 in the form of dividends and share repurchases more specifically, we paid $61 million to shareholders in the form of dividends and the board recently approved a second quarter dividend.
Speaker Change: 16, and a half cent per share.
Speaker Change: We also repurchased 4 million shares during the quarter for approximately $70 million.
Speaker Change: It's important to note that we have $331 million remaining on our share repurchase authorization as we proactively and opportunistically achieve our goal of offsetting dilution.
Speaker Change: Our strong balance sheet gives us the foundation to focus on capital allocation with the goal of enhancing long term shareholder value.
Speaker Change: And in this dynamic environment. This also allows us to be thoughtful about the levers, we're pulling to mitigate potential headwinds while remaining mindful of pursuing opportunities for growth.
Speaker Change: Now turning to our outlook for fiscal 2025.
Speaker Change: We've been operating in a highly dynamic backdrop for the last few years and we're expecting the same for the balance of fiscal 2025.
Speaker Change: Our outlook assumes a relatively consistent macroeconomic environment, but acknowledges the potential for increasing uncertainties related to consumer behavior, and global economic and geopolitical conditions.
Speaker Change: As a result, we continued to take a balanced view with our guidance and remain focused on controlling the controllable.
Speaker Change: Today I'll provide our fiscal 2025 outlook that does not include tariffs and then separately quantified the potential impact of trade policy on our profit should current policies remain <unk>.
Speaker Change: Since last quarter's outlook trade policy has introduced new cost headwinds to margins in the form of tariffs.
Speaker Change: Because tariffs remain dynamic we have not reflected the potential effect in the outlook we provided today.
Speaker Change: However, we are providing an estimate of our latest view, we remain confident that our strategic priorities are working as evidenced by another strong quarter.
Speaker Change: That success underscores our belief that the outlook, we provided on our fourth quarter call remains fundamentally intact, excluding the estimated impact of current tariffs.
Speaker Change: Starting with full year 2025, net sales, we continue to expect net sales to be up 1% to 2% year over year.
Speaker Change: Our outlook assumes ongoing strength at old Navy and gap stabilizing performance of Banana Republic, and a longer recovery timeline at Athleta.
Speaker Change: We believe great brands can win in any environment.
Speaker Change: Moving to gross margin we continue.
Speaker Change: To expect underlying gross margin to expand slightly year over year with roughly equal amounts coming from rod leverage in merchandize margin.
Speaker Change: Turning to SG&A, we continue to expect SG&A to leverage slightly for the full year as we discussed on last quarter's call. We're driving continuous improvement in the cost structure of the company as we rigorously drive savings in our core operations through efficiency and effectiveness.
Speaker Change: Our outlook continues to reflect the approximately $150 million in cost savings and efficiencies, we expect to achieve this year through better operations.
Speaker Change: We remain committed to reinvesting a portion of the $150 million of efficiencies into future growth projects as we pursue the long term success of the company.
Speaker Change: While we have contemplated whether to delay these strategic investments in the face of trade policy headwinds between our foundational execution and balance sheet strength. We believe the pursuit of these initiatives remains important to the long term momentum of the company.
Speaker Change: Select examples of these initiatives our product to market capabilities that will build localization and speed.
Speaker Change: In addition to foundational capabilities like RFID and AI.
Speaker Change: Portion of these savings will also offset continued inflation.
Speaker Change: Finally for fiscal 2025, we expect underlying operating income growth of approximately 8% to 10% for the full year.
Speaker Change: Now regarding tariffs as I mentioned previously given the dynamic nature of trade policy, our fiscal 2025 outlook does not reflect the potential effect of tariffs. However, based on what we know today, if current tariffs of 30% on most imports from China and 10% on most.
Speaker Change: Imports from other countries remain for the balance of the year, we estimate our gross incremental cost of approximately 250 million to $300 million.
Speaker Change: We currently have strategies to mitigate more than half of that amount.
Speaker Change: After considering our mitigation strategies, we estimate our remaining net impact of about 100 million to $150 million to fiscal 2025 operating income primarily weighted to the back half of the year.
Speaker Change: As a global leader with the benefit of scale, we are moving swiftly with our mitigation plans, which include adjustments to our sourcing manufacturing and Assortments, we remain committed to evaluating the remaining levers we have at our disposal to achieve further mitigation.
Speaker Change: Accordingly, we're taking a long term view as we continue to mitigate these headwinds rather than responding with short term decisions that could compromise the integrity of our strategy.
Speaker Change: This is an early view and trade policy remains dynamic. So we will continue to reassess and refine our approach as future developments arise.
Speaker Change: We are being even more rigorous in our approach to inventory for the balance of the year. We have further tightened the way we purchase unit inventory for the second half of the year to ensure maximum flexibility for various demand scenarios and to enable us to be more responsive to consumer demand.
Speaker Change: We continue to expect capital expenditures of $600 million for the year as we utilize our strong balance sheet to invest in the organic opportunities for value creation that we see in our business.
Speaker Change: Now, let me share some color on our outlook for the second quarter of fiscal 2025. It is important to note that we estimate minimal impact to our Q2 outlook based on currently enacted tariffs.
Speaker Change: We expect second quarter net sales to be roughly flat year over year. This contemplates our solid quarter to date performance and reflects a one percentage point impact related to the lapping of the benefit we saw last year from the incremental revenue related to our credit card agreement, which we do not expect to recur this year.
Speaker Change: We expect second quarter gross margin to be similar to our first quarter gross margin.
Speaker Change: This outlook reflects the impact from lapping last year's credit card benefit, which is the primary driver of the implied year over year decline.
Speaker Change: And finally, we are planning for second quarter SG&A to leverage slightly versus last year.
Speaker Change: In clothing Iman.
Speaker Change: I'm incredibly proud of the strong first quarter performance, which reflects disciplined execution and underscores the progress we are making while tariffs have the potential to impose new costs. We remain focused on controlling the controllable and executing our strategic priorities, which are driving results and we remain committed to.
Speaker Change: Building on this momentum as we work toward becoming a high performing company that deliver sustainable profitable growth and long term value for our shareholders with that we'll open the line for questions.
Speaker Change: Thank you 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. Our first question will come from Alex Straightened from Morgan Stanley.
Alex Straightened: Thanks, so much congrats on a nice quarter.
Alex Straightened: Wanted to focus on tariff here.
Speaker Change: Said, you can mitigate more than half of the impact and I'm. Just curious is there room for that to be bigger. Both this year and then over time it sounds like maybe that's the case given your reinvestment commentary thanks a lot.
Alex: Thanks, Alex first of all thank you for the shout out on the quarter, we're really pleased with the progress and the results.
Alex: And I'm happy to sort of address the tariff question upfront.
Speaker Change: What I would say is first off you know Katrina and I will take this but like any business, we're constantly navigating complexity and in this case, it's tariffs and it's our responsibility to do so without compromising.
Alex: The long term integrity of our strategy and most importantly, the customer value proposition. So we've already have strategies to mitigate over half of the anticipated impact of tariffs now this has been done through thoughtful adjustments to sourcing manufacturing Assortments and we also.
Alex: Remain committed to achieving additional mitigation overtime now we've also shared with you that we've been diversifying our sourcing footprint for several years.
Katrina O'connell: China as an example used to be one of our top sourcing countries and we now expect it to be less than 3% by the end of this year and by the end of 2026, we're planning for no country to account for more than 25%. So theres a lot more information to unpack, but I'm going to pass it to Katrina to talk about our outlook.
Katrina O'connell: The estimated tariff impact great and thanks, Alex I mean, our goal first and foremost in providing the outlook. We provided today with transparency, we were very purposeful in separating the outlook from the estimated tariff impact we believe that the outlook provides a perspective on the underlying health of the business, which is where.
Speaker Change: King and as well as then the estimated impact of current tariffs, which could still change I think last night's news is a good example of where we're still trying to see where this lands.
Katrina O'connell: And the first half of 2025 is largely unimpeded by current tariffs there was no impact in Q1 and very minimal impact to Q2. So the estimated tariff impact that we provided today is really primarily weighted to the second half and much of that will be determined with shipping that occurs late in the second quarter and beyond so that's.
Katrina O'connell: Sort of the context to the way we set the outlook as it relates to the actual tariff impact.
Katrina O'connell: If current tariffs of 30% on most imports from China and 10% on most imports from other countries remain for the balance of the year. We have estimated a gross incremental cost of $250 million to $300 million now as you note. We have already swiftly in the last few weeks are put.
Katrina O'connell: In place strategies to mitigate more than half of that amount.
Katrina O'connell: So considering those mitigation strategies, we have about our remaining net impact of 100 million to $150 million to fiscal 'twenty 25, now I think given we will know more coming out of the July 9th milestone and pending court decisions.
Katrina O'connell: We certainly expect to be able to provide more perspective on the remainder of the year on our next call. Meanwhile.
Katrina O'connell: We do expect to mitigate the impact over time and plan to use the same levers, we've discussed including adjustments to sourcing manufacturing assortments.
Richard Dickson: But as Richard said, we're committed to the long term strategy, even as we navigate the short term disruption.
Alex: Yeah.
Speaker Change: Let's Super helpful. Good luck.
Alex: Thank you.
Alex: The next question is from Adrian <unk> from Barclays.
Adrian: Good afternoon, and congratulations on the quarter and the the gap brand in particular and from where I said it looked like they were really driving full price selling.
Speaker Change: My first question Richard is on the gap brand.
Speaker Change: It seems like you are starting to have moment, whether they're the collaborations where you can really drive full price and then inquired a moment that we still do often see it sort of a box off of purchase off and I know you've talked about kind of maintaining the balance between.
Speaker Change: Providing value and then having these kind of full price moment. When you talk about kind of your success in getting something more than the more millennial and then guiding that fine balance and at what point, what do you need to see to start pulling back more on your sort of like box off promos. Thank you.
Speaker Change: So adrienne. Thank you so much for the call out of the quarter, but in particular, the gap brand, which we collectively are really proud of the progress that we've been making there.
Speaker Change: They've done an incredible job executing with clarity and consistency our brand reinvigoration playbook and as you note Q1 comps accelerating to 5%.
Speaker Change: While achieving the eighth consecutive quarter of market share gains is really proving that momentum is building.
Speaker Change: This strong performance has been fueled by innovation and product.
Speaker Change: Style product newness and compelling marketing with a social first approach.
Speaker Change: Both mens and womens gained share in the quarter and our brand campaigns and the collaborations which you mentioned are also attracting a new generation to gap now we're doing this while we're also reinforcing the brand to those who have loved us for years. Examples of this the recent campaign featuring Parker Posey re.
Speaker Change: As needed with consumers both.
Speaker Change: All generations and its unique creative format is the Great example of how we're bridging the generation gap.
Speaker Change: The collaborations that we've been working on like Harlem fashion row DAU in the recent launch of GAAP studio, which generated real excitement and buzz to the brand, but it's also showing that we can drive strong full price sell through which is demonstrating the brand's pricing power.
Speaker Change: It's a very exciting moment for the brand as we get more and more traction and momentum and with the strength of our playbook in action and the power of the brand is performing we really do believe that the gap brand is well positioned to continue to to continue the momentum.
Speaker Change: Great. Thank you anchor tenant my follow up is on the mitigation practices that are already in play.
Speaker Change: Kind of at that number the gross number if you were to mitigate that seemingly kind of implying a low to mid single digit price increase if you were just using that I didn't hear you talk about price increases as one of the things that you were already.
Speaker Change: They're going in.
Speaker Change: Certainly you wouldn't do that until later in the year, So I'm wondering where pricing falls into the mitigation strategy is it in there already thank you.
Adrian: So Adrian let me just take that and if.
Speaker Change: Katrina wants to embellish, but where we're approaching our pricing strategy as we always do we consider all the various inputs, while maintaining the overall value proposition for our consumers and based on what we know today, we do not expect there to be meaningful price impacts to our consumer we really do believe that strong brands can win.
Speaker Change: When in any market.
Speaker Change: And as we look ahead, we see the potential for further market share opportunity now we're going to continue watching trade developments the consumer as we do very closely in the competition closely but at this particular time, we're approaching our pricing strategy as we always do.
Mike: Fantastic Best of luck. Thank you. Thank you. Thank you Mike.
Speaker Change: Ladies and gentlemen, as a reminder, please limit your questions to one per participant up next is Matthew boss Jpmorgan.
Matthew Boss: Great. Thanks, So Richard at the gap brand could you speak to new customer acquisition as you comp the comp and drivers of the consistency that you are now seeing at old Navy or just any change in momentum in either brand. So far in May and then Katrina I guess, excluding tariff is this year's outlook for eight to 10.
Speaker Change: Percent operating income growth on 1% to 2% sales is that a reasonable multi year model algorithm and lastly is there any reason multiyear that you can't mitigate the full tariff impact through sourcing diversification.
Speaker Change: So Matthew Thank you we will tackle that question as a team, but I think the first part of that as I mentioned we.
Speaker Change: We really are bridging the generation gap, particularly with the gap brand.
Speaker Change: Our recent campaigns are designed to literally attract all generations through music big ideas and the amplification of those through really what we'll call fashion payment marketing the collaborations that we've been driving have real proof points of that new customer acquisition is increasing.
Speaker Change: We also saw that through the Collabs, there's a halo effect and the core brand is driving at least 25% of that basket. So the collabs, while driving new traffic and new volume, 25% of that basket includes core product. So we have great proof points, both qualitatively and quantitatively.
Speaker Change: Our strategy is really working now on the old Navy, which is important to talk a little bit about we delivered really strong comps for the quarter, 3% increases its also our ninth consecutive quarter of market share gains.
Speaker Change: Again, proving the consistency and the deliverables of the execution are really resonating we called out categories like active and denim, where we've been very intentional about pursuing a leadership position and its showing up in the result, our active business continues to grow quarter after quarter, where the number five player in the <unk>.
Speaker Change: <unk> and we're continuing to gain share.
Speaker Change: As as recent as this quarter.
Speaker Change: You might have noticed we launched a new segment called studio smooth. The collection has outperformed our expectations, which is really marquee. Another step forward in the category. We on Tuesday introduced a new campaign old Navy new moves there's a great exciting campaign that supports the activewear strategy it's culturally.
Speaker Change: Relevant marketing, that's really speaking to the brand playbook and it's a clear example of how we're accelerating old Navy's adoption of the new brand playbook, taking big product ideas amplifying them with storytelling and ultimately connecting to the consumer generation gap for sure. We've got Lindsay low hand, Dillon <unk> quillin.
Speaker Change: Blackwell and even chara in the campaign that just launched Tuesday.
Speaker Change: And it's also getting great traction. It's also important to note denim was a really another big category standout for US we've gained share in that category as we secured our position as the fourth largest adult denim brand in the U S. We also saw a positive response to our occasion dress collection, which had.
Speaker Change: Really strong full price sell through serving as a great example of pricing power. When you have great product great style and great value customers take notice. So look these are all foundational elements that we've established in our portfolio and in particular old Navy.
Katrina O'connell: Underpinning the brand's performance and it's giving us real confidence that we will continue to deliver in 2025, and maybe I'll turn it over to Katrina to answer the second part of your question. Yeah. So Matt I think it is fair to say that our longer term economic model.
Speaker Change: Is for us to deliver somewhere in that low to mid single digit sales growth range with Ben operating margin that grows in the high single digit range.
Speaker Change: And then when you combine that with return of cash to shareholders you get a very nice top tier T. S. R and so that algorithm I think is one that we look to repeat over time.
Speaker Change: Any reason over multiyear we can't impacted mitigate no I don't think so I mean, I think there's a few things momentum in the business as a great way to start to offset it.
Speaker Change: We're working on that through our reinvigoration, we continue to stay very focused on efficiencies within our cost structure of the company and so well well well we've got a track record of that we will stay focused on that and then I think lastly, I spoke to some of the investments that we're staying committed to because they are important for the momentum going forward many of those.
Speaker Change: Like AI RFID and some of the product to market capabilities are intended to help shore up margins over time and so that's part of the reason why we remain committed to those in the near term. So that we can continue to make progress over the long.
Speaker Change: That's really great color best of luck.
Speaker Change: Thank you.
Speaker Change: Up next we'll hear from Lorraine Hutchinson Bank of America.
Lorraine Hutchinson: Thank you. Good afternoon can you talk about the puts and takes driving the flat merchandise margin this quarter and then.
Speaker Change: Which brands our strategy is leading to the upside in the remainder of the year to hit your guidance for merch margin.
Speaker Change: So Lorraine I think on merchandise margin.
Speaker Change: For Q1, we were very proud that we were able to expand merchandise margins by 60 basis points that was underlying merch margins are relatively flat, which was holding on to many of the gains we got over the last few years.
Speaker Change: With the margin expansion really coming from Rod our brands are really resonating well.
Speaker Change: And that's really allowing us to gain relevance and have market share gains as well as giving us pricing power in the market as we look to Q2, we have guided to margins to be similar to Q1 that does imply a year over year decline that is really from lapping law.
Speaker Change: Last year's credit card benefit if you remember that was a primary driver of some of the increases last year and so as we lap that that does drive a decline year over year. The underlying merchandise margins are intended to be relatively flat.
Speaker Change: And then as we look out to the full year, we continue to expect underlying gross margins to expand slightly with roughly equal amounts coming from rod leverage and merchandise margin expansion.
Dana Telsey: The next question will come from Dana Telsey Telsey group.
Dana Telsey: Hi, good.
Dana Telsey: Good afternoon, everyone. As you think about the solid progress that you've made in both gap and old Navy on the product side and also the customer appeal side. How are you thinking about banana Republic, and Athleta and what happens with anything pick up with tariffs with them versus the other brands and attracting new customers and <unk>.
Speaker Change: Lastly, just on store and online sales what did you see by brand traffic in each of them does it differ at all and how you're seeing the consumer come back. Thank you.
Dana Telsey: Dana Thanks for the question and I'm happy to talk about Banana Republic and Athleta.
Dana Telsey: I'm really encouraged by the ongoing progress that we've made in banana Republic. We've also talked about it being the focus on reestablishing the brand by fixing fundamentals and we see some great new proof points emerging delivering a flat comp in the quarter.
Dana Telsey: We're leaning much more heavily into classics much more precise assortments fit is resonating as we work to rebuild that trust with our customer men's continue to perform well and we've been pleased by the improving performance in womens.
Dana Telsey: We've been focused on greater alignment and design and merchandising across both genders, which we believe will cultivate a broader appeal overtime and the work. The team has done to improve women's and strategically redeploy our marketing to a much more culturally relevant storytelling brand is.
Dana Telsey: Really resonating I would call out one of the highlights from the quarter was the white Lotus collaboration I mean, it was a real testament to the clarity of our positioning as a modern explorer brand one that embodies obviously the spirit of exploration and it was inspired by the world flight Lotus, but still distinctly banana Republic, So I think.
Dana Telsey: It is a great example of our playbook in action, we're going to continue to strengthen the foundation at banana and with each passing quarter, we're seeing clear signs of brand progress customer engagement, and it's giving us confidence that the brand is indeed on the right path forward.
Dana Telsey: Now Athleta are important to say has a really valuable place in both our portfolio and in the industry and we've been resetting the brand to be more effective in competing in the marketplace. We do expect this year to continue to be choppy.
Dana Telsey: As we continue to focus on fixing the fundamentals and this has been reflected in the outlook that we provided today as I've said, we've made progress with the brand in 2024. This was primarily through a lot of discipline and rigor, which is actually showing up in better profitability, what we need to do more work on to <unk>.
Dana Telsey: Breakthrough is get our product and marketing to get back to top line growth now we're continuing to continuing to work through what we shared last quarter, which was an over rotation towards a new more trend forward customer.
Dana Telsey: And by the way we've been successful in bringing new customers into the brand and we did also see new customers in the quarter, but we still don't have enough compelling products to appeal to our large existing customer base and that's showing up in the brand's performance. So we're investing in design talent, we're working to find the right.
Dana Telsey: Balanced across the assortment it will take some time, we do have work to do but we're absolutely committed to taking the necessary steps.
Dana Telsey: And resetting the brand now.
Dana Telsey: Now.
Dana Telsey: The next part of your question was channel strategy.
Dana Telsey: So let me just talk a little bit about that first of all the goal is to always be where our consumers are where they are and where theyre going whether that's in our stores or through a digital dialogue. We've been really focused on cultivating the best experience that we can provide across every touch point. It is a work.
Dana Telsey: In progress, but we're making progress.
Dana Telsey: This quarter, we saw store sales flat in the first quarter.
Dana Telsey: And our online business grew 6%.
Dana Telsey: It represents about 39% of our total net sales, but it's also demonstrating the strength of our digital business. Today Gap, Inc. Is the number one branded apparel e-commerce business in the U S. We've got nearly 1.5 billion visitors in the last 12 months and it represents an X.
Dana Telsey: Extraordinary continued growth opportunity for us, we're obviously going to continue to focus on advancing and expanding our e-commerce capabilities and create more compelling customer experiences, but not at the expense of our stores.
Dana Telsey: We love our stores stores are really important way for customers to experience our brands they bring our product our storytelling our service to life in ways. The digital can't so with our company that operates a fleet of 2500 stores, we're always optimizing our retail footprint enhancing customer experiences.
Dana Telsey: Testing new formats, we believe both channels.
Dana Telsey: Represent great opportunities for continued growth and.
Dana Telsey: And we will continue to update you on both channels and our progress that we're making.
Dana Telsey: Thank you.
Dana Telsey: Okay.
Speaker Change: The next question today will come from Paul Lajoie Citigroup.
Speaker Change: Hey, Thanks, guys.
Speaker Change: About the comp drivers by brand traffic ticket curiously so on AUR and then also just on the old Navy business can you, maybe quantify where the market share gains are coming from from an age demographic perspective.
Dana Telsey: So as I mentioned on old Navy, we have been really gaining market share overall as as the ninth consecutive quarter of market share gains, we're seeing gains primarily as I've called out in the strategically intended categories.
Dana Telsey: Particularly denim.
Dana Telsey: And also active we have seen progress across many categories overall dresses in particular again with our occasion launch and we are really pleased with the overall progress that we're making again as we look at total market share one of the areas that I think is also important to note is from a consumer purse.
Dana Telsey: <unk>, we saw our.
Dana Telsey: Income cohorts really respond to the old Navy proposition, we saw expansion in both top income and bottom income cohorts. So it really is resonating with our consumer I mean, we've got a strong value proposition that appeals to a wide range of consumers, but as we get more relevant as we.
Dana Telsey: Drive more style design and narratives on storytelling, we're seeing a top income cohort migrate into the old Navy brand. We also saw that on gap gap is gaining share in the top and the middle cohorts. When you back up from this what we recognize in what we believe is our portfolio is really appealing.
Dana Telsey: To a wide range of consumers, it's giving us great flexibility in today's environment, we have a stronger portfolio of brands that is resonating with consumers across multiple cohorts as well as generations and it's our job just to continue making great product great style, great quality, keeping the value proposition and.
Dana Telsey: Growing our presence in the marketplace. So we're very pleased with market share gains across our.
Dana Telsey: Our brands and in <unk>.
Dana Telsey: Specifically with the categories that we've been strategically intending to grow.
Dana Telsey: And then Paul as far as comp drivers in the quarter. We were pleased to see both traffic as well as average transactions up in the quarter, which is what drove the positive comp.
Paul: Thanks Katrina and within the transaction anything on AUR with CPD.
Paul: AUR was down modestly, but that was honestly, primarily due to higher promotional activity at athleta.
Speaker Change: Thank you. Good luck. Thank you. Our next question is from Ike <unk> from Wells Fargo.
Ike: Hey Katrina Richard.
Ike: Gross margin question.
Ike: Can you just give us a flavor of it and maybe.
Ike: Just quantify what that margin headwind is that you have from from from a year over year credit card issue in the second quarter and then I know you don't want get into the details on the numbers, but just at a high level. If we excluded the tariffs based on your guidance for gross margin are you effectively guiding the back half grocery was flat.
Ike: And then if we put in the tariff that is it seems like it should hit but it's not in the guide is that roughly like a 50 basis points headwind. So if you put it in.
Ike: Take it out it's flat if you put it in its down 50, just ballpark is that fair.
Ike: And I think to take the first one first Ike so for gross margin in second quarter.
Ike: We just provided an outlook that said that gross margin in Q2 would be similar to our first quarter gross margin.
Ike: That implies you know roughly somewhere in that 60 basis point decline.
Ike: And that's largely the credit card impact from last year that we're lapping this year and don't expect to get so be without the credit card impact, yes margins would be somewhat flat to leveraging slightly.
Ike: As it relates to the guidance that we gave so we continue to believe that the underlying impact to gross margin for the year is that we will have margins leverage slightly.
Ike: And we said that that was almost equally merch margin leverage and rod leverage separately as we provide sort of that hundred to a $150 million of.
Ike: Potential tariff impact again, we'll know a lot in Q2 as we see where policies are subtle we will be able to update what that means but if you hold the $100 million to $150 million on the year, depending on what revenue you're looking at.
Ike: I think you'll get to somewhere in that 80 to 90 basis point of annual headwind I'll, let you calculate the back half, but more to come again, you know, it's dynamic where we're continuing to work on the mitigation and we're also continuing to wait for clarity on policy, which remains uncertain.
Ike: Thank you.
Ike: Thanks Ike.
Speaker Change: And ladies and gentlemen, our final question today comes from Simeon Siegel from BMO capital markets.
Speaker Change: Thank you everyone.
Speaker Change: Richard and team, obviously fantastic job on the resonating marketing.
Speaker Change: Or are you thinking about marketing spend for the year and I guess, how are you judging the success of the campaign because this should they be driving units. If so is it new customers versus going deeper with existing into the ability to take higher prices as general awareness media impressions et cetera, just curious how you're gauging, what's what a successful campaign should look like and how you are tracking them.
Speaker Change: Thanks, Simeon appreciate that marketing is a is a much more complex function than it has been in the past.
Speaker Change: We've been working very hard at driving new narratives and putting our brands back in the cultural conversation and as I've said, often our job is to be everywhere. Our consumer is with the right creative messaging and I think over time as we've initiated our reinvigoration playbook, we're really starting to see.
Speaker Change: The momentum of that come across as evidenced by our performance in the first quarter, we actually are spending less marketing dollars, but we're generating more revenue, we're getting generating more relevance and this really goes to speak about the creative conversation that we're starting to have and we believe we're on the right track in the metrics.
Speaker Change: Are really proving it.
Speaker Change: As we continue to be more effective and efficient with our spend.
Speaker Change: We start to see and gain more strength in our own conviction new assets that we've created based on data and consumer insights is driving new customer acquisition. I mean, we are seeing our house file increase and increase with new generation and new customers.
Speaker Change: The assets that we're developing are showing great traction we are planning to accelerate what's working we're testing and learning as we go it has a very specific strategic focus on social media content. It is in fact, the number one platform for our consumers by time spent by Influencer content.
Speaker Change: And it is the most common product discovery methodology among Gen Z and millennials. So look it is early days, we're testing new task tactics, we continue to work towards a more balanced funnel strategy over time, but when I back up and I look at the progress that we've made the identities that were.
Speaker Change: Creating that separate our portfolio from each other.
Speaker Change: I'm really pleased with the progress and I think the metrics are speaking for themselves and we'll continue to work hard at it, but ultimately becoming more effective and efficient with better creative and better media mix models.
Speaker Change: That's great. Thanks, and then if I could just throw one quick one in Katrina, what's great way to think about where rod leverages. What comp is it just seems impressive to get 60 bps of leverage on a 2% growth. So any help there would be would be helpful. Thank you sure.
Speaker Change: So we've done a lot of work on Rod as you know by closing 350 stores over the last few years that we're under productive so with that Rod will leverage for the full year on any positive sales growth.
Speaker Change: Great. Thanks, a lot guys best of luck for the rest of the year. Thank you. Thank you.
Speaker Change: Ladies and gentlemen, we have reached the end of our question and answer session that does conclude today's conference we would like to thank you all for your participation you may now disconnect.