Good afternoon, ladies and gentlemen. My name is Karina and I will be your conference operator today. At this time, I would like to welcome everyone to The Gap, Incorporated Third Quarter 2020 Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] I would now like to introduce your host, Steve Austenfeld, Head of Investor Relations. Please go ahead sir.

Great, thank you very much. Good afternoon, everyone and welcome to Gap, Inc.’s third quarter 2020 earnings call. Before we begin, we would like to remind you that the information made available on this webcast and conference call contains forward-looking statements. For information on factors that could cause our actual results to differ materially from any forward-looking statements, as well as the description and reconciliation of any financial measures not consistent with Generally Accepted Accounting Principles please refer to Page 2 of the slides shown on the investors section of the website gapinc.com. We supplement today’s remarks as well as today’s earnings release, our quarterly report on Form 10-Q filed with the Securities and Exchange Commission on June 9, 2020 and any subsequent filings all of which are available on gapinc.com. These forward-looking statements are based on information as of November 24, 2020 and we assume no obligation to publicly update or revise our forward-looking statements. Joining me on the call today are Chief Executive Officer, Sonia Syngal; and Chief Financial Officer, Katrina O’Connell. With that, I’ll turn the call over to Katrina. Katrina O’Connell: Thank you, Steve and thank you everyone for joining us today. Before we get started, we hope you and your loved ones are safe and healthy, recognizing we continue to address the COVID pandemic. As we head into the holiday season, we recognize many people are eager to purchase gifts for their family and loved ones. At Gap, Inc., we've invested year to date over $100 million in health and safety measures to make our stores a safe shopping experience, both for our store employees and our customer. Additionally, we further invested in online shipping capabilities, as well as curbside pickup options, enabling our customers to purchase gifts how and when they want for themselves…

Thank you, Katrina and good afternoon everyone. I'm happy to talk with you today about our third quarter results within the context of our newly defined go forward strategy, our Power Plan 2023. As we shared with you at our investor event in October, we grow purpose led billion-dollar brands that shape people's way of life. So, what does that look like? It's Old Navy paying employees to serve as poll workers to show that every voice and action counts. It’s Gap delivering American optimism by encouraging people to stand up for one another in their Stand United TV spot. It's Banana Republic reissuing its iconic notorious necklace, and raising half a million dollars for the International Center for Research on Women to celebrate and honor the life and legacy of Supreme Court Justice, RBG; and its Athleta putting its brand mission into action with a $2 million pledge to establish the power of [she fund] keeping women and girls connected through movement. It starts with brands that stands for something. Brands with a distinct point of view that connects directly with how consumers are shopping, what they're wearing, and most importantly, how they're feeling. And in today's landscape, this means more than ever. Since the beginning, we have led the casualisation of American wardrobe were comfort, fit, and quality matter. Whether it was introducing khakis and the notion of casual Fridays to the New York Stock Exchange in the late 1990s or a modern version of Gap Khakis making the headlines during election coverage earlier this month. It's about more than just a pair of pants. It's about relevance. And since our recent election coverage, we saw a dramatic increase in online traffic and within a day, the number of straight fit Palomino, brown khakis, we sold online went…

Thank you. [Operator Instructions] We'll go ahead and take our first question from Kimberly Greenberger with Morgan Stanley. Please go ahead, ma’am.

Okay, great. Thank you so much. Very nice results tonight. I wanted to ask specifically about Old Navy. The really impressive 15% bounce back in revenue here would seem to suggest that Old Navy delivered some margin expansion as well here in the third quarter. I'm just wondering if you can laser in on Old Navy's margin performance in particular. And I knew after potentially two challenging third quarters in a row, the Old Navy business was sort of off of the level that had delivered back in 2017 margins. I'm wondering if you made progress towards recovering back to 2017, and what are the sort of key drivers for Old Navy margin expansion, or let's say returning back to those 2017 margins in the future? Thanks so much. Katrina O’Connell: Sonia, I don't know if you want to start with sort of the sales performance, and I'm happy to wrap up with the [quarantine suggestion].

Old Navy had a standout quarter and we're really pleased with their results, strong response to product offerings, we saw a great increase in digital and traditional marketing with more to come with high return on that investment, strong active business, the Kids & Baby achieved the number one brand in that segment. And in terms of sustainability, we know it speaks to the brand positive and we have referenced in our super sales outlook that we expect to be equal or slightly higher than [indiscernible]. So, we're confident about their business and their momentum, and, you know, the product margin expansion that we saw this quarter, and you know, I think that the yield management that they drove in combination with their strong product is something that they'll continue to focus on. Katrina O’Connell : Yeah, I mean, Kimberly, what I would add is, the team has done really a tremendous job between the lean inventories that we had when we sort of cut the inventories heading into the pandemic, and then chasing back into the categories that really have resonated active fleas, knits, Kids & Baby etcetera. They've done a tremendous job managing the inventory, and then the promotions on those inventories. So, you're right, the team did see expanded, gross margins in the quarter are based on that. And that relates to historical levels, you know, we'll see longer-term, but we are very pleased with the way that team is executing on all fronts.

Thank you

We’ll go ahead and take our next question from Ike Boruchow with Wells Fargo. Please go ahead.

Hey, good afternoon, everyone. Two questions. Katrina, one quick one, I'm sorry, if I missed this, did you pick up the merchandise margin versus occupancy dynamic in the third quarter? And then on the SG&A, I guess on a higher level, can you kind of talk to the accelerated investments you guys are making that we saw in the third quarter, and you're talking about for the fourth quarter, is this assignment, you know, your expectations on growth going forward are higher just, you know, it's an interesting dynamic that we're not really seeing from the other, a lot of other retailers out there. So, I’m just kind of curious how you're thinking about pulling forward that investment and what that really means to your ultimate, you know, to get through to get the margins back to 10% over the next couple years? Katrina O’Connell: Yeah. Thanks, Mike. So, on the margin question, you're right, so our third quarter margin was up [160 basis points], what I said is that the rent and occupancy was 360 basis points of expansion. And that was partially offset by 200 basis points of deleverage in merchandise margins, which was a result of higher shipping, which largely offset the lower level of promotion. So, higher product margin. So that was the margin dynamics. I'm glad you brought up the SG&A, it's really an important point, because we see this time as a very unique time for us to really drive market share gains ahead of other competition in this dislocated time. We still remain committed to what we said less than a month ago, or a month ago, which is, we're going to continue to invest in demand generation expenses. And we're going to re-engineer the fixed cost structure of the company, and that's going to be everything from the store closures to the evaluation of some of our international markets for partnership to some of the work that I know Shawn talked about in our Investor Day around driving down operating expenses, like store, labor, etcetera. And so that's all important for us achieving the 10% and beyond operating margin in 2023. But in 2020, with this COVID environment, and really a lot of the weaker players seeing significant amount of disruption, we see this as an important time to be investing in our brands or demand generation. And as the quality of the consumers we're going to gain now will pay dividends in the future. And so, it is a strategic shift that we have chosen to make.

You know, just to add on to that, it is quite intentional. Thanks for putting it out, like and – and as we said, Investor Day, apparel, you know, 200 billion in market size and a unique moment to consolidate share with whether it's the share donors, or is the weaker players and using both the power of our brands and the scale advantage we have, we are playing to win in this unique time. And we are very committed to the healthy top and bottom line. So, we articulated in our Power Plan 2023 last month, with the growth in profitable sales and that growth plan delivered on quarter-over-quarter.

Thank you.

And we'll go ahead and move on to our next question from Matthew Boss with JPMorgan.

Great, thanks. Maybe to follow up on SG&A, is there a way to maybe help quantify the 3Q buckets? If we think about store closure costs, COVID cost and marketing expense, and just know maybe those same buckets, what's embedded in your fourth quarter forecast? And just larger picture as we think about the timeline, when is it best for us to think about the inflection to operating margin expansion, as you've outlined at the analyst day? Katrina O’Connell: Yeah, so Hi, Matt. In my speech, I tried to break out the basis points of deleverage associated with each one. So, I'm happy to go through that, but you know, we said that over the 270 basis points of operating increase, operating expense increased 175 basis points was attributable to higher marketing, and then 140 basis points is attributable to the safe shopping. And then we have this dynamic in SG&A also where any cost that we have to incur to close the stores that were strategically closing, that falls into SG&A and that was 120 basis points of deleverage. So, that's hopefully helpful to you guys. That 120 basis points of deleverage is basically offset in gross margin though through a one-time savings in rent and occupancy. So, that's the one unique dynamic there. As we think about Q4, you know we were trying to be helpful in our guidance around how we're thinking about operating expenses. We said, we expect them to be 33% to 34% of company sales. When you look at our as reported last year, you'll see this is a meaningful improvement to last year. That's mostly because we had an almost $500 million expense last year attributable to some store impairments and separation costs. When you isolate for that, we expect that the marketing and the store closures – excuse me, the store safety costs will be about the same impact as what you saw in Q3. And so hopefully, that's helpful for you, as you look at your model. You know, longer-term, let's see what happens, we've got a vaccine coming and we don't know how long the COVID pandemic will last, but hopefully, what's helpful is that we've tried to let you guys know, we think it'll be profitable sales growth year next year. And we'll provide more details on exactly how we see that play out when we get to our fourth quarter earnings call.

And to build on what [Shawn said], two out of the three line items are, you know, because of the environment we're in, right, whether it's the store safety cost, or the cleanup of the real estate, that's been a long time coming, and the marketing investment is to play [indiscernible] and play aggressively to consolidate share, and we'll continue to learn. We have a lot of rigor around the return on those investment dollars with marketing effectiveness mechanisms. And so, we feel very good about that, but two of the three are not long-term cost that we expect to incur and so we’ll be out of that at some point and you know, link to the vaccine, etcetera.

That's helpful. Thanks.

We’ll go ahead and move to Mark Altschwager with Baird. Please go ahead.

Good afternoon. Thanks for taking my question. With respect to the fourth quarter, was hoping you could talk about the planned shipping headwinds there, maybe relative to what you saw in the third quarter? And then what are the controllable drivers, you have to offset some of these pressures? So, along those lines, maybe hoping you could talk about in the trends and split shipments? And how that trended in the fall relative to what you've experienced in the spring? Thanks. Katrina O’Connell: Yeah, I mean, the good news is, is that as we expected, shipping was still a headwind in Q3, it was meaningfully improved from Q2. And that was based on what you just said, Mark, which is that dynamic of being able to buy our inventory is more strategically back into the online channel, and reduce mostly that that ship from store dynamic. And so, we did see a meaningful improvement there. Now, as we look to Q4, our guidance does sort of reflect a multitude of possible outcomes, but largely similar to maybe increasing pressure on shipping and a little bit of air freight associated with either airing in product where we chase product for the pandemic or the port issues we've been having. The lovers we have whether it's the merchandise margins that you saw, deliver higher product margins in Q3, and let's see how Q4 plays out, but we can see similar execution, that would be great. We would see merchandise margins offset some of that, but I would say some of the shipping is a shift that we're seeing, and we'll see a lot of that benefit offset [and rod] with a lot of the store closures. And then longer-term, working through some algorithmic ways to start to reduce splits, as you say, and then there's going to be some of the longer-term capital investments. But I also think we have said before our supply chain is advantaged. And so, I don't know, if Sonia, you want to talk about that.

Yeah, listen, I think we have the most automated [PCs] for our sector, and that gives us an advantage versus the competition, versus more labor-intensive environments. And in terms of shipping, we have focused quite a bit on whether it's ordered logic improvements, whether it's reducing shipments, all the drivers that that are controllable, as you’d say whether it's multi-packs in the value space, but they'll maybe – we have many, many levers that we are deploying and as you noticing, hopefully it is execution for us to set up very heightened premium. And we're expecting and know that the teams will continue to deliver on innovation in the technology space, as well as in terms of intent, new economics that will help us reduce these costs in the coming months and quarters.

That's great, thanks and best of luck.

And we'll go ahead and take our next caller, Lorraine Hutchinson from Bank of America. Please go ahead.

Thanks. Good afternoon. I just wanted to follow up on the gross margin point, it seemed as though some of the store closure rod benefits will continue in 4Q and into the first half of next year, I think as we look to first half of 2021 and look at it versus 2019, do you think you'll be able to post higher gross margins on a year-over- year basis? Katrina O’Connell: Well, Lorraine, I think it'll be good for us to have that discussion on the fourth quarter call when we guide more specifically to 2021, but it's fair to say that the rod benefit, as we discussed in our investor meeting just a month ago, is a significant benefit to gross margin, as well as operating margin in the long-term, but we can talk more specifically about 2021, and the dynamic when we guide later or actually early in 2021.

Just to build on that, we're more than pleased with the progress we’re making on a real estate strategy and the execution and the compromises and the fairness of deals you've landed with. Now, the vast majority of our landlords, and you know, I think it'll be nice to close that out and really focus on you know, what that's going to then positively impact on the P&L. I’m excited to see that complete.

Thank you.

And we'll go ahead and take our next question from Paul Lejuez with Citi. Please go ahead.

Hey, thanks, guys. Just one clarification. One question. First, you mentioned, [indiscernible] basis point I think of store closing costs, the deleverage that was offset by [indiscernible] line, I just want to make sure I understand that the 120 that you mentioned on the store [closing time], is that one time in nature, is that going to continue? And I guess same question on the rent line, wouldn't that be something that is ongoing and ongoing benefit that would help gross margin to those just the clarification? Question, just curious about the new customers that you are seeing in the Athleta brand, what's customer profile of the new customer relative to your existing customer base, anything to share on spend? Thanks. Katrina O’Connell: So, the store closure cost that we're referencing, and maybe we're not being clear, I think maybe we’re not, but those are attributable to the buyout. So, if you remember, when we were at our investor meeting, we did indicate that there was about 210 million of buyout costs that we would incur, as we try and get out of some of the high-profile stores, it's going to be lumpy depending on when those negotiations land. So, the 120 basis points is attributable to the cost that we use – the dollars that we use to pay out some of those buyout costs with a select number of stores. And then as we do those buyout costs, we're able to settle some rent expense. And that comes through the one-time benefit to rod. Now, so it's a unique dynamic, it doesn't repeat, other than maybe in Q4, we have more buyouts as we chunk away and that 210 million and get that behind us. But that piece is going to be lumpy, depending on negotiation. And then you're correct, going forward, there is an ongoing rent benefit that's more associated with the monthly rents we would have been paying in those stores. So, it's a little complicated, but that's what we're referencing.

Listen, we're very lucky and fortunate to have such a cash generating business that we are able to get some of these problems behind us that are lumpy and hard to bottom out, but you know, we can take the one-time measures that we are taking that are showing up and get them done and continue to think about our cash to fuel organic, organic growth, and foliar growth going forward. Katrina O’Connell: And then Paul, I think you had customer question, but I’m not remembering it, do you mind repeating it?

The Athleta customer, new customers that are seen in brand, how the profile is different from the existing customer base spending levels? Katrina O’Connell: Do you want to take that Sonia, the Athleta customer, sort of how the new customers are different than the existing one?

Yeah. Listen, what I will say is masks had been a great, you know, way for many new customers to be introduced to the Athleta brand. Also, it's a relevant category in the act space, which has become even more relevant during COVID and advantage – because of its online channel being greater than 50% of sales. The relationship with the customer has been a real builder with math and the team has innovated and introduced another fourth, you know, math that has greater and greater sustainability, beauty and technical capabilities that customers are really flocking to, and so then they get infused, and they get into to the math into some of the, you know, core loyalty products such as the bottom business. So, we've been quite pleased, and then, you know, the recent ad that they did, you know, has had 60 million views. So, the impression that that brand is making, right now is a unique moment of time that’s quite high.

Thank you guys.

We'll go ahead and take our next question from Kate Fitzsimons with RBC Capital Markets. Please go ahead.

Hi, thanks very much for taking my question. I guess just one follow up to Paul’s question. I guess, you know, Sonia you noted resonance to some of the marketing at Athleta, I am curious just how you are viewing customer acquisition costs at that brand, you know, over time, and just, you know, relative to the superior profitability, it does be to the other brands, you know, do you expect, you know, ongoing investments in that item, I think to move the needle on brand awareness, with perhaps offsets on the merchant margin front, you know, that would be helpful, you know, some of the puts and takes there. And then, you know, next, I think just on the supply chain, you know, with inventories down 7% ex-packaway, can you just remind us about some of the supply chain capability, perhaps by brand, or category that you think in particular can help you support the top line at Old Navy and Athleta? Thank you.

So, in terms of the first question on Athleta I just shared in our Investor Day, Athleta is our fastest growing and most profitable brand. So, all of the marketing investments that we're making are contemplated in that statement, and in our three-year view. So, while we are leaning into aggressive growth of brand awareness whose mechanisms, we're also really pleased with the profitability of the brand and expect that as it grows that the greater share of the portfolio to impact the overall financial health of the company in a very good way. Now your second question was around the Vantage supply chain, and what I would say here is, what we have just moved very, very quickly to add speed and agility because the one thing that we do know is that it's very hard to predict what the environment will look like, and we will be best served with that agility. So, the star scale advantage has given us the ability to chase in a product that's working really well very quickly, shed weeks, and even months out of our supply chain lead times, you know, bring in, you know, hundreds of millions of units in faster ways. As we shared in Investor Day, we are, I think we've got over 100, maybe 150 now, planes that are direct shipping into our DCs so that we can chase the positive selling. So, lots of mechanisms in our supply chain across the portfolio to enable really driving sales growth and capitalizing on this one is once in a generation opportunity for us.

Great, thanks so much.

Thank you. We'll go ahead and take our next question from Susan Anderson with B. Riley FBR. Please go ahead.

Hi good afternoon. Alec Legg on for Susan. Thanks for taking our question. So are you able to provide the store productivity by brand or just overall Gap Corporation and how that has trended throughout the quarter and maybe in the fourth quarter? And then has conversion rates in store increased with just customers shopping more of a purpose and then also YEEZY Gap] collection still on track to launch this spring?

I think Katrina can go through by brand, but I will start with this. We’re pleased with the conversion improvements in stores, we have seen that and you know, having fueled by the 15 point improvement in our net promoter score that we spoke about, the store environment is something that the customer is really pleased with between the focus on safety, the focus on the heightened experience – leader unit, but give a more elevated merchandising environment and the service emphasis that we placed. So, pleased with the in-store experience and what that's doing. And then your question YEEZY Gap, you know, I think we're looking forward to first half launch next year, and what I will say is the creative that I've seen and whether it's the product or the e-com site that is getting prepared, very exciting and very innovative, some of the most creative work we've seen. And so, pleased with what’s ahead and we are on track for our launch as announced. Katrina O’Connell: And then as far as store sales are concerned, so net sales were flat with 61% increase in online and our store sales down 20%. Now, several percentage points of that store sales decline was driven by closures, as we said, and so the remaining sort of is the average of the productivity in Q3. And similar to the dynamic we've articulated in the past, given the results that you see at Old Navy, and that's what I think it's fair to assume that those stores have recovered more quickly, especially since they are largely off mall and strip locations, as well as the fact that they're seeing a disproportionately high performance in our online business. But then you know, Gap sort of more in line and then Banana, more disadvantaged based on the product categories that they've been having a tougher time with as they look to reposition their assortment. So, I would say that's what I would tell you as far as thinking about productivity in Q3. And then we'll see in Q4, but as you've heard, we've been investing substantially in store safety measures to make sure people feel comfortable. And they're also prepared with capacity, and shipping capabilities, as well as, you know, store related capabilities to service the customer wherever they want to shop, since we know that this will continue to be a unique environment for shoppers.

Thanks. And if you don't mind, just a follow up on shipping. The carriers provided a cut-off date just to essentially guarantee delivery by Christmas or it that something that's still being worked out on?

No, listen, we are in deep relationship and partnership with our carriers, and they're being very agile with us. So, as demand comes in over the next, you know, these 11 days of the Black Friday through Cyber Tuesday now, I guess, you know, very, very important timeframe for us, and then December shopping. So, we're seeing a lockstep with our carriers. We're adding capacity as needed in order to service our customers.

Thank you.

And we'll go ahead and take our final question from Alexandra Walvis with Goldman Sachs. Please go ahead.

Good afternoon. Thanks so much for taking my question. I wanted to just ask a follow-up on the fourth quarter guide, can you help us out with anything that's giving you confidence in achieving the sales level and the [same] quarter to date. How within that you are thinking about the timing of the holiday season this year, is difficult to predict perhaps different from prior years? And then whether you're factoring anything else for capacity constants and some delivery bottlenecks, can you comment a little bit [indiscernible] pull that together which should be very helpful. Katrina O’Connell : So, I think I kind of have let me try. So listen, we think the consumer is in a really good place. We think that the forecast for consumer spending is up. We think that apparel is a great category when customers can't travel or spend on sporting or events, those kinds of things. And we believe that our voice shared growth, as well as our developments makes us an ideal destination for Q4 selling and you know, as we learn and shared with you in our last quarter, you cannot predict when exactly the customer will make their decisions for holiday shopping back to school was much later than it had been in previous years. Because of the pandemic situation we expect, you know, dynamics to be what they are and we will be ready. Our whole focus is, we will be ready and ready to service the customer whenever she's ready to shop. With 176 million customers, they're all going to choose different times to shop. Whether it's the, you know, early shoppers or the ones that love Black Friday or the ones that shop on December 24. And you know, I think we'll be ready for all of them.

And that does conclude today's question and answer session. I would like to turn the call back over to today's presenters for any additional or closing. Katrina O’Connell: Thank you very much. It's been a pleasure. I hope everyone has a safe and you know time down with their families over Thanksgiving and enjoy the festive holiday season and lots of great gifts for you in case you want to participate. So, talk to you next time.

Once again, that does conclude today's conference. We do appreciate your participation. You may not disconnect your phone lines.