Please standby. Good afternoon, ladies and gentlemen. My name is James, and I will be your conference operator today. At this time, I’d like to welcome everyone to The Gap, Inc. Fourth Quarter 2020 Conference Call. [Operator Instructions] I’d now like to introduce your host, Steve Austenfeld, Head of Investor Relations.

Thanks, James. Good afternoon, everyone, and welcome to Gap, Inc.’s fourth quarter 2020 earnings conference call. Before we begin, I’d like to remind you that the information made available on this webcast and earnings 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 a 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 our website, gapinc.com, which 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, again, all which are available on gapinc.com. These forward-looking statements are based on information as of today March, 04, 2021, 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. It’s nice to be with you as we wrap up 2020. I want to share comments regarding the fourth quarter of the year, but more importantly, provide our 2021 financial outlook as noted in our earnings release today. Following my comments, Sonia will then share her perspective followed by Q&A. We’re very pleased with our progress on our path to our sustainable economic model, which I outlined at our Investor Day in October. Let’s talk first about some key accomplishments from 2020 that put us well on our path to achieving our Power Plan 2023. First, we remained very pleased with the performance of Old Navy…

Thank you, Katrina, and good afternoon, everyone. Before we look ahead, I want to take a minute to reflect on 2020. COVID-19 presented the biggest crisis to our company, our industry has ever faced. And alongside our employees, our customers, our communities, and the rest of the world, we face challenges that defined a new path for everyone us. It's also true that every crisis is an opportunity. And this one met Gap Inc. at a crucial pivot point. We use this opportunity to lead with our competitive advantages while embracing the values company of was founded on, to emerge in a place of strength and with a clear path forward. Our teams showed resiliency and the ability to try fast, learn fast and think big to meet customers’ needs. First, we gained meaningful market share quarter-over-quarter by investing in growth across our purpose-led brands, during this period of market dislocation. We grew our global known customer file by 14% in 2020 to over $183 million and introduced convenient new ways for them to shop with us by expanding our buy online, pickup in store capabilities, to curbside pickup and launching new payment methods like Afterpay and introducing our loyalty program. Our online business reached over $6 billion in sales and delivered 54% annual sales growth leveraging our powerful omni-channel platform. Following the shutdown, we reopened our fleet of more than 3,000 stores quickly while permanently closing a group of over 200 unprofitable stores as part of our fleet rationalization strategy. With the increased casualization of style, we played into our product category strength with disproportionate sales coming from active and fleece and kids and baby. We also quickly pivoted to produce masks, a new top category, which represented 3% of sales in 2020 and drove new customer growth. We've…

Thank you. [Operator Instructions] Our first question will come from Matt Boss with JP Morgan.

Great, thanks. So at Old Navy 7% comps, despite significant improvement in the markdown rate for the third straight quarter, I think now. So could you just speak to what you see driving the inflection at Old Navy, any structural changes with inventory and the sustainability of top line growth and the mid-teens margins at this concept in your view.

Yes. Thank you for the question. And we're really pleased with the trajectory of the Old Navy business instead of strong response to the product offering through 2020, and we think we've distorted into the winning categories with excellent execution and we're investing in digital and traditional marketing with more to come. Strong active business will maybe seen phenomenal growth there and very well positioned to meet the rising demand for active and casual product over last year. And kids and baby, another very bright spot for the brand, as the Old Navy achieved the rank of number one, the kids and baby brands in the segment and if this is a particularly distressed sector outside of our business. And so we are consolidating market share aggressively here. The brand has evolved the product offering, and we expect the launch of synthesizing across the assortment this later this year. The test results have been really positive. So proud of the work that the team is doing to give our customers what they're asking for and confident in the sustained momentum against our Power Plan 2023. And I don't know, Katrina, if you need to like to build on that.

What I would add is a couple of things. So as Sonia said, they're advantaged in their value space and with their democracy of style positioning and then their creative execution has been excellent and they offer the products customers want like active and kids and baby. And then as we look forward, we're launching the Plus business in the back half of this year, which we think is really squarely appropriate for acquiring new customers and servicing better than existing customers and also the loyalty capability that we look for launch in the back half of the year. As we look forward to driving more lifetime value with a multi-tender loyalty customer. And then to add to your question about margins, I would say, the right product with a relevant brand and strong execution has allowed the team to really pull back on promotions and use the strength of the brand and the marketing to drive the sell-through on the inventory and structurally we feel like there's nothing really holding them back from continuing to deliver that. And then I think you heard, Sonia saying in her prepared remarks, we're also looking at the store productivity as it relates to self-checkout and other mechanisms where we can start driving more productivity in store. So I guess all to say, we have great confidence in how Old Navy has executed and what the future holds for them this year and beyond.

Yes. Just to build onto it. So we could talk about this forever. It's very exciting. Two of the main capabilities that were – that we know will help with driving consistency for us. And consistency is very, very important for this business, is the expansion of our loyalty program, which allows for repeat visits in a deeper relationship and the personalization journey that our tech investments are fueling. And so when you think about the huge reach of Old Navy and the sheer customer file and personalization continuing to progress and having the ability to optimize on product, on price, et cetera. The need for the historical discounting or methods of driving the business are fading as we move into these more sophisticated and consistent capabilities, a big part of our capital investment this coming year. And we're excited to see what that'll do to transform this very important measure that we're holding ourselves to, which is consistency of growth.

Great color. Best of luck.

Next we'll hear from Oliver Chen with Cowen.

Thank you very much. Regarding their loyalty program and the innovation there, how did you decide to do it as a platform versus pursuing individual brands and how would you speak to the intersection of speed, agility and supply chain relative to interaction measurement and/or lower hanging fruit that your loyalty program can achieve? Thank you.

Yes. Great question. One, we spend a lot of time on this. We have these four making brands. We also know the power of our platform and portfolio. So we're solving for the and not the or. What we're doing with our loyalty design is to have really intimate emotional brand level engagement and offering. While at the same time, we know the customer values cross-brand shopping, we know the customer values the benefit of the portfolio. So we're doing both and we've been very thoughtful about what offerings we give our customers depending on their preferences. As it links to supply chain and make sure I understand your question. One of the things, we are using loyalty for and we're designing it for us to tier fulfillment based on if you're a bronze, silver, gold member, for example. And so that will also allow us to optimize the speed of delivery fulfillment based on our best customers and manage fulfillment costs effectively while pleasing our most valuable lifetime value customers.

Thank you. And just a follow-up, reintroduction of inventory as you do that how does that intersect with the trends that you're seeing now. And also the promotional environment in terms of optimizing reintroducing of inventory that you held back in a dynamic environment?

Yes. No. Great question. Listen, we love the inventory that we held back last year. We were very thoughtful about what we hold back to make sure that it would be relevant now, and we believe it is. It's already coming to life in our stores as we speak and we're seeing good acceptance. So that's all contemplated and what's contemplated in our inventory buys for Q1 in terms of seasonal relevance and integration.

Thank you very much. Best regards.

Next, we'll hear from Ike Boruchow with Wells Fargo.

Sonia thanks for the details on the outlook. I was wondering if I could ask something there. So the $1.20 to $1.35 I believe you mentioned that it excludes any actions around Intermix or the European business of Gap. Could you frame it up for us, if you could let us know what would be on these drives of those two businesses are currently on the P&L?

Yes, I'm glad. You caught that, because it's really important. We are still deep in the negotiations on a potential operating model change or outlook for Europe, and we just have initiated strategic review for Intermix, so more to come and the reason why we didn't include it in our current outlook is we didn't want our current outlook to be clouded by what we don't yet know the outcome of those two things will be. But certainly, as soon as those things start to take shape, we will provide as much detail as possible to be able to help you understand what the impact of those are. If you think about just at the highest level, a model change on Europe, if for instance, we were to partner a franchise that model the revenue, which is about 2% of sales will go down right as a franchise business or a partner business, but importantly the SG&A, the rent and occupancy, and really the cost of operating that business will be meaningfully less. And so they should have a process impact that is favorable to the company. Now more to come on exactly how that gets structured when and how, but that's conceptually how it could work. And again, we will update you as soon as we know more about how those things are progressing.

I guess, just a follow-up, Katrina, I mean, is it possible just to say, are we talking about $0.01 to the P&L? Are we talking about nickels and dimes? So I guess just some trending that up would be helpful if you can?

I guess premature, because again, we are not sure even what the change will look like. And so, as you can imagine, the model that we choose will have a wide range of outcomes. And so we'll, we'll let you know. But again, we said that Europe is 2% of sales. We have about 120 wholly owned stores and we have an online business. And so that can help you understand sort of order of magnitude. But again, it just is too premature without having really gotten to any level of structured yet on what the future could be to be able to mention like that. It could be such a wide range of outcomes. So we promised as we've committed to transparency that as soon as we have line of sight to that, we'll provide more details.

Thank you.

[Operator Instructions] Your next question will come from the line of Kimberly Greenberger with Morgan Stanley.

Thank you so much. I wanted to just ask about the occupancy or the ROD leverage this quarter, 400 basis points, Katrina, I think you said. How much of that was sort of temporary savings that might've been from rent abatements, that you were able to settle and how much of that is permanent driven by the store closures?

Excellent question. So really, I would say, Kimberly, about half of the ROD leverage is permanent as it relates to closures and so ongoing. And the other half is really that temporary non-recurring benefit.

Okay. That is super helpful. And can I just ask one follow-up on the comp for the fourth quarter? Could you just help us understand a little bit the texture of the progress through the quarter? Did you see improvement in comp trend from month-to-month? Did you see any sort of pick up in January on the back of stimulus? And I'm not sure if you gave a comment and I missed it on sort of helps you want to start it, but if you have anything you'd like to share there, I'd certainly be curious about that as well.

Sure. Kimberly, I'll give you a little bit of insight on the fourth quarter and then maybe Sonia can talk a little bit about how the quarter has started off. I would say, we continue to see the dynamic that we saw all year in the midst of this pandemic play out in the fourth quarter where the customer is just shopping differently. And so the peaks aren't as peaky, and there's – it's just sort of a flatter seasonality. And so overall, when you think about November, December, January, I would say, different flatter seasonality. Now of course, December is also when we started to see the pandemic surge again. So that had an impact on December. And then I'll let Sonia talk a little bit about how we're feeling quarter today.

Yes. And let me just start by talking about the comps here. Look, I'm really very pleased to see three of our four brands deliver positive comps in Q4, including Gap brand. And I think that just shows that the operating health. And overall, what I would say is, we have – we grew our customer file by about 14% that's meaningful. And those customers paid more. We saw higher pricing utilization. And the reason we saw that was because our products resonating and our branding and marketing is more emotional and more connected, which then converted these customers into loyalists, right? So these are going to be underlying momentum trends that we're pleased about. And we're seeing that play into the startup Q1 with more momentum in February than we had in Q4. So we're pleased with the start and with these new capabilities that we're deploying and the response that we're seeing from the customer through price and acceptance of our product.

Great. Very encouraging. Thank you.

Our next question will come from Adrienne Yih with Barclays.

Let me add my – how pleased I am to see the progress and the congratulations to everybody. I guess my first question is on the incremental ad spend that started in the third quarter, carried into the fourth quarter. Can you talk about how you felt about the return on that ad spend? What it means that you go this year? And what we should think about either in dollars or that, I guess, it’s pushing on 5.5%, 5.7% this year, but on very low sales. So how we should think about total ad spend for 2021? And then Katrina, could you just remind us, I think I just missed it in the prepared remarks, the loss sales during the fourth quarter, what percent was from store closures temporary versus permanent store closures? And how should we sort of shape the sales against fiscal 2019 Q1? Thank you very much. Katrina O’Connell: Maybe Adrienne, I’ll start with your last question and then Sonia can talk about marketing for a second. So in the fourth quarter, what I had said is that we attribute about 4 points of sales loss in the quarter to the COVID related impacts to the quarter and about 5 percentage points of sales decline related to our strategic store closures that we’re closing permanently because we are restructuring Gap and Banana. So that’s store closure. As it relates to Q1, I think what Sonia said is true, which is quarter-to-date, we are pleased with the momentum we’re seeing and certainly seeing that the trends are better than what we saw in Q4. And I think I’ll leave it at that other than to say, there’s pluses and minuses, as you can imagine, right? There’s all the momentum that Sonia spoke to as far as the underlying health and our brands, the incremental growth that we’re getting from our file, the margin momentum we’re seeing. But we’re also still navigating COVID and we’ve said in our prepared remarks that the front half of the year likely has some of that still in it, whereas the back half will return to the pre-pandemic levels. So I’ll let you sort of model Q1 and Q2 based on that, but overwhelmingly feeling like, so far so good. And we certainly feel good about the mid to high teens sales growth guidance that we gave you overall for the year.

Very helpful.

And let me add on to that and give you a little color on marketing. As we declared our strategy at our investor event last year we led with the power of our brands. And so for us, that meant moving to offset on branding, marketing, and technology investments to unleash that power. And when we talk specifically about marketing and the investments, we do expect those investments to continue. We feel good about the effectiveness of those investments. I can talk about at the high end of the funnel, top of the funnel and the bottom of the funnel. Certainly at the bottom of the funnel, our digital marketing investments, we managed by the hour, by the day, by the week and have a lot of fluidity being able to turn that on and off, based on the return on that investment. And at the top of the funnel, in terms of brand affinity and brand building, we’ve been really pleased with the creative clarity that we’re seeing from our brands and the values based marketing has given us some of the highest ad spots that we’ve seen in the history of the company this past year. So that combination and the momentum that we’re building creatively, the talent that we’re adding for the teams and unleashing the full creative potential of our team is giving me more and more confidence that leaning into marketing in the time of dislocated disruption is even more critical than ever as we look to consolidate market share from a position of strength.

Totally agree. Best of luck. Thank you.

Our next question will come from Janine Stichter with Jefferies.

Hi. Thanks so much for taking my question and congrats on the momentum. I want to ask a bit about the ports. Is there any markdown risk associated with some of the products that is maybe arriving later than planned, or is that mostly smoothed out and accounted for? And then on the merchandise margins with the product margins, I think you said above last year in the first half, maybe you could help us contextualize where that would be versus pre-COVID levels and then more broadly just how you see the mark down and opportunity taking hold. Thank you.

Yes. As it relates to the port, I would say it really is timing. And certainly, we wish everything to be here exactly on time. But fundamentally the teams have developed an amount of agility around navigating the assortment timing. And so they are watching closely the timing of when the receipts hit getting those into the stores. And then, if there is lateness adjusting receipts on the back end. And so we feel quite good that there’s no margin impact to the port issues. It’s really more about the timing of getting things offloaded and over here. So I think, as you said we set our market inventory with below last year heading into the year. The teams did an incredible job of really balancing the choices that they made around pricing to get higher AUR, lower mark down inventory levels, and then are highly focused on maximizing the margin on the inventory we have in the front half of the year. I’m not going to comment specifically as it relates to 2019, but certainly our aspiration as a company is to continue to build momentum through relevance in our brands and better product to drive incrementally better margin year-over-year, especially as we look to offset some of the structural changes that happening in the business when we’re shifting to online. So anyway, we’re focused on AUR, and as you said, we’re focused on driving higher margins in the product space in the first half.

Great. Thanks for the color.

Our last question will come from the line of Kate Fitzsimons with RBC Capital Markets.

Yes. Hi. Thanks very much for squeezing in. I guess, one for Sonia and then one for Katrina. Sonia, can you just elaborate a bit more about the inflection you saw on the Gap Brands in North America. And I guess, as you’re evaluating Gap Brand into 2021, and in context of your plan, any indicators you see suggest maybe brand consideration is moving in the right direction relative to awareness. And then Katrina, I guess, I appreciate certainly the 5% EBIT margin target. I guess, we’re just thinking about the puts and takes relative to where we were pre-pandemic, that 6.4% margin, occupancy is certainly moving in the right direction. Sounds like you’re feeling good about the product improvements here in the markdown opportunity. I guess the offsets with COVID cost, I guess, just help us keep together, I guess, pre-pandemic and now 2021. Thank you.

Yes, happy to talk about Gap. So listen, 1% North America comp in Q4 reflects a positive momentum in the brand, and they’ve done so much hard work this year, restructuring their unprofitable fleet segments of it, while investing in their stores. I mean, we refreshed 70 of our go-forward stores we intend to get to that by mid-year. And I was in a store in New Jersey recently, and the customer stopped in her tracks and said, this is light, bright and happy. I mean, what’s the better statement than that to hear from our customers. We’re seeing a really nice pickup in net promoter score as a result of our refresh plan. So the restructure of the stores, the improvement of the go-forward fleet, the leaning out of the SG&A and this is a lean mean effective team now that is wired and has a culture oriented to winning. They’re attracting new customers, their team launch, for example. There are – is now representing about 17% of our kids business and they’re centered grounded in sustainable product offerings. So really pleased to see their overall discounting reduced. And then the partnership, partnerships are important part of the future of the brand. We have a big launch coming up with Yeezy Gap. And I spoke to Yeezy last night and he’s very, very focused on this incredible opportunity. We’re both very excited about it. And he and marketing to our Gap our team are heads down and believe this to be a very big potential for us. And look forward to sharing more with you as we launch in the first half. And then our licensing program that plan that we signed last year, we expect some big launches in multi-categories across the lifestyle coming up here later part…

Thanks very much for the color. Best of luck. Katrina O’Connell: Thank you.

All right. Thank you for joining us today. And we look forward to speaking with you at the end of the first quarter.

Thank you. That does conclude our conference. You may now disconnect.