Good afternoon, ladies and gentlemen. My name is Regina, and I will be your conference operator today. I would like to welcome everyone to the Gap Inc. Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] I would now like to introduce your host, Cammeron McLaughlin, Head of Investor Relations.

Good afternoon everyone. Welcome to Gap Inc.’s fourth quarter fiscal 2022 earnings conference call. Before we begin, I’d like to remind you that information made available on this webcast and conference call contains forward-looking statements that are subject to risks that could cause our actual results to be materially different. For information on factors that could cause our actual results to differ materially from any forward-looking statements, as well as the description and reconciliation of any financial measures, not consistent with Generally Accepted Accounting Principles, please refer to the cautionary statements contained in our latest earnings release; the information included on page two, of the slides shown on the Investors section of our website, gapinc.com, which supplement today’s remarks; the risk factors described in the company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 15th, 2022 and any subsequent filings with the Securities and Exchange Commission, all of which are available on gapinc.com. These forward-looking statements are based on information as of today, March 9th, 2023 and we assume no obligation to publicly update or revise our forward-looking statements. Joining me on the call today are Interim Chief Executive Officer, Bobby Martin; and Chief Financial Officer, Katrina O’Connell; and Old Navy Chief Executive Officer, Haio Barbeito With that, I’ll turn the call over to Bobby.

Thank you, Cammeron, and good afternoon, everyone. When I first spoke with you in August of last year, we discussed the need and bias for action. In that time, we moved quickly and effectively at clearing excess inventory improving assortment balance, particularly at Old Navy, while removing costs across our business and improving our balance sheet and as a result, we entered fiscal 2023 in a more competitive position. In parallel, we've wasted no time in shoring up the foundation of our company to get back to a place where we are delivering what our customers, employees, and shareholders expect. In my time as interim CEO, I've spent many hours listening to our people across every area of the business, especially those closest to our customers. What I have found is incredible talent and creative muscle that has been varied, dampened by a complicated organizational structure, bureaucracy, and outdated processes. That's why we are hard at work to remove barriers, simplify how we work, and empower our teams to embrace and drive change that will enable the future for Gap Inc. really is a healthier company at its core. I will share more on this in a moment. But before I do that, I'm sure you are all looking for an update on our search for Gap Inc.'s permanent Chief Executive Officer. The Board has narrowed its search, and we are getting close to naming a new CEO. The Board and I remain determined to land the right leader. An external candidate, one with an unwavering commitment to leading brands with a point of view, delivering relevant products and experiences for our customers and above all, a strong leader who sets the right tone, one with heightened accountability and operating rigor. Final candidates have been provided appropriate insight to the…

Thank you, Bobby. It is nice to speak to all of you today. Old Navy has always been around that delivers on the idea that great quality fashion and an unbelievable prices where we delightful experience should be accessible to everyone. This was true differentiator in the apparel industry when Old Navy reached $1 billion in sales in just four years. And it still rings true today as Old Navy maintains its position as one of the largest apparel brands in the US, delivering not only sales in excess of 8 billion, but also serving more than 45 million customers and nearly 50,000 associates globally. And I am confident that our unique customer value proposition is well suited for an environment where consumers are increasingly seeking value. I am pleased to report that Old Navy has delivered significant improvements in performance relative to the first half of the year. But in order to unleash Old Navy’s full potential long-term and further amplify its market leadership, we have spent considerable time focusing on stabilizing the core and elevating execution across our entire organization. Let me provide some more specifics on where we have been focused. First, we took decisive action to rightsize the historic high levels of inventory in the second half of fiscal 2022, which had arisen from the supply chain disruptions and also some execution issues that impacted Old Navy in late 2021 and early 2022. At the end of the fiscal 2022, liable inventory for Old Navy store hit one of the lowest levels in brand's history, abate at expensive margin, which made room for newness and seasonally the right assortment that you can see these days across our fleet and online. And it's now making it even easier for our customers to find and discover the product…

All right. Thanks, Haio and thanks again for the great leadership you're providing. To wrap up, let me take you back to where I began. We are in the midst of transformative change. We are on a journey to build a healthier Gap, Inc. at its core, and the actions we shared today are just the beginning. Again, I believe we have taken the right short-term actions to boost performance at Old Navy, clear excess inventory, removed cost from the business and improve our balance sheet, which is allowing us to begin the year in a much stronger position. The true payback will be far greater than the cost savings we've discussed. The payback will come when we show up as a more informed, faster and more creative company, delivering brand and cultural relevance to our customer. I have found great talent across the company, great creative talent. And I'm confident that they are ready to embrace change, unlock value and strengthen our core capabilities and the talent waiting in the wings is more than capable of becoming the future leaders of our company. As I hand the reins over to a new permanent CEO for Gap Inc. in the near future. I am confident that the work our team is doing now to restructure for – the long term will enable them to join a healthier organization on day 1, an organization ready to pursue creative excellence and to deliver for our customers, our people and our shareholders. And with that, I will turn the call now over to Katrina. Katrina? Katrina O’Connell: Thank you, Bobby, and thanks, everyone, for joining us this afternoon. We moved swiftly in fiscal 2022 to manage the levers in our control and took action to drive immediate and long-term improvements across our business…

Thank you. [Operator Instructions] Our first question will come from the line of Brooke Roach with Goldman Sachs.

Good afternoon. Thank you so much for taking the question. My question is on Old Navy. Based on the improvements that you've made to the brand to-date, what do you see as a reasonable time line to returning to consistent positive comparable sales growth for the brand? And maybe as a follow-up for Katrina, along those lines, can you help contextualize the outlook for 1Q sales down mid single digits, I guess that commentary of Old Navy product improvement as you cycle some of the assortment issues from last year. How was the Old Navy brand been comping quarter-to-date? Thank you. Katrina O’Connell: Haio, do you want to go ahead and start a little bit with your view, and then I can jump in.

Yes. I think on the green shoots, we're seeing maybe women's strength, the inventory cleanup, as we said in the prepared remarks, some of the green shoots we're seeing in NPS scores in the stores are giving us confidence that even though we don't call it a trend, but we are in the right direction, addressing some fundamentals of the business. Katrina O’Connell: And I think, Brooke, the way I would think about the quarter is, we did say that Q1, we expect revenues to be down mid singles. We gave some context around how China and foreign exchange are headwinds of about three points when taken together. And then really, the balance is the current trend and some macro conservatism potentially, but maybe it's really more uncertainty about sort of how the consumer will play out through the important March, April timeframe, which we know is spring break and Easter. As far as by brand, I'm not going to give you the quarter to date trend by brand, but our commentary, I think, would talk to the fact that we're mindful of the fact that Athleta has some maybe product acceptance issues that might meet their performance in the near term, and that we're carefully watching the Banana Republic consumer for whether or not they are moderating a little bit in their work wear and sort of how to think about that. So it's fair to say that Banana and Athleta are sort of more muted in the near term based on what we're seeing with momentum building at Old Navy. But again, I want to be clear, -- it's good to see the trend, but March and April are really important for that brand in particular as we head into spring break and Easter.

Thank you so much. I'll pass it on.

Your next question comes from the line of Bob Drbul with Guggenheim Securities.

Hi. Good afternoon. I guess, just if I could stick with the Old Navy question, Haio when you think about the environment that's out there, just in terms of pricing and the competitive positioning, how do you feel like you guys are positioned to capitalize on the environment today around the prices and the promotional cadence that you've seen? And if I could just ask a question on Old Navy – I'm sorry, in Athleta as well. Bobby, when you think about where Athleta is today, when you look at the leadership or the search for the leadership, can you just talk about exactly what you think does need to be repositioned around the brand overall as you look forward? Thanks.

Thank you for the question. I think on the importance of starting this year, cleaner in inventories giving room to newness, a little bit of scarcity some novelty and work forward. So we foresee a lower level of promotional aggressiveness. We may see intensity, but not aggressiveness. And I think when you see the initial product acceptance around spring, for example, is a good indication that we're having a healthy balance. And that was something that we wanted to remove from last year as we were having big areas of clearance and some product challenges. So we're monitoring very, very close after the big effort of reducing the inventory to current levels.

Bob, this is Bobby. On Athleta, just to address your question. I think we really double underlined it in my remarks, and I said, it all comes down to product. And I think the acceptance issues that, we've seen from customers is really where I think we've not really hit the right stride with them in performance. We've lost a little bit of the franchise really around our basics in that area and where clearly, we always have to be on top of it, whether it's color or style or whatever. We just had too many misses in there. And right now, we're plagued with some execution issues, I would say, around BIP. Those things have really kind of dampened, I think, the recovery as we have moved back towards performance. There's strong points in the assortment. So I don't want to miss that. I mean, today, low and bottoms, knit bottoms are performing pretty well. Everything in our basic assortments, jumpsuits right now are trending well. And we've hit some of those items, but the consistency of performance against our customer who she is, the style that she's looking for; we are just not on target yet. So it really comes around to, I think, getting that design, that styling right and get it where it's delivered to her in an experience that she's looking for.

Thank you.

Your next question will come from the line of Lorraine Hutchinson with Bank of America.

Thank you. I wanted to hear a little bit more about the inventory planning for this year. It sounds like you're able to return to using responsive capabilities. And I was just curious what percentage of the assortment does that apply to at Old Navy? And then are you able to use that in your other brands as well? Katrina O’Connell: Lorraine, maybe I'll start off. Just talking a little bit again about some of the numbers and what the commentary today was, and then I'll let Haio talk maybe more conceptually about how they're leveraging responses. We are really, really pleased that we use the opportunities in fourth quarter to clear albeit at lower margins, the markdown inventory that has plagued us through the last three quarters to start off this year, which what we would consider to be well-positioned liability inventory heading into the quarter. So we're happy to have achieved that. I think that not only gives us the opportunity to pull back on the discounting and markdowns, but it really gives us the opportunity to have room to bring in newness through these responsive capabilities. And that's an important thing, we did not have enough newness in fourth quarter, which really muted some of the performance because we had so much markdown carryover that we had to get through. So this gives us the opportunity to showcase our new products and then also bring in new products as we see things trending. So we feel like we've got a lot more breathing room. As we look forward, we will not only have lower initial buys, but we will be chasing into trends. And so this should give us, again, a much better stock-to-sales ratio as we move forward and we expect that overall inventory will be lower than sales, as we said. So with that, we've not quantified how much response is, but it's in the form of chase, it's in the form of vendor-managed inventory, which allows us to reflow in-stock levels and then some reorder capabilities, all of which should give us opportunities. I don't know, Haio, if he wants to talk?

I think, it's well said, with supply chain being less disruptive and variability coming to normal levels. I think responsiveness is not going to be -- the main focus is a contingency mechanism and we want to get it right in the in our assortment, and that's where the focus is. But the supply chain stability will really help us on leveraging our strength.

Thank you.

Your next question comes from the line of Alex Straton with Morgan Stanley.

Great. Thanks so much for taking the question. I wanted to just drill down those $550 million in annualized savings you all were speaking about on the call. I just want to understand, what is the base that this is off of? And then can you also help us understand what's offsetting it with that severance piece? Do you get a sense for like the net savings you're speaking to? And any color you can give us in terms of like the breakdown of that $550 million, like what the buckets are there, that are comprising it? Thanks so much. Katrina O’Connell: Hi, Alex, this is Katrina. So we did say that we expect full year 2023 SG&A to be about $5.2 billion. So hopefully, that helps you with the number we're aiming for. How we get there is -- we did talk last year about $250 million of annualized savings. That broke out into three buckets. It was $125 million of headcount that was really early actions on closing open roles and really tightening our belt immediately as we realize that the cost structure was just too high. We had $75 million of marketing expense that we were able to pull back on based on contract negotiations and about $50 million of savings that was really tech. And again, that was primarily headcount. So all of those actions we nodded to last year, and those will largely be annualized in the base of 2023. Now, we did say that, that's almost fully offset by the bonus reset, as we didn't pay management incentives last year, as well as some inflationary pressure. So I would think of those two as largely offsetting. And then the new news is that, we've now identified $300 million of incremental savings, that is related to some of the management changes we talked about today, but also a broader reorganization that we are embarking on to really unlock the potential of the company. That will hit partially this year, because we've announced it today. And as you can imagine, we're embarking on the work. And that will probably get done in order to benefit the back half of the year, but then that will also anniversary into next year.

Great. Thanks so much.

Your next question comes from the line of Dana Telsey with Telsey Group.

Hi. Good afternoon, everyone. As you think about the cost structure and the opportunity where you mentioned rationalized technology investments, optimized marketing, what are we talking about there? How big of a benefit could that be? And what do you see about the operational go forward from there? And then, just on the real estate portion of the business, what are you seeing in terms of shrinkage? How is that looking? And the investment and what we're all hearing about higher crime and shrinkage, things like that? How are you thinking of that? And does it at all influence the cadence of store openings or closings? Thank you. Katrina O’Connell: Yes. Thanks, Dana. So on the cost restructuring we agree that we have more to do on costs than what we've announced today. So we're really happy that we've identified the $550 million. What we'd like to do is, get through this fairly large organizational change and then, from there, have the operating leaders in place and the operating model in place to really evaluate the next levers, which you just identified, marketing and technology to see the right level of where those will land. So more to come, but we agree there is more in the cost structure of the company that needs to get unlocked. And as we identify that, we'll let you know. On the shrink side of things, we're hearing that, too, and we've certainly been watching what competitors have said. We're sort of in the middle of our current full annual shrink. And so far, we don't have anything to preview that would indicate that there's anything materially changing. But certainly, if we see something, we'll absolutely report it out. But right now, we're not seeing that trend at capping.

And just lastly, what's your overall view on the health of the consumer? How is it different now than maybe going into the fourth quarter? And is it different by brand of what you're seeing from the income level status that you spread to? Thank you. Katrina O’Connell: Sure. I mean I'm happy to take that. And then certainly, as Bobby and Haio want to jump in. When we look at the data, we still see that the lowest income consumer is impacted. Now, what we see is that, that took a pretty big leg down in the middle of last year, but it stayed about where it is now as we move through Q4 and again, that primarily impacts Old Navy and then some of our outlet consumers. We've seen a little softening throughout the rest of the consumer base, but nothing material. I think, Dana, we're just watching the news and the economic levers that everyone else is and trying to be prudent about whether or not we will see weakness once the savings that are still accumulated start to spend down. But I think beyond that, I don't know, if Bobby or Haio if there's anything else you'd add.

No, I think -- I mean, again, it's really it's only too speculative to really point to very much. It is interesting as I know you're hearing from others. You see signs of customers going back to store. That's an interesting trend to watch. We obviously are tracking units per transaction on visits to really just kind of judge that. But it's certainly, I'd say, a cautious outlook to stay on top of, and Old Navy, probably we would have our better read what we're seeing there as you may comment.

Yes, acknowledging that there is -- the outlook is somewhat concerning the state of the consumer, but nothing to call out specifically other than to say that our value proposition position us well for whatever may come our way. So, as I mentioned, there are some things that depend on us to be a better Old Navy despite of the context.

Thank you.

Your next question will come from the line of Matthew Boss with JPMorgan.

Great. Thanks. So, Katrina, on the topline, could you just help bridge the drivers embedded between the mid-single-digit decline in 1Q and the low to mid-single-digit decline for the year? And then at Old Navy, just the confidence on peeling back some of the promotional activity despite the demand softness that you cited from the lower-income consumer at the concept over holiday would be helpful. Katrina O’Connell: Yes. So, hi Matt, on the revenue side of things, for first quarter, again, we said negative mid-singles with about three points being China and foreign exchange. And then really, the rest is about a view on what the trend coming out of fourth quarter and maybe conservative macro outlook is. On the full year, the low to mid-singles really has two points of China, but then a point of the 53rd week. So, about a point impact to a year-over-year growth. And then really, it's about taking a position on the trend plus the macroeconomic environment, which, again, we're really trying to take a prudent approach because I think we're all watching what's happening and not 100% clear where the consumer will go as we move through the year. I think as it relates to Old Navy in the promotional environment, I think what's really important for us to recognize is a significant portion of the margin drain whether it was at Old Navy or our other banners last year was because we just had too much inventory for the demand and so the quality of that pricing and margin was really poor because we were focused on clearing it. Now, what we have is better inventory, but with what we think is a good value proposition that we think will still serve the Old Navy consumer, but with better balance on what we like to compete on, which is fashion, style, price, fit, all the things that matter, so I think we'll still have a good value proposition for the lower-income consumer. We just won't have that glut of markdown inventory. So I just see it as better quality of value for them.

Great color. Best of luck. Katrina O’Connell: Thank you.

Your next question will come from the line of Jay Sole with UBS.

Great, thank you. Katrina, I want to follow up on that question. I think you mentioned that in your gross margin guidance for the year, you assume RODs flat, I assume you mean that as a percentage of sales. Can you give us an idea of what the comp leverage point is for ROD? Katrina O’Connell: Yes. I'm glad you asked that, Jay. So on the full year, you're absolutely right, so thanks for clarifying. We did say that, I mean, RODs basically neutral to leverage on the year. And I just said that low to mid-single-digit revenue declines is what we're expecting. So I think that's a good benchmark for you on given how low we've driven the ROD structure of the company, what's the right way to think about leverage is.

So I mean, can we assume that just the way the company has negotiated leases at the year-over-year, like the comp – the comp and leases is actually negative that you're seeing less rent, or is it just the store closures have led to less overall ROD expense? Katrina O’Connell: It's really the store closures. And I would say the partnerships of our international businesses, which had such high rent structures. So I think it's really all the restructuring work, Jay, that we've done, has finally given us some relief on the rent leverage point where we can run now, not that we want to, but low to mid-single digits and still not see drag on the cost structure based on how low we brought down that portfolio of expense.

Got it. Understood. Thank you so much.

Your next question will come from the line of Adrienne Yih with Barclays.

Great. Thank you very much. A couple of questions. The first, I guess, is the comment on Banana Republic sort of moderating. And I know that there was a big return to work occasion kind of spring of last year. Would that imply that quarter-to-date is running in the negative range. And then secondarily, could you talk about your credit card penetration by brand and its ability to acquire new customers as a new customer acquisition tool. And then what was the annual income from that piece of the business? Thank you very much. Katrina O’Connell: Sure. So Adrienne, I would say BR, we recognize that BR has been through a massive repositioning over the last 1.5 years, and we're still really proud of the way Banana Republic is showing up to the consumer. Right now, they are lapping the massive business that they had last year based on the revenue trend change as well as the relaunch. So I'm not going to preview whether they're negative or not, but I will say that as they lap those results, we're watching carefully to see the sales trends might moderate. And then on the credit card data, I'm sure you can imagine, I can't disclose the credit card income. We don't disclose that. What I will say is we just partnered with Barclays, new credit card partner with us from Synchrony last spring. We've been working hard with them to put in place new ways of being able to speak to our consumer. And we see credit card as a very important way to drive the pinnacle of lifetime value with our consumers. So I would say, credit card is more sophisticated. We launched our loyalty program. I think we have work to do now that we've acquired customers to better move them up through the lifetime value chain. But credit card continues to be important across all of our brands to speak to our most valuable customer.

Okay. Thank you very much. Best of luck. Katrina O’Connell: Thank you.

Our last question will come from the line of Paul Lejuez with Citigroup.

Hey, thanks, guys. Can you maybe talk about your free cash flow assumptions for F 2023? Also, I think you mentioned Old Navy pulled some sales forward from 4Q to 3Q. But do you think Old Navy also maybe pulled sales into 4Q at the expense of 1Q just given how promotional you were to get your inventories clean? And then just going back to Adrienne’s question on credit. What do you expect in terms of year-over-year change in credit revenues? Are you planning for that business to be up, down, flat? Any color you can give there? Thanks. Katrina O’Connell: Okay, Paul, that's a triple. So on free cash flow, I think, first of all, while overall free cash flow for the year was down $78 million. I'm really pleased that we were able to see the reversion in fourth quarter that we've been working towards, which was free cash flow of about $600 million in fourth quarter, once we were able to really get the inventory receipts down. So, good progress on free cash flow. I would say more to come on how we see the year playing out. We did say we plan at some point during the year to repay our ABL, which means that as we continue to have lower receipts, lower expenses and release pack and hold and start generating sales off of that, we do see that we're getting back into a much healthier cash position, more to come on whether that how free cash flow happens during the year. On the Q4, Old Navy question, it's funny, because it's actually the opposite where we actually saw our December sales take a dip unlike what I think other competitors have said, because we had cut holiday receipts, and we were carrying a lot of fall inventory. So our ownership of inventory in the quarter was a little off for what the consumer wanted. But once we were able to get holiday receipts down and start clearing through the inventory at markdowns, we were able to bring in spring and really see the business rebound. So I think that actually gives us confidence that the new product is resonating. As we talked about, we have markdown behind us and so there's room for us to be chasing. So I think Q4 was just sort of a confluence of maybe not the best content of inventory, we feel better about going forward. And then on credit card, again, I'm not going to guide to that. I think we see similar dynamics, which is credit headwinds, right, based on interest rates and all that other stuff, but we're working hard to offset that with aggressively looking to acquire customers. So more to come on where that program comes out, but we are pulling all levers that we have to keep that going. We know that's a very important part of the business.

Thank you. Good luck. Katrina O’Connell: Thank you.

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