Good afternoon, ladies and gentlemen. I would like to welcome everyone to the Gap Inc. Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] I would now like to introduce your host, Whitney Notaro, Head of Investor Relations.

Good afternoon, everyone. Welcome to Gap Inc.'s third quarter fiscal 2024 earnings conference call. Before we begin, I'd like to remind you that the information made available on this conference call contains forward-looking statements that are subject to risks that could cause our actual results to be materially different. 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 19, 2024, 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, November 21st, 2024, and we assume no obligation to publicly update or revise our forward-looking statements. Our latest earnings press release and the accompanying materials available on gapinc.com also include descriptions and reconciliations of any financial measures not consistent with Generally Accepted Accounting Principles. Joining me on the call today are Chief Executive Officer, Richard Dickson; and Chief Financial Officer, Katrina O'Connell. With that, I'll turn it over to Richard.

Good afternoon, and thank you for joining us. In the third quarter, Gap Inc. continued to perform while we transformed, delivering another quarter that exceeded financial expectations. We grew net sales for the fourth consecutive quarter, expanded gross margin, delivered our highest Q3 operating margin in seven years and gained market share for the seventh consecutive quarter. Our third quarter results reinforce that the execution of our strategic priorities, notably the rigor and discipline we've implemented around our brand reinvigoration playbook has made us stronger. This gives me confidence that our transformation is taking hold and that we are on our way to become a high-performing company and unlocking Gap Inc.'s full potential. As usual, on today's call, I'll provide an update on our third quarter performance and progress in the context of our four strategic priorities. Then Katrina will walk you through our detailed financial results and share our outlook before we open the call for questions. Let's start with financial and operational rigor. Gap Inc. net sales were up 2% in the third quarter and comps were up 1%. Old Navy posted a flat comp in the quarter with the seventh consecutive quarter of market share gains. GAAP comps were up 3%, the fourth consecutive quarter of positive comps, and the brand delivered its sixth consecutive quarter of market share gains. Banana Republic comps were down 1% as we continue to see improvements around the fundamentals and I am pleased to report that Athleta's comps turned positive in the quarter, up 5% as the reinvigoration of this brand begins to take hold. We expanded gross margin by 140 basis points with SG&A in line with our expectations, delivering operating income of $355 million and an operating margin of 9.3%, an increase of 270 basis points versus last year's…

Thank you, Richard, and thanks everyone for joining us this afternoon. The third quarter is yet another quarter of meaningfully improved performance as we delivered sales growth, gross margin expansion, well-controlled expenses, operating profit expansion, and strong free cash flow year-to-date. It's exciting to see the brand reinvigoration take hold with our fourth consecutive quarter of net sales growth and wins across our brand portfolio as we continue to drive relevance and revenue. The financial and operational rigor we've developed is core to how we operate and is enabling us to perform as we transform, consistently delivering on our commitments and strengthening our financial performance. Some key highlights from the quarter include the following. Net sales were up 2% and comparable sales were up 1%, with solid results at Old Navy, continued strength at Gap, progress at Banana Republic and an inflection to growth at Athleta. We delivered approximately 140 basis points of gross margin expansion and tightly managed SG&A dollars below last year in line with our expectations. This resulted in an operating margin of 9.3% for Q3, marking the highest Q3 operating margin in the last seven years and a 270 basis point improvement versus last year's reported operating margin and we achieved 24% growth in earnings per share to $0.72. We ended the quarter with $2.2 billion of cash, cash equivalents and short-term investments on the balance sheet and have generated $540 million in free cash flow year-to-date. The continued strength in our performance gives us the confidence to raise our fiscal 2024 outlook for sales, gross margin and operating income growth. Turning to detailed results for the quarter. Net sales of $3.8 billion increased 2% versus last year with comparable sales up 1%. Net sales in the quarter benefited from approximately one percentage point of growth…

Thank you. [Operator Instructions] Our first question comes from the line of Dana Telsey with Telsey Advisory Group. Please go ahead.

Hi, good afternoon, and nice to see the progress. As you think about the weather impact that you had, it certainly sounds like the business would have beaten expectations in the third quarter. With each of the divisions, are there activations in product, is it the consumer that's driving the sell through as you see it, Richard. And then the promotional tone outlook as you prepare for the holiday season, how you're planning it this year compared to last year? Thank you.

Okay. Well, thank you, Dana. I appreciate the question. And first let me just start by saying that I'm really proud of the results. I mean we delivered a really, another successful quarter. We grew our net sales for the fourth consecutive quarter. We gained market share across all brands. That's actually the seventh consecutive quarter that we're posting market share gains for the company and against the backdrop of a challenged industry. The apparel industry was down point and a half. So we really feel very good about the strength of our brands overall, particularly this quarter. We meaningfully also expanded operating margin, as mentioned, 270 basis points to 9.3%. It's the highest Q3 operating margin in seven years. We're running a more disciplined business, higher margins, controlling the controllables, tighter expenses and better inventory management. Dana, when we look at weather, weather becomes a really interesting, obviously, parallel to many retailers. Our teams did a really nice job navigating multiple disruptions and delivered strong performance in the quarter. Obviously, we had significant challenges. There were two hurricanes, multiple tropical storms. These resulted in some store closures across our brands. In fact, at peak of the storms, we had almost 180 closures, half of which were Old Navy stores. Most importantly, we were pleased that all of our employees by the way affected in areas remained safe and obviously we've reopened those stores that were affected. As we saw the weather turn, we saw big pickups and rebound in our business and in the context of our merchandise and merchandising and reaction from consumers as the weather picked up, so did our business. And we're feeling as we look ahead, it's a strong start to the season. From a promotional perspective, there's nothing consequentially different. As you know, we basically drive our promotional levels based on competitive environments that we operate in. We're remaining focused on executing our playbook to drive interest and demand. We will, of course, compete with promotions in the quarter as we do so all the time, but we do it strategically. We're able to complete well, while we drive sales, market share gains continue and we'll, of course, continue to work on expanding our gross margins.

Our next question comes from the line of Adrienne Yih with Barclays. Please go ahead.

Thank you very much and congratulations on yet another quarter kind of strung together of this outsized upside. Richard, I guess my question for you and it's kind of one and the same for Katrina as well is the OpEx number. So kind of just staying at the $5.1 billion. I think last quarter you had talked to us about some media and marketing shifts and kind of looking at the efficacy of kind of like return on advertising et cetera. Can you update us on that? And maybe Katrina an early look, if you can just at is what $5.1 billion, the right OpEx number? I know you've talked about additional cost cutting opportunities. I'm just wondering structurally how we should think about that dollar number. Thank you very much.

Hi, Adrienne. I'll go ahead and maybe address the broader SG&A question and then Richard can double click a little bit on the marketing piece. So we've rigorously managed the cost structure over the last few years and that includes this year. Over the last two years, we've worked to increase the rigor in the business and have actioned roughly $550 million in cost actions. You're right, the $5.1 billion is still the number we've guided to for this year. That does reflect lower nominal dollars versus last year and it's leveraging. Interestingly, we are finding efficiencies throughout this year and that's offsetting costs that are associated with higher sales then we started out with at the beginning of the year as well as higher incentive comp accruals that we expect this year. So we are managing that line. It seems like the 5.1% hasn't moved, but there's a lot of work happening to find efficiencies in the business. As it relates to the future, we're being very thoughtful about this next leg of cost savings as we balance efficiencies, which we know exist in the business, with some strategic investments we might use to fuel the reinvigorations of our brand. So we're committed to the discipline, and with that, maybe, Richard, you can comment a little more on the marketing piece.

Hi, Adrienne. I'll go ahead and maybe address the broader SG&A question and then Richard can double click a little bit on the marketing piece. So we've rigorously managed the cost structure over the last few years and that includes this year. Over the last two years, we've worked to increase the rigor in the business and have actioned roughly $550 million in cost actions. You're right, the $5.1 billion is still the number we've guided to for this year. That does reflect lower nominal dollars versus last year and it's leveraging. Interestingly, we are finding efficiencies throughout this year and that's offsetting costs that are associated with higher sales then we started out with at the beginning of the year as well as higher incentive comp accruals that we expect this year. So we are managing that line. It seems like the 5.1% hasn't moved, but there's a lot of work happening to find efficiencies in the business. As it relates to the future, we're being very thoughtful about this next leg of cost savings as we balance efficiencies, which we know exist in the business, with some strategic investments we might use to fuel the reinvigorations of our brand. So we're committed to the discipline, and with that, maybe, Richard, you can comment a little more on the marketing piece.

Yes. Thanks, Adrienne. As Katrina mentioned, we do concentrate heavily on effectiveness and efficiencies speaking very specifically about marketing. We all know marketing is a much more complex function than it has been in the past. We're certainly living in a daily digital dialogue with consumers and consumers are moving at an incredibly faster pace than ever. We talked about in our Q1 earnings call, we announced our new partnership with Omnicom, which is really centered on leveraging our media dollars. They've become a much more effective in our demand creation model. Our brands really need to meet consumers where they are. We've been working hard at improving our creative expression, which needs to be met with our media platforms that we manage those creatives on and much of that motivation was designed in selecting our new media partner. I would also say that this all complements the up-leveling of our creative expression of our brands in support of our playbook, driving cultural-relevant messaging, stimulating conversations about our brands. I'm very pleased with the progress we're making across the portfolio in our effectiveness of marketing and ultimately our new approach in media. As we continue to learn, expand and grow, we do believe that this best-in-class partnership that we've established with Omnicom will continue to elevate our media capabilities and result in a much more effective spend over time.

Thank you very much. Happy holidays and best of luck.

Thank you.

Our next question comes from the line of Robert Drbul with Guggenheim. Please go ahead.

Hi. Good afternoon. Two questions for you, if I could. The first one is on Athleta. And just how are you feeling about the product and sort of the progress that you're making on the product? And then the second one is, can you just talk a bit more Zac Posen, the impact that he's having. And are you able to see yet or can we see it yet from the results or in the product? Thanks.

Yes. Robert, thanks for the question. We're excited to talk about Athleta. Q3 marked an exciting milestone for the brand. The brand returned to growth with net sales up 4%, comps were up 5%. And this is really built around the efforts the team has been working around product, marketing, in-store experience. All of this really came together in the quarter and it showed up in the results. It's also important to note that we had share gains as well in a category that has been really important for us collectively to grow. We saw great success with our new product, particularly in core bottoms and our limited edition drops. We've also seen continued strength in other key categories in the brand. Our marketing is resonating. We've begun to really broaden our customer base as our marketing and media continue to gain traction. We've had meaningful acceleration in our new follower growth on TikTok. And we've been seeing great amplification of the Power of She through our culturally relevant activations that are happening all over the country. So in Q4, we really believe we have a much stronger product and visual presentation. We're expanding the distribution of the limited edition drops I mentioned that are working really well and we're, of course, advancing and implementing innovative media strategies that are really driving at the speed of culture. I'm really very, very confident in the progress that we're seeing in Athleta. It's encouraging. The team has energy and momentum and we're feeling increasingly confident in the trajectory of the brand. On the second part of your question, Zac, look, Zac has provided incredible energy. Overall, Zac's effort to truly put Gap Inc. brands in the cultural conversation has been pretty pronounced. He's working on a variety of different product execution, specifically also working on fit across the company. We have Zac focused as well on some of our store refreshes. There are many happening on Gap, Athleta, Banana and Old Navy. And he continues to attract a great, I'd say, talent pull from the marketplace and also represent a great cultural curation for the company overall. We couldn't be more pleased with the energy that he's provided and there's a lot more to share as 2025 rolls out.

Our next question comes from the line of Matthew Boss with JPMorgan. Please go ahead.

Thanks and congrats on a really nice quarter.

Thanks, Matt.

So Richard so with the reinvigoration work driving low single-digit positive comps year-to-date, do you see this as a sustainable target multiyear as we think about maybe top line for the business? And then Katrina you cited 50 basis points of ROD leverage on a one comp this quarter. What's the right leverage hurdle you see going forward for the business?

Thanks, Matt. I really appreciate the question because it's to the extent that it sort of makes me reflect on where we've been and where we are today. And we've made considerable progress executing around our strategic priorities. We're delivering consistently and that's a really important part of what we've been working on at Gap Inc. This is the fourth quarter of consecutive sales growth. It's the seventh consecutive quarter of share gains. We're expanding margins. We're finding efficiencies in our cost structure. We're returning to more historical levels of profit and we're also strengthening the balance sheet. The reinvigoration playbook is fundamentally working and our brands are stronger today. We're gaining strength. That's demonstrated not only by sales, but by market share gains across all of our brands this quarter. And again that's against a backdrop of a challenged industry down 1.5%. So What I would say is that we're doing what we said we were going to do. We're transitioning from fixing fundamentals to now continuous improvement. We're building a stronger foundation really to unlock the full potential of Gap Inc.'s portfolio. And it gives me great confidence to be able to not only commit to increased guidance in the context of sales, margin and operating income, but ultimately it gives us the confidence in our ability to generate sustainable, profitable growth. So at this juncture we're focused on executing with excellence in the fourth quarter as we look to finish the year strong and of course providing updates for you towards the end of the year as well as for full year 2025.

And Matt, as it relates to the leverage point on ROD, on a full year basis, ROD leverages on sort of modestly positive sales growth.

And Matt, as it relates to the leverage point on ROD, on a full year basis, ROD leverages on sort of modestly positive sales growth.

Great. Best of luck.

Thank you.

Thank you.

Thanks, Matt.

Our next question comes from the line of Brook Roche with Goldman Sachs. Please go ahead.

Good afternoon and thank you for taking our question. You mentioned that you're fueling some strategic investments to drive reinvigoration of the brands and that's something that you're considering in SG&A going forward? Richard, you also spoke to putting more energy behind the customer experience at the Gap brand. Can you contextualize some of these strategic investments to a broader degree? And how you're thinking about the rate and pace of some of these tests as well as broader rollout to drive sustainably positive comps and market share growth. Thank you.

Thanks, Brooke. Look, each brand is in a different point in the process of the reinvigoration journey. And again I'm really encouraged to see each one of our brands gaining traction as we continue to execute our playbook and really drive to becoming a high-performing house of iconic brands. And a lot of that is reflected in the consistency of how we're delivering our reinvigoration playbook. Net sales up for the fourth consecutive quarter is a great reflection of that consistency. Our two biggest brands, Old Navy and Gap are probably furthest along with multiple quarters of market share gains both relevance and revenue. Banana Republic, there's been a lot of progress at Banana and we're continuing to focus on reestablishing the brand to thrive in the premium lifestyle space and Athleta at an inflection point. The improvements we've made in product, marketing, stores are really beginning to show up in the results. As I mentioned plus 5% comp in the quarter is a significant turn and we're happy with that as well as the market share gains that brand has gained in the quarter. So our brand reinvigoration playbook is comprehensive and we've been deliberate about taking a phased approach in our execution. We made a lot of progress on product. We've made a lot of progress on marketing. We're focused on continuous improvement in those areas and we're going to expand our thoughts around enhancements in both the in-store and online experiences for our customers. This is ongoing work. But at this juncture as we reflect on where we are compared to where we were and the energy in our go-forward, we're feeling very, very confident.

Our next question comes from the line of Ike Boruchow with Wells Fargo. Please go ahead.

Hey, good afternoon. Congrats, guys. Richard, I think two for you or maybe the second is for Katrina. But just I think when people look at the margin structure of the business, it seems like there's more room to go on the operating margin, but the gross margins just historically look very high, which is a good problem to have. I guess how would you talk about your ongoing ability to drive margin in this business. It feels like you've only been in the seat here. It feels like there's a lot more opportunity, but would love to kind of get your thoughts on how to think about that. And then maybe Katrina the net cash position is as large as it's been in a long time. Is there a moment where you guys would consider kind of going back to share repurchases to at a layer of growth to the bottom line that maybe you're not seeing today?

So first off, thanks, Ike, for the question. We've been concentrating heavily obviously in our four strategic priorities. And the first, which has been financial and operational rigor has really included a lot of discipline that's been put into the business, primarily to drive more credibility and consistency in our financial outcome. We were really pleased with the 140 basis points of year-over-year gross margin expansion in the third quarter. And I think it's a reflection of the rigor that we've developed. It is becoming core to how we operate and it's showing up in stronger financial foundation as we really better our assortments, continue to run tighter inventory management. I mean we mentioned obviously up to net sales, but that's down to inventory. We've got lower promotional activity. This combined with commodity costs that we've recaptured in the first half has really continued to help us deliver better gross margins overall. And I think I'll just turn it probably over to Katrina to expand on the next part of the question.

Yes, Ike, I really appreciate you asking that question. I think we're very proud of the strength of the balance sheet. As you called out, we're sitting on about 64% more cash than we were a year ago. We are always evaluating the best return of capital to shareholders to make sure that we're maximizing value. I think we've articulated this before, but we have a pretty balanced framework as we think about capital allocation for the company. The first is that we like to invest in the business to the degree we can get a good return. Second, we believe in paying an attractive dividend as a really key component of shareholder returns. And third we do believe in repurchasing shares to offset dilution over time and we are consistently evaluating that. I think of note we do have about $476 million remaining under a prior share repurchase authorization. So we do sort of continue to reevaluate that over time.

Yes, Ike, I really appreciate you asking that question. I think we're very proud of the strength of the balance sheet. As you called out, we're sitting on about 64% more cash than we were a year ago. We are always evaluating the best return of capital to shareholders to make sure that we're maximizing value. I think we've articulated this before, but we have a pretty balanced framework as we think about capital allocation for the company. The first is that we like to invest in the business to the degree we can get a good return. Second, we believe in paying an attractive dividend as a really key component of shareholder returns. And third we do believe in repurchasing shares to offset dilution over time and we are consistently evaluating that. I think of note we do have about $476 million remaining under a prior share repurchase authorization. So we do sort of continue to reevaluate that over time.

Our next question comes from the line of Alex Straton with Morgan Stanley. Please go ahead.

Great. Thanks so much for taking the question. Maybe for Richard or Katrina just on Old Navy, it sounds like you've seen some improvement following the weather headwinds. So are you targeting acceleration in that business in the fourth quarter? And maybe taking a bigger step back like what are your priorities for Old Navy into '25. Thanks a lot.

Thanks, Alex. Look, Old Navy really showed some real strength in the quarter. Net sales up 1%. Comps were flat. This is our seventh consecutive quarter of market share gains for the brand. Again this is against a backdrop of a challenging industry. I've been really excited to see the strength in men's and women's, which outperformed the comp of the overall brand. We saw double-digit growth, as I mentioned in my opening remarks, in Active as a category. Denim also performed really well. The challenge for Old Navy was the kids business. In particular, it was impacted by the wear now nature of the category. We had unseasonably warm weather which slowed sales as the quarter progressed even though we started very strong with a back-to-school season. But not only is the kids and baby category more weather sensitive but value consumers also tend to buy closer to need. So it is also important that we mentioned at the Gap level, we quantified the weather impact to sales at about one point. And as soon as the weather cooled, we saw a rebound in sales and feel confident in the go-forward. As we look to our priorities in Old Navy now and as we head into 2025, we're concentrating and continuing to be an authority in the style and value space. The marketing that we've been doing is resonating with more clarity in pricing, in-store navigation and compelling storytelling. As we look ahead, in the fourth quarter, we're very excited about the brand's dialed up holiday activations and we're focused obviously on executing with excellence to deliver the year. And we will continue in 2025 to build on the success of the brand. The brand itself is a huge business. It's the number two apparel brand in the US.…

Our next question comes from the line of Lorraine Hutchinson with Bank of America. Please go ahead.

Thank you. Good afternoon. Katrina, where are Old Navy's margins versus prior periods of positive comps? And what do you see as the biggest drivers to improve profitability at the brand?

Well, I think you know we don't disclose margins by brand. But overall, we're really proud of the margin progress as a company. We picked up the 140 basis points of margin in the quarter and we just guided to margins that will expand about 220 basis points versus prior year. I think it's important to note that, that reflects average unit retails that are above 2019 almost universally across our brands. And so we're really proud of the progress that we've made there. As we think about improving profitability going forward, we'll talk more about that. I think at the end of the day, we're really excited that the brand reinvigoration work that is happening is showing up in sales growth and market share gains. I think that's a really important part of overall profitability.

Well, I think you know we don't disclose margins by brand. But overall, we're really proud of the margin progress as a company. We picked up the 140 basis points of margin in the quarter and we just guided to margins that will expand about 220 basis points versus prior year. I think it's important to note that, that reflects average unit retails that are above 2019 almost universally across our brands. And so we're really proud of the progress that we've made there. As we think about improving profitability going forward, we'll talk more about that. I think at the end of the day, we're really excited that the brand reinvigoration work that is happening is showing up in sales growth and market share gains. I think that's a really important part of overall profitability.

Our next question comes from the line of Simeon Siegel with BMO Capital Markets. Please go ahead.

Thanks. Hey, everyone. Nice to see the ongoing progress. Richard, can you talk to you about your customers a little bit as you think about the market share gains, anything new you're seeing? So are you bringing in new customers? Are you seeing more frequency with the existing. So anything you could speak to around that? And then maybe a dumb question I apologize. But can you elaborate on the improved merchandise margin because of inventory management comment. Is that just better full price, less markdowns, something else? Maybe any color how that plays across the different brands. Thanks guys.

Thanks, Simeon, for the question. We see and saw consistent results across our customer income cohorts in the third quarter. Our lowest income customers remain somewhat flat. And given that they're impacted by the warmer weather with less reason to update wardrobes based on seasonal changes. And on the flip side, we continue to see share gains from our middle and higher income cohorts. Those customers are responding to value relevance of our assortments, certainly, our style authority across our portfolio. But we do see strong responses to our value proposition from higher-end consumers. When they're offered the right price and right style and right value equation, customers with income over 100K did grow in the quarter and we believe that we're well positioned with our portfolio of brands particularly with Old Navy as the largest brand in the value space but with a very strong perception of style, quality and authority. I'll probably turn the next part over to Katrina to elaborate on merchandising margin.

Sure. So with our disciplined inventory management as well as the progress we're making on the assortments that we're offering to our consumers as well as the relevant marketing that's driving consumers to purchase our brands, we are seeing the merchandise margins improve based on that overall discipline. It's showing up, honestly, Simeon, in almost all the levers, whether it's fewer markdowns, whether it's fewer overall promotions or whether it's just basically tighter inventory allowing for better sell-throughs overall. So it's showing up in all the different levers.

Sure. So with our disciplined inventory management as well as the progress we're making on the assortments that we're offering to our consumers as well as the relevant marketing that's driving consumers to purchase our brands, we are seeing the merchandise margins improve based on that overall discipline. It's showing up, honestly, Simeon, in almost all the levers, whether it's fewer markdowns, whether it's fewer overall promotions or whether it's just basically tighter inventory allowing for better sell-throughs overall. So it's showing up in all the different levers.

Our next question comes from the line of Mark Altschwager with Baird. Please go ahead.

Great. Thanks for taking my question. First, Richard, where is each brand's real estate footprint today versus the longer-term opportunity? And any plans to accelerate store refreshes moving forward as you reinvigorate the customer experience. And then Katrina just on gross margin a quick follow-up there. I guess, one, did you see ongoing AUC tailwinds in the quarter or was that fully played out in the first half of the year. And then just overall on gross margin, it's been a nice consistent source of upside this year, suggesting some pretty conservative planning there. How are you thinking about the range of outcomes over holiday on the promotional front? And was there any -- did you approach the guide any differently in Q4 versus what you've done year-to-date just given the compressed shopping window and perhaps greater uncertainties there? Thank you.

Okay, Mark. We will do our best to unpack that, but I appreciate the comprehensive questions. First, on the each brand's real estate footprint and how we're thinking about real estate and certainly our store refresh is moving forward. It is part of our brand reinvigoration effort. We are always evaluating and optimizing our retail footprint. We're currently working through various different store closures as well as store openings, refreshes, remodels across our fleet. We just yesterday, in fact, opened up a new refresh in New York City Flatiron District with our Gap store. We have tests as well for Athleta that are rolling out to over 40 doors. Old Navy has new expressions from a merchandising perspective that we are rolling out and testing. And of course Banana Republic has opened several new aesthetic flagship stores, one in particular in SoHo that really features and puts forth the new aesthetic. So we approach our strategy through an omnichannel lens, both e-commerce and bricks and mortar. We do believe in the store experience and we're working hard and fast and furiously to refresh some of these locations in a more pronounced way. Learning as we go, testing and measuring the success both things that are working and not working, so that we could accelerate the progress and create really exciting consumer experiences that excite and delight our customers moving forward. On the other two, yeah, you take the first question.

Yes. So on gross margin, Mark, I think the first question around AUC tailwind in the quarter, so overall, we expect about 100 basis points of benefits from commodities on the full year. That's about 200 basis points of commodity benefit that came in the front half, but the back half is largely neutral as we start to lap the commodity benefits from last year. So really not much happening in AUC tailwinds in either Q3 or Q4. As it relates to the compressed holiday shopping window, right now, we are focused on winning early. I think you can see that we're out there with our holiday assortments. We are working hard to compete to win with newness and product compelling marketing and, yes, some strategic promotions. Richard, I think, mentioned this, we have a much more pronounced holiday expression in our stores, driving relevant interest and early customer engagement and we're really focused on executing that with excellence. We are actually operationally prepared across our supply chain logistics and stores for the higher volume days we're expecting as a result of the compressed shopping season. And as far as margin, we're going to compete on margin and promotions as needed depending on the customer environment. And that's all embedded in the guide that we gave today.

Yes. So on gross margin, Mark, I think the first question around AUC tailwind in the quarter, so overall, we expect about 100 basis points of benefits from commodities on the full year. That's about 200 basis points of commodity benefit that came in the front half, but the back half is largely neutral as we start to lap the commodity benefits from last year. So really not much happening in AUC tailwinds in either Q3 or Q4. As it relates to the compressed holiday shopping window, right now, we are focused on winning early. I think you can see that we're out there with our holiday assortments. We are working hard to compete to win with newness and product compelling marketing and, yes, some strategic promotions. Richard, I think, mentioned this, we have a much more pronounced holiday expression in our stores, driving relevant interest and early customer engagement and we're really focused on executing that with excellence. We are actually operationally prepared across our supply chain logistics and stores for the higher volume days we're expecting as a result of the compressed shopping season. And as far as margin, we're going to compete on margin and promotions as needed depending on the customer environment. And that's all embedded in the guide that we gave today.

Thank you. I think you hit all of my questions. So I appreciate that and best of luck. Happy Holidays.

Thank you, Mark.

Our next question comes from the line of Michael Binetti with Evercore ISI. Please go ahead.

Hey, guys. Thanks for taking our question. Congrats on a nice quarter. Back to one of the earlier questions, the 50 basis points of leverage on a one point of ROD, Katrina is that maybe could you speak to how durable that kind of leverage is beyond 2024? And then I guess, Richard, given some of this competitive landscape in kids and babies, there's some capacity coming out of the industry and some signs that competitors lowering prices or tightening up value. Have you seen any impact to your business or had to make any adjustments to the way you're thinking about strategy in kids and babies beyond the weather sensitivity that you spoke to in the quarter?

Michael, so on 2025, we'll talk more about that as we move forward. I think right now what you're experiencing is the higher sales that we get from our online business on relatively study ROD as we've closed stores over a time period is giving us that leverage. So we'll talk more about 2025 as we move forward.

Michael, so on 2025, we'll talk more about that as we move forward. I think right now what you're experiencing is the higher sales that we get from our online business on relatively study ROD as we've closed stores over a time period is giving us that leverage. So we'll talk more about 2025 as we move forward.

Yes, and Michael on the kids and baby category it had a challenging performance overall. It underperformed the apparel category. The market was down 3% in the quarter. Gap Inc. is a dominant player in this category. I mean we certainly have a strong presence and we believe in the category. We own over 8% of total share. As I mentioned, we had a strong kickoff in the third quarter with a strong back-to-school season. We had some terrific product and advertising, which, by the way, I hope you saw. And in the beginning of mid-September, we did have unseasonably warm weather, which presented a headwind and it disproportionately impacted the kids and baby business. It is a wear-now category. Mom shopping this category shops when it's closer to need. Kids grow fast. You're not buying a puffer in weather that you don't need it. And then you're sort of waiting because six months later, you could have a different size. So the weather really does impact the kids and baby business more significantly than it does other. That being said, we're a leading player in market share in the category. We believe in the category. As soon as the weather turned, we saw a rebound and feel very confident in our assortment and composition going forward and we'll continue to be a leader in this category and we'll have lots to share in 2025.

Thanks very much.

Thank you.

Thank you. We've reached the end of our question-and-answer session. That does conclude our conference call. You may now disconnect.