The Gap, Inc. (GAP) Earnings Call Transcript & Summary

[Audio Gap] on the Gap brand. I mean, I think you have all watched our story. You're all familiar with our brand. I think Three years ago, if we said Gap brand was going to be one of the fastest-growing brands and trending brands on TikTok, I don't think anybody would have believed us. But here we are. And I think it's a testament to the execution of our playbook. Our team, in particular, has been relentless and focused not only from a product perspective, which you've seen get enhanced, but as well in executing against that playbook with culturally relevant narratives. I think when you look at our product, the culturally relevant storytelling that we've been doing and the drumbeat of that experiential moment that ultimately drives traffic and drives interest and drives conversation, which is incredibly important today when you look at consumers and how fast they migrate through storytelling, we need to be at the speed of culture. And I think Gap has delivered that. This is our 11th consecutive quarter of growth. It's our second double-digit quarter, which we're incredibly proud of. We have some really great statistics as well from the products that we've been delivering and the categories that we've been focused on. A couple of years ago, even before we spoke to you, we were the #10 denim brand in the country, which we thought that was pretty good as top 10. Today, we're now 6. So that's a big climb when you're talking about those rankings. Other really strong facts as well. Kids and baby, we were 6 last year. We're now the fourth largest kids and baby business our customer file is also growing. And in that file, we also see the who of that. So we're attracting Generation Z, which is very exciting as well. So we have a new generation that's entering into Gap while we're preserving the existing appeal. And that's a careful balance, love the one you're with and try and attract new customers. And I think The Gap case study is one that we could all take a look at as we do within our portfolio and recognize that, that methodology is really well. Really good other statistics. Traffic is increasing. AUR is increasing. The units are increasing. All of those metrics that really indicate health the brand are happening. We've got more full-price selling, which is incredibly important. Again, if you remember going into a Gap several years ago, it was more about price than it was about product. Now really, the product is telling the stories that we want to tell. So we have healthier margins, which is really obviously helping the overall P&L. And hopefully, you see what we see. Gap is in the Zeitgeist. It is part of the cultural conversation. And through that, we're attracting incredible partnerships. You see a lot of collaborations coming from Gap. There's something happening every couple of weeks. By the way, that's with great intent, but we've got super influencers and great tastemakers and all of the attractive ways that we're driving cultural relevance that drives revenue. We just launched GapBag, and we're very excited about that, which just has a great display at [ Rockefeller ] Center. I think it just came down as Fashion Week ends. We launched Gap fragrances, which you've got a sample piece there, which we're excited about. But ultimately, I think when you look at how the playbook has been executed by Gap and our Gap team, it just shows the power that we have in our portfolio. And it shows that we can do this. We're growing our share in those destination categories that we believe are important. We're growing our customer base, which lends well to the future proposition of the brand. We're expanding our distribution. We're expanding categories and ultimately on pace to execute that long-term growth model that we believe the brand has as potential going forward.

That's great to hear. Let's turn to Old Navy, which the brand had a little bit of a tougher summer. You mentioned that trends had improved into August. What gives you confidence that the brand is getting back on track? And you also announced new leadership at Old Navy. Can you tell us a little bit more there? What changes can we expect? And what's the timeline for applying the playbook to the largest brand in the portfolio?

Yes. Well, first off, it is important to take a step back and recognize that this was the first comp decline in 11 quarters. So we have actually been making progress on Old Navy, and we feel good about Old Navy in general. It is very clear, and we've been very transparent. We missed the seasonal categories. I think -- I wake up in the middle of the night saying that phrase, by the way, because it's just constantly something that we don't feel good about. But the good news about it is that we've diagnosed it. It is, to some extent, a bit transitory. The transitory drivers really is what we fell short of in the first half. Dresses just didn't appeal to our consumer for the most part. We had a very big assortment of everyday dresses, and the consumer really wanted the occasion dresses. So it wasn't that we didn't have the right dresses, we just had too many of those stresses. In the context of the other categories, it was inventory mix issues. The product actually worked. We just didn't have enough of it worked. So the good news in that context is it was very clear. It was diagnosed. We've improved product and assortment mix as we move forward. The more that we move forward, by the way, by the day, seasonal categories get less and less important for us as we look at the back half. We've already seen the customer respond to our product offerings. Our marketing has been totally rewired in the context of that, to create more sharper price points and more value orientation with, of course, the Old Navy narrative that keeps our brands really relevant. Our denim category, active category, kids and baby; these are the areas of strength for our brand and the areas that you're going to see more and more marketing as the weeks go by and ultimately become the important categories that drive the back half. I've been incredibly energized by the way, on the Cardi B campaign. And don't worry, we have a little clip of it. So if you haven't seen it, which would surprise me if you haven't seen it. But if you haven't seen it, we have it. But it is an example of the rewire that we did last quarter, learning from what our marketing drove in the last quarter, which, by the way, was with Paris Hilton, drove incredible engagement, but didn't drive the traffic. So measuring what worked and what didn't work. What didn't work in that campaign was we weren't as product-specific as we needed to be and as price-specific as we needed to be. And so we rewired the Cardi B campaign to do just that, and it's resonating. It's obviously got a greater focus on product and value. It still holds the tongue-in-cheek playful narrative that is Old Navy, but without talking about it, why don't we just take a quick look at it? [Presentation]

Yes. See, it's all Navy baby. You can't help but say it. But what's been exciting is it's resonated really well. In fact, we moved from denim, which we started with, and we extended that into knits. So if you haven't seen it, probably it's on our site, but we've done a lot of marketing around Cardi B's cardigan, no-brainer. It's done incredibly well. I think we sold over 500,000 units in a very short period of time. So we know this flywheel can work. We're seeing it work in real time, and we're excited about what the back half has for us. A lot of work to do. There's no doubt about it. But ultimately, we know how to do this, and we're seeing the indications of that success story. We did also roll out our beauty line as well, both third party and our own line, which is rolling into stores. Fanatics, a great partnership, sports obviously on the forefront of all of our minds as we've already just finished the U.S. Open. But ultimately, sports and fashion are becoming a bit synonymous. And so we have a great partnership with Fanatics that we recently launched and product is rolling out indoors. We've got a lot more announcements to come. So a lot more heat around Old Navy. So I will tell you, I'm proud of the progress Old Navy has made over the past several years. You did mention the transition of leadership. We have had a very smooth and continue to have a very smooth CEO transition. I often say in these chapters, what got us here won't get us there. And we're at a really exciting juncture for Old Navy. The baton pass from Haio to Michael. Michael Francis joined us if you recall, in early spring, came in as a consultant for us, so the swimming in the waters. He then took on the Chief Customer role, working side by side with Haio and really understanding the insights and the marketing organization various other different parts. And then we just announced the transition plan for Michael Francis to become the CEO of Old Navy effective on November 2. But ultimately, rocking and rolling, if you will, on a day-to-day basis. In fact, he had a real hand in the Cardi B work, and I've worked very carefully with Michael over the last several months. feel really confident that he's the right guy at the right time. For those of you that don't know enough about Michael, he's got incredible big box retail experience as the CMO of Target back in the day where Target became [ Target ]. He then had a really exciting chapter with DreamWorks, which again leads well into our narrative around Fashiontainment and brand storytelling and creating content that really connects with consumers. And then he spent the last 10 years working with Doug McMillon at Walmart. So really a great foundational background. And as the #1 specialty retailer in apparel, that type of experience is going to be incredibly important for us. And we believe Michael is going to be the right talent for us to unlock the next chapter of the brand.

That's great. Let's turn to some of the accelerators that you talked about earlier in the portfolio. Last year at our conference, you announced your expansion into beauty and accessories. How are these initiatives progressing? And what is the timeline for scaling these businesses?

We did. So the good news is we said it last year, and now it's in front of you. So that's already a lot of progress. But as we shared, based on insights, we know these categories are important categories in our consumers' lives. There are also categories that we've been in before. So it's not foreign language to us. We've had a fragrance business, we've had an accessory business. We've had some bags, we've had some belts. We've been in this business, but we haven't done it with real strategic intent. And so to the credit of the team, we really studied our consumer, we studied these categories. We brought in experts from those industries, acknowledging we need experts to surround us. to actually execute with excellence to the extent that the authenticity that we need to have to win in these categories is there with the talent and the interpretation of what is the Gap fragrance, what is Gap accessories? How do our brands translate to consumers with a meaningful distinctive point of difference? Beauty, as you know, it's incredibly resilient. It's one of the biggest and fastest and most successful categories in the U.S. It's the highest, actually, growth category in our checkout lanes. And so as we study what works in our checkout lanes and Old Navy, beauty is the #1 category. So offer more choice, offer more depth, offer more assortment and ultimately, we'll win the consumer. Accessories as well. It's a key element in wardrobing. I mean everybody has some form of bag today. And in that context, you're also complementing it to what you're wearing. And so there really is a natural wardrobing opportunity for us to extend our brands in a more relevant way in accessories. It's a natural extension of apparel. We've had some great success stories with pockets in our portfolio on accessories this year as well. We just, of course, launched the Bag business. We recruited best-in-class industry talent in both categories that are really focused on the strategy. And while it's early in our days, last year, we told you we were launching now you're experiencing the launch. That is in the build momentum phase. So not a lot of material impact in the short term. But as we get to that accelerated growth phase, we really do believe these will be really meaningful categories for us for long-term value. So pleased with the early progress.

Excellent.

There's some pictures actually. Also, the Gap fragrance, which is a collection of fragrances. You see here, by the way, the #1 fragrance is Dream right now, but you've got an opportunity to test and enroll all of them. We've had really strong responses to them. Last month, of course, we rolled out the Old Navy Beauty Collection. Here, you see some of the flavors also Splash, Vanilla Crush, various other really tested well fragrances. But it is how our consumer shops. We see her checkout out of our checkout lanes and select beauty. So now that she has more choice, we believe that there's real opportunity here. And it also adds to the basket, which is a really exciting add additional purchase as she experiences our story. Oh, here's the best. We set up an 18-foot Gap Five Pocket Tote bag here in Fashion Week, which was a really exciting statement for us. It was the buzz of Rockefeller Center, and it was the buzz in Fashion Week. Reed Krakoff, who is leading our accessory business, really incredibly well-known and experienced accessory/brand creative director, really figured out how to express and create distinction for Gap accessories, which is an exciting part. It's not just a bag. It's very much a Gap bag. These are iconic silhouettes, they're drawn from inspired iconic silhouettes and signature styles from Gap. We've got the hoodie tote, the 5 pockets out. I encourage you to take a look at our site, look at our stores, you'll see them. Looking ahead, we've got some other new additions, product drops, great marketing that's going to solidify this category and gain momentum, by the way, across both categories. And we believe while these categories are in the early stages, not only do they represent great incremental volume for us, but they're also margin enhancers. I mean these are great margin categories for us as we look to expand margins. We think that there's meaningful opportunity for incremental growth.