Earnings Transcript for GAP - Q1 Fiscal Year 2024

Operator: Good afternoon, ladies and gentlemen. I would like to welcome everyone to The Gap Inc. First Quarter 2024 Earnings Conference Call. [Operator Instructions] I would now like to introduce your host, Emily Gacka, Director of Investor Relations.

Emily Gacka: Good afternoon, everyone. Welcome to Gap Inc.’s first 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 press 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, May 30, 2024 and we assume no obligation to publicly update or revise our forward-looking statements. Our latest earnings 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 the call over to Richard.

Richard Dickson: Good afternoon and thank you for joining us. During today's call, I'll provide an update on our first quarter performance and progress in the context of our strategic priorities. Then Katrina will walk you through our detailed financial results and share our outlook before we open up the call for questions. Gap Inc. delivered a strong quarter that exceeded expectations across key metrics. Importantly, we gained market share for the fifth consecutive quarter with share gains and positive comparable sales at all brands, demonstrating improved relevance with our customers, as we execute against our brand reinvigoration playbook. We are on a journey to become a high-performing house of iconic American brands that shape culture but this will take time, perseverance and rigor. That said, I am encouraged by the momentum and results. We remain focused on our four strategic priorities, which are, first, maintaining and delivering financial and operational rigor, second, the reinvigoration of our brands; third, strengthening our platform; and fourth, energizing our culture. Let's start with financial and operational rigor. The improvement in our first quarter performance reflects our continued focus on this important priority. Comp sales for the company were up 3% with positive comps and for all brands. Old Navy posted comps up 3%, the highest quarterly comp in three years with continued strength in the women's business. Gap's comps were also up 3%, gaining share in men's, women's and kids and baby with women's performing well again, driven in part by success in our linen moves campaign. Banana Republic comps were up 1%, as the brand continues to focus on strengthening fundamentals. And Athleta's comps were up 5% in the quarter, reflecting better execution against the brand strategy, and encouraging signs of customer response to new product innovation. We expanded gross margin in the quarter, and remained focused on managing expenses, resulting in significant operating margin expansion. We also maintained rigorous inventory discipline with first quarter levels down 15% year-over-year. We ended the quarter with $1.7 billion of cash, cash equivalents and short-term investments on the balance sheet. Our financial footing remains strong and positions our company well for the future. Operational and financial rigor is becoming the fabric of how we work, which we will continue to reinforce through better processes and cultural accountability, and expense efficiencies will continue to be an area of focus. Turning to our next strategic priority, we're focused on driving relevance and revenue by executing on our brand reinvigoration playbook. Each brand is at a different point in the process, but I'm encouraged by the improvements we're driving across the portfolio. We are building stronger brand identities and purpose, recently highlighted by Gap Brand championing originality with our Linen Moves campaign. In terms of trend-right products, Old Navy is seeing product improvement across the board, Gap Brand is seeing success in standing behind big ideas, Banana Republic is making headway with its Classics line, and Athleta Product Innovation is gaining traction. Our products are being amplified through more compelling storytelling across each brand, cutting through with clarity and better differentiation. Cultural relevance and marketing are starting to show up in metrics that matter, like buzz, consideration and brand relevance. We are working to provide our customers with a more engaging omnichannel experience, with improved digital execution, new layout, and visual merchandising tests in our stores, and a clearer and compelling pricing strategy. And we aim to execute with excellence in-store and online across these pillars. Each of these are early proof points of the playbook in action. Over time, we expect to see this unfold more consistently and more holistically. Now I'd like to update you on the progress of each of our brands. At Old Navy, we are reasserting the brand and being more deliberate and consistent about how we express the brand, clearly communicating fashion and value for the family. Old Navy's brand acceptance scores for quality, impression and reputation are strong, giving us confidence that Old Navy is reasserting its position as these style authority in the value space. In the first quarter, we continue to focus on driving strength in the Old Navy women's business, while also highlighting looks for the family through campaigns featuring spring colors and fabrications like linen. A key category for the brand is active, where Old Navy is the fifth largest brand in the space. We are driving outperformance with intent in this category, with share gains for the third consecutive quarter. We have also made a concerted effort to build greater trust with our consumers through precision and clarity around the combination of storytelling and pricing, with wow prices in-store and online. We continue to test opportunities to enhance customer experience in the store through physical layout and new merchandising strategies. These actions are driving better consistency and experience, and the consumer is noticing, enabling us to win market share in key categories like active and dresses in the quarter. At Gap, we are reigniting the brand working to deliver confident trend-right products, price right and expressed through big ideas and culturally relevant messaging. Linen moves is a great example of taking trend-right product and amplifying it. Turning it into a big idea expressed through compelling in-store merchandising and strong digital execution. During the quarter, we saw outsized results within this category with Gap Linen sales up double digits versus last year. Building on this success and the continuation of the campaign, new deliveries will include new colors and new styles as we aim to secure a leadership position in this important seasonal fabrication. While this campaign itself is encouraging, our focus going forward is on relentless repetition of these type of creative expressions. Collaborations also remain an important part of our brand strategy. The recent launch of our limited edition 51 piece collection with California clothing label DÔEN is generating buzz, driving both relevance and revenue for the brand. These examples demonstrate the progress unfolding through better storytelling, improved assortments and our stronger brand identity. Our stores are presenting a clearer brand narrative and we're showing up for the customer with healthier in-stock levels. These actions are building a stronger foundation that we believe will drive more consistent performance over time. Turning to Banana Republic. We are focusing on reestablishing this brand to thrive in the premium lifestyle space. The work to fix the fundamentals is underway, and we are starting to see green shoots in the first quarter with positive comp growth. A notable improvement versus the fourth quarter. Banana Republic Classics and Finest Fabrics performed well, benefiting from foundational improvements, including increased product depth in stores, elevated marketing and better site execution. With the close of the first quarter, we decided to commence a leadership transition at the brand. We see a significant opportunity for Banana Republic and are working to set the stage for improved future performance under new leadership. We are resetting Athleta a brand with significant growth potential and a clear and distinct brand positioning rooted in the Power of She. Core bottoms performed well in the quarter, giving us confidence as we accelerate this loyalty gateway category. Brand heat and excitement were evident in the response to our limited edition drops. Our innovative Fabric PowerMove successfully launched with Train and Run products contributing to the significant improvement in results in the first quarter. This year has been a major step forward for women's sports as female athletes globally are beginning to get the attention and credit they've long deserved. It's an important cultural moment and one that we're proud to authentically participate in as the largest athletic brand singularly focused on empowering women and girls. Athleta has developed the Power of She Collective comprised of legendary athletes including Simone Biles and Katie Ledecky serving as game-changing brand ambassadors united in their mission to empower women and girls. The positive signs we're seeing in Athleta are encouraging, and we believe the team is on the right track. Moving to the third strategic priority, strengthening our operating platform. I talked to you last quarter about opportunities to drive scale and efficiency across our organization and to better support our brands through our platform functions like supply chain, technology and media. After conducting an internal assessment that I mentioned last quarter, we identified an opportunity to implement a new operating model for media activation that will enable us to up-level our marketing capabilities and offer our brand team’s better leverage. As part of this effort, during the first quarter, we selected a new premier media agency partner who will help us to leverage our media dollars to be more effective in creating demand and building brand equity. This new model and approach will centralize and optimize our media mix across the marketing funnel and align measurement and metrics across brands. It will also elevate our ability to use content as a strategic differentiator for cultural amplification, supporting a key element of our brand reinvigoration playbook. This is a great example of strengthening our platform and leveraging the scale of Gap Inc. to bring greater value and capabilities to our individual brands. We look forward to sharing more as we initiate this important partnership. And the fourth strategic priority is culture. Over the last nine months, I have hosted numerous town halls where thousands of employees from around the world tune in, both in person and virtually. The excitement is building across our organization. We are seeing more collaboration between our teams, and accountability is becoming the cultural norm. Chief People Officer, Amy Thompson, has been working alongside our teams to put our company values into action, evolving us into a more customer-centric organization that approaches business through a lens of curiosity and collaboration and focused on achieving excellence. 2024 is off to a good start. As we continue to execute our four strategic priorities, we are dialing up the exciting and thoughtful work to reinvigorate our brands, against a backdrop of macroeconomic and geopolitical uncertainty we performed well and delivering encouraging results in the first quarter, giving us the confidence to raise our guidance for the year. Before Katrina walks you through the detailed results, I'd like to take a moment to thank our global team across our stores, distribution centers and headquarters and all of our partners for their hard work and dedication as we continue to execute and unlock the power of Gap Inc. We know we have a lot of work to do. We are excited about the opportunities ahead. And now, I'll turn the call to Katrina for a closer look at our financials.

Katrina O'Connell: Thank you, Richard and thanks, everyone, for joining us this afternoon. We're pleased to report first quarter results ahead of our expectations with all brands in our portfolio, driving positive comparable sales and market share gains. In addition, we remained focused on the discipline we've created around margin expansion, expense and inventory management and maintaining a strong balance sheet, which resulted in notably improved operating profit and cash flow versus the prior year. The rigor we've developed is becoming core to how we operate, as Richard noted, and it is enabling us to focus on what matters driving relevance and revenue as we aspire to become a high-performing house of iconic American brands. Some key highlights from the first quarter include the following

Operator: Thank you. [Operator Instructions] Our first question comes from Matthew Boss with JPMorgan. Please go ahead.

Matthew Boss: Great. Thanks, and congrats on a nice quarter. So Richard, as we look across the portfolio, maybe it would help, what inning do you see each brand today in their respective reinvigoration timeline, just help us to think about runway remaining to drive further same-store sales growth relative to the first quarter's 3% comp? And then Katrina just if you could help walk through the drivers of gross margin expansion in the second quarter? And then how best to think about the cadence in the back half of the year.

Richard Dickson: Thanks, Matt. Look, I'd like to differentiate between our thoughts about growth in the near term and the midterm. And of course, long term and beyond. But in the near term, we've outlined our four strategic priorities and we are diligently focused on executing with excellence around them. We've seen good progress. It's giving us the confidence to raise our full year guidance, which includes operating income growth in the mid-40% range versus last year. We're going to continue to make progress. We will revisit our mid- and long-term views on the path to unlock the value of this extraordinary portfolio and ultimately continue to execute with excellence on the day-to-day. We've got four brands with meaningful volume and great heritage. We've got a leveraged operating platform that provides scale and efficiency we're executing against our priorities, and we will continue to keep everybody updated as to where we're headed on that front.

Katrina O'Connell: And then, Matt, as it relates to gross margin, I hope you're seeing that the rigor we've developed is really becoming core to how we operate, as Richard said. It's showing up in the stronger financial foundation. It's showing up in the recapture of commodity costs, the better assortments and the tighter inventories, all of which are showing up in overall better gross margins. I think you heard we gave guidance today that we now expect overall margin for the year to be up at least -- excuse me, 150 basis points for the full year. And this is about 100 basis points of commodity recapture and some modest improvements related to better inventory management. As we think about Q2 guidance in particular, we provided guidance that margins in Q2 would be up about 300 basis points. That's roughly the 200 basis points of commodities with the balance coming from better inventory management and ROD. The only other thing I'd tell you to make sure you pay attention to is the impact in the fourth quarter to the loss of the sales that does result in deleverage of ROD, which will impact overall fourth quarter margins.

Matthew Boss: Best of luck.

Katrina O'Connell: Thank you.

Richard Dickson: Thanks, Matt.

Operator: Our next question comes from Robert Drbul with Guggenheim. Please go ahead.

Robert Drbul: Hi. Just got a couple of questions for you. I think on the first one, are there opportunities for the brands within your portfolio to share information around how products you're selling. So like a company could blow it out to all divisions like you did with Linen. And then the second question I have is on the recent Gap shirtdress, I think Zac Posen launched a shirt and Gap but he's the Creative Director at Old Navy. Can you just help us understand how he's working within the various brands within the company? Thanks.

Richard Dickson: Yes, Robert, thanks for the question. Yes, I think this really are both examples of our brand reinvigoration playbook. As you've seen us evolve, I mean, we're sort of executing against our brands with renewed strength around their identities and purpose. We've been developing more trend-right product assortments these product assortments have a clear point of view and ultimately, through reduced inventory, you could really start to see the merchandising stories in our stores and online. We are creating better, more engaging omnichannel experiences with clear and compelling pricing strategies. The example of the linen campaign ultimately is one that I think is a really good example of the brand reinvigoration playbook coming to life. And ultimately, executing with excellence at every touch point. And so the drive from an idea through the various different means of consumer communication is showing up in the metrics that ultimately matter and we're really feeling very encouraged with the progress that we've been making. As it relates to Zac, we've certainly seen Zac's influence start to show up. He's doing great he's focused on influencing many creative aspects within our company, obviously, most particularly in design and merchandising, but his role is part of our broader strategy to cultivate a culture of creativity. And frankly, that's been missing for some time here at Gap Inc. His work is being publicly recognized, of course, The Gap Met Gala dress that we were so excited to see get such attention you mentioned the recent and Hathaway shirtdress, which is really important work showing how we brought that from a relevant perspective right to revenue as we offered our customers online, the ability to go and purchase an inspired dress like that. Zac's team produced the Old Navy Summering campaign on Old Navy, which is now getting fantastic response. And even as recently as yesterday, Zac was intimately involved in the launch of our new Banana Republic flagship in Soho, which by the way, is an amazing portrayal of our brand's future direction. So all-in-all, we're continuing to gain momentum unlocking the creative opportunities that we see across the Board and exciting ways that we'll continue to unlock these brands and the value that we believe we can give shareholders.

Robert Drbul: Thank you.

Operator: Our next question comes from Paul Lejuez with Citigroup. Please go ahead.

Paul Lejuez: Thanks guys. You saw a really strong merch margin improvement. I'm wondering if you could talk about in which brand you saw a big improvement from better inventory management. Also, if there's anything that you can share by channel, how stores perform versus e-com on the path of that merch margin improvement? And anything that you can share in terms of how we should be thinking about inventory management in the back half of the year? Thanks.

Katrina O'Connell: Yes. I think, Paul, as you said, we saw really good merchandise margin expansion in the quarter. And our rigor, as we just discussed, is showing up in the outlook we just provided we don't provide the margins by brand. But I think it's fair to say that we will continue to use the rigor within all of our brands to make sure that we are delivering against an overall margin expansion goal that we articulated today. When I think about inventory, as we talked about in the prepared remarks, we've sort of moved beyond the big inventory cleanup that we saw. And now we're back to really having just the rigor in the business to ensure that we have stock-to-sales ratios that ensure that our inventory levels continue to be below sales, which gives us the opportunity to continue to chase trends and allow ourselves to be more responsive to our consumer. And so that principle will remain.

Paul Lejuez: Got it. You gave some color on Athleta in the second quarter. How are you thinking about that business as you move past the second quarter? And then also curious why the negative spread in the Athleta business in the first quarter? Thanks.

Richard Dickson: Yes. Well, Paul, thanks for asking about Athleta. It's clearly an important brand in our portfolio. We believe it's got significant long-term potential, and we were really proud to deliver a strong quarter. Comps up 5% compared to down 10% in Q4 of 2023 is a significant change in direction. During the quarter, we also saw positive signs of Athleta's progress in the strategic initiatives that the team has been driving so diligently. In particular, core bottoms, which is a key loyalty building category for us, performed particularly well in the quarter. We also saw brand heat coming from our limited edition drops, which we've started to gain more and more traction with. We had great innovation Fabric PowerMove, successfully launching new products in Train and Run. And we do expect the promotional volume comparisons to improve by the second half of 2024. We've shared that before, but Q2 has the toughest comparisons for the brand. We are focused diligently executing against our brand reinvigoration playbook and ultimately really starting to see green shoots unfold.

Katrina O'Connell: And then the negative spread, Paul, that was really just some unique timing related to online sales. So just nothing major, just unique timing.

Paul Lejuez: Online sales are included in the comp there, right?

Katrina O'Connell: Correct. Its really – it’s the return keys.

Paul Lejuez: Got it. Okay, thanks. Good luck.

Richard Dickson: Thank you.

Operator: Our next question comes from Alex Straton with Morgan Stanley. Please go ahead.

Alex Straton: Perfect. Thanks so much for taking the question. I've got one for Katrina then one for Richard. So Katrina, you're keeping the audit guidance the same. Maybe how do you think about the opportunity to trim or reduce that line item, both maybe this year and then into the future? And then, Richard you've got another three months under your belt. Maybe talk to us about what your focus areas are in 2Q versus the rest of the year. And maybe to help us put some metrics around, if you have any KPIs that you're most focused on, that would be helpful to know. Thanks a lot.

Katrina O'Connell: Yes. I'll start, Alex. So I know that you know over the last 18 months, we've really worked hard to increase the financial rigor within the organization. And we've actioned roughly $550 million of cost reductions from our high. And so with that, we're pleased with the progress, but we do realize that SG&A is still high. I do believe we can make our cost structure more efficient and drive more operating margin expansion, but we have work to do. So the outlook we provided today shows that point of view, but we're going to continue to assess the efficiency of our investments and look for opportunities for reduction of redeployment where it makes sense. So more to come as we move through the year, but we do understand that the $5.1 billion we have work to do.

Richard Dickson: And Alex, my priority is continue to be very consistently portrayed both in and outside the company. We've laid out our four strategic imperatives

Alex Straton: Great. Good luck, guys.

Richard Dickson: Thank you.

Operator: Our next question comes from Michael Binetti with Evercore. Please go ahead.

Michael Binetti: Hi guys. Add my congrats on a great quarter. I guess, jump ball here, but I mean we love earnings as much as anyone, but you raised sales, you raised gross margins and you raised EBIT dollars a lot. It sounds like you're getting more comfortable with the investments you're making are headed in the right direction, any reason not to take up the SG&A a little bit with the better operations here to invest against the wins? And then I guess, similarly, if I think about it a little bit differently, you raised the year on sales by a small amount, but EBIT by a lot if the results do come in better than the guidance rest of the year, and we see similar strength, do we see a similar flow-through on upside to the top line guidance for the rest of the year? Or are there other puts and takes we should consider from here?

Katrina O'Connell: I think, Michael, on the first question, I don't think we see any reason not to invest against wins. I think what you're seeing is the discipline to be looking for both effectiveness and efficiency within SG&A. And so, we're doing as much work to optimize what's not working and invest in what is working. And so, all of that is showing up in holding the number, but we are certainly looking at opportunities under the cover. And if sales outperform, certainly, we'll look at that as well. What I would say as far as the guide, we're very pleased to have had a very good start to the year. And that did result, as you said, in taking up both revenue and more meaningfully the operating margin. What I would say is while we aspire to outperform even further, our outlook right now does reflect the fact that each of our brands is in a very different point in brand reinvigoration and so while the first quarter was encouraging, we remain mindful that it's still really early in our work and we're building consistency takes time. We're also watching consumer and macro trends, but we're confident in our ability to deliver against these commitments, and we'll always look for potential to do more.

Michael Binetti: Okay. Congrats again, really nice to see the progress in the quarter.

Richard Dickson: Thank you.

Operator: Our next question comes from Lorraine Hutchinson with Bank of America. Please go ahead.

Lorraine Hutchinson: Thank you. Good afternoon. I wanted to follow-up on the gross margin point. It sounds like there's still a good second quarter gross margin opportunity from both commodity costs and as you lap some heavy multiyear clearance, how are you thinking about merchandise margin drivers in the back half and beyond?

Katrina O'Connell: Well, what I would say, Lorraine is we just don't want to get too far ahead of ourselves. Right now, if you do the math on the merchandise margin that we just gave for the year, you'll see that we're expecting for overall margins related to sort of inventory management to be up slightly. And we're going to really take it one quarter at a time, certainly, if we can outperform we well.

Operator: Our next question comes from Ike Boruchow with Wells Fargo. Please go ahead.

Ike Boruchow: Hi everyone. Let me add my congrats. One for you, Richard one for you, Katrina -- just maybe Richard as you've been there in the seat longer, are there any other bigger picture initiatives that you have your eyes on that maybe you haven't really addressed yet. And I'm thinking mostly around the store base or maybe around the additions around the cost structure, but really thinking about the channel mix of the business? And then Katrina curious, I'm not looking for guidance or anything as we flow into next year. I know this is one of the first quarter. But can you just give us a high-level point of view on deflation. I mean there -- there's been some chatter about a lot of capacity that's opened up overseas for manufacturing that just kind of lens for the idea that there could be ongoing cost benefits into next year. I'm just kind of curious if you have any initial thoughts on that? Thanks, guys.

Richard Dickson: Yes. Thanks, Ike for the question. Look, I probably sound relentlessly repetitive, but we continue to just operate and execute against our core priorities. Within that, in the context of our performance and arguably bigger initiatives that I am focusing on, clearly, we're not losing focus on any of the mentioned four priorities. But one that I would probably mention in the context of the answer is the strengthening our platform that particular one, I believe, has enormous opportunities for us to gain more efficiency and effectiveness. In some cases, I believe we're in good shape, but ultimately, we have more work to do. Our supply chain, for instance, is a really terrific scale benefit for us that gives us unique cost leverage, but we need to accelerate innovation. And in that respect, I just recently spent almost a week with our Gap Inc. Supplier Summit, an event that we haven't had in many years, met with our top 100 vendors from around the world had the opportunity to see Gap Inc's Platform scale really start to show up in the day-to-day and the powerful partnerships that we have around the world in action, the design teams, the merchandising teams, the marketing teams working alongside best-in-class partners, vendors, mills, logistics literally helping us create and produce more than 800 million units a year. But with a renewed cultural connection on innovation, and creativity was really an exciting place to spend some time and recognize the unlocked value. The other one I'd probably mention is media and marketing. I did mention in my opening remarks, that we recently announced a new partner that we're engaged with to help up-level our capabilities and drive leverage. We're going to see a lot more interesting innovative marketing materials as well as creative in addition to recognizing behind the scenes that we've got a lot of leverage from a media scale perspective to get more efficient. The last one I would talk about in relation to the question is technology. This is an incredible area of opportunity. I certainly have my eyes wide open in the space. We're living in a daily digital dialogue with consumers today. So it's clearly vital that we move quickly to a way of thinking and acting that really uses technology to drive value, solve problems and ultimately achieve business goals. So we are evaluating and assessing our infrastructure, talent, capabilities and our ways of working to advance to become a high-performing apparel company, probably more than you bargained for in terms of an answer, but in the context of your question of what bigger initiatives, do I have my eye on, I'd say, the platform right now is an interesting place to mention.

Katrina O'Connell: And it's really, honestly, too soon to preview anything around commodity costs for next year. But certainly, if it is deflationary, we'll leverage our scale to get the best cost we can. I would say we remain mindful of the wage inflation impacts that are also out there. So we'll balance those and come up with a view to share when we have it.

Ike Boruchow: Okay. Thanks guys.

Richard Dickson: Thanks Ike.

Operator: Our next question comes from Brooke Roach with Goldman Sachs. Please go ahead.

Brooke Roach: Good afternoon, and thank you for taking our question. Richard, can you provide some additional context on the marketing and product initiatives that you have planned within the brand reinvigoration playbook for the Old Navy brand this year, that give you confidence in continued comp growth, even as you come up against some of the tougher comparisons in the back half?

Richard Dickson: Brooke, thanks for the question. When we say marketing today, it's a much more complex function than it was in the past. And our brands need to show up where our consumers are. And we need to do so in relevant ways, which is one of our motivations, as we've selected a new agency partner As I did mention, this partnership is in part another ingredient that is going into our reinvigoration playbook, which is helping our brands communicate a much more relevant, innovative and modern narrative using a very different media mix than we have in the past and creating really compelling storytelling. It's not about spending more. It's really about spending more efficiently. There's a lot of examples within the brands today that are showing up proof points around marketing and the reinvigoration playbook. Gap, of course, we've mentioned for this a long, I'd say, with an example on the linen campaign. But as you talk about Old Navy, Old Navy in particular, has been delivering consistently. We've had -- obviously, we're coming off of a very strong quarter, sales up 5%, comps up 3%. But in the marketing narrative, they've become much more effective storytellers. I'd say one of the great examples right now is our current campaign, featuring Tracee Ellis Ross, Yara Shahidi, it's a fantastic storytelling fun, if you will, on brand execution. That is an example of how we're marketing and storytelling our brand differently, but yet feels very connected to the essence and the roots of Old Navy. The team is focused on executing with excellence, and you're going to see a lot more interesting, innovative and surprising initiatives, as we roll into the back half, very confident and excited about our work and the work that's coming.

Brooke Roach: Great. And then as a follow-up, the Old Navy brand has rolled out a few different pricing initiatives to simplify the value that you offer to customers such as WOW pricing. Can you talk to any early, learnings from these tests and how you're thinking about pricing and promo for the rest of the year, at both Old Navy brand and then across the portfolio?

Richard Dickson: Yes. Thank you. Another good question and what I would say is it's not so much about a pricing strategy. It's about pricing communication. We know that compelling pricing and great value are a really important part of the equation at Old Navy and in all of our brands really. And we love being a highly exciting brand with great value, but we need a balanced promotional strategy. We've been reinforcing value by communicating to customers with much more clarity on price and quality we've been doing that in stores and online. As you have seen, our brands communication strategy evolved most evidently online and in stores our signing package or various different ways that we promote what we call WOW! prices versus percentages off have been much more strategically well thought through with a much more precise communication strategy. And I would encourage you, by the way, to go to our stores, go online, you're going to see a really direct narrative around pricing. You'll see more WOW! prices, both through clear out-the-door price messaging and with marketing centered on product. We have a lot more work to do in the context of this strength as a narrative, but I'm really encouraged with the progress that we're seeing. And clearly, the results that we're experiencing on Old Navy both in sales and brand qualitative metrics are showing up, and we're very encouraged with the progress.

Brooke Roach: Great. Thanks so much. I'll pass it on

Richard Dickson: Thank you.

Operator: Our next question comes from Adrienne Yih with Barclays. Please go ahead.

Adrienne Yih: Great. Let me add my congratulations. Richard so when we spoke or what we met sort of in December, you talked about sort of item number one was to have visibility on making and delivering plan. It's really early on in the year, and you've tripled your OI growth. That's really high conviction. So we've heard about the steps that you're doing company-specific. I'd like to hear about how you are convicted in the demand side of it, which is customer feedback and engagement, particularly at Old Navy and Gap.

Richard Dickson: Adrienne, thanks for the question. And also recognizing the progress that we have made, while we can take a very, very -- and I've shared that with my team, very quick victory lap, it is a marathon, not a sprint. And in the context of our priorities and the brand reinvigoration playbook, a really big part of that playbook is around insight and recognizing that at the center of what we do, it's all about the customer. And so driving a customer-centric led organization insights, trends, research, hands-on experience. I've also said this is not a business where you could lead behind a desk. In stores, I'm online. We're sort of pulling our team out of, if you will, the norm and into where the consumers are, studying the consumer and also then reacting with nimble and agility aspects as we drive our business to meet their needs. I do think this is an area that we will continue to improve on there's a lot of work across the business to ensure that we react and respond and meet the consumer where the consumer is and ensure that we excite and delight. I do think as you sort of look at our results, that we are on the winning side of that narrative in an industry right now where the market did decline as an industry, Gap Inc. delivered market share growth. So we have begun to see across all of our brands, the consumer connect to our brand reinvigoration playbook and the efforts that we've made around operating and financial discipline enable more encouragement to invest and continue that process. So lots more to share, lots more to do, but certainly a good milestone moment to note the progress that we've made.

Adrienne Yih: And then a follow-up quickly for Katrina. I know you don't give operating margin performance that each brand, but what might be helpful is we're clearly seeing the most promotional rigor at Old Navy, right? So I was wondering, can you for each of the brands or maybe just for Old Navy and Gap give us a relative sense of where merchandise margins are relative to historical average below or at or above? Thank you.

Katrina O'Connell: Yes, Adrienne, we don't actually disclose margins by brand. So what I would say is if you do the math around the full year outlook on gross margin that we just gave, you'll see that it implies a return to really a historical high gross margin for the company. If you go back many, many years. The implied margin really is historically high. Again, that's because of the rigor we're applying across all of our brands related to inventory, related to ensuring that we're being prudent around recapturing commodities. And really, as Richard said, thinking about the health of our brands through the customers' eyes, and ensuring that we have the right brand reinvigoration to ensure that we can sell product at higher our AURs overall for the company are actually higher than pre-pandemic levels. And so all of that is contributing to overall gross margins that are historically high.

Adrienne Yih: Fantastic. Thank you. Best of luck.

Richard Dickson: Thank you, Adrienne.

Operator: Our last question comes from Jonna Kim with TD Cowen. Please go ahead.

Jonna Kim: Thank you for taking my question. Just curious, as you have new collaborations and more culture regimens with consumer? Are you seeing higher customer acquisition at Gap -- and what is your strategy to retain these customers? And another question is any change in the strategy at the outlets as you continue to look at all brands that would be helpful. Thank you.

Richard Dickson: Thanks, Jonna. I think what I could share with you in particular, Gap I've talked about Gap as a pop culture brand, and we've been showing up in the cultural conversation. Our Met Gala address effectively worn by Da'Vine got incredible attention as did our shirtdress by Anne Hathaway. We've had a history of collaborations, most recently with DÔEN that has driven both relevance and revenue. It is a part of our playbook. It is a part and a methodology around unlocking the value of our brands through relevance and ultimately driving revenue. And so successful brand reinvigoration is when you have both. In some cases, if you just have relevance without revenue, it's not really a successful reinvigoration. And I think what you're seeing unfold is ultimately the combination of the two, most displayed at this juncture with our Gap brand. But you can take a look at Athleta as well. Athleta had an incredibly strong performance. And while we're really encouraged with the progress that we're making, we do have work to do. Athleta is also becoming part of the cultural conversation. This year, we've seen a major step-up for women's sports, female athletes. -- globally are really starting to get recognized with the attention and the credit that they've long deserved. And Athleta has developed the Power Of She Collective which is comprised of legendary athletes. We've got Simone Biles. We've got Katie Ledecky. They're serving as game-changing brand ambassadors who are ultimately united in our mission to empower women and girls. These are great examples of our brand playbook. These are great examples being part of the cultural conversation. And ultimately what we believe will drive relevance and revenue. In relation to the second part of your question, there are no, change in strategy narratives at this time around our outlet or omnichannel businesses. What we're very focused on is our prioritization map that we've shared and ultimately executing that with excellence.

Katrina O'Connell: Operator?

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