GAP INC Q3 FY2024 earnings call

• Gap Inc. continued to perform while transforming, with net sales growth for 4 consecutive quarters, expanded gross margin, highest Q3 operating margin in 7 years, and 7th consecutive quarter of market share gains. • Brand reinvigoration playbook execution: Old Navy had flat comp but 7th consecutive quarter of market share gains, Gap had 4th consecutive quarter of positive comps and 6th consecutive quarter of market share gains, Banana Republic saw progress in fundamentals with men's strength and work in women's, Athleta comps turned positive at 5%. • Strengthening operating platform: Resilient supply chain navigated port strikes and natural disasters, China now <10% of sourcing; new vision, mission, purpose, and values unified the global team.

Gap Inc. net sales were up 2% in the third quarter. Old Navy: net sales $2.2 billion, up 1% Y/Y, comparable sales flat, 7th consecutive quarter of market share gains. Gap brand: net sales $899 million, up 1% Y/Y, comparable sales up 3%, 4th consecutive quarter of positive comps. Banana Republic: net sales $469 million, up 2% Y/Y, comparable sales down 1%. Athleta: net sales $290 million, up 4% Y/Y, comparable sales up 5%, comps turned positive in the quarter. Gross margin expanded 140 basis points, operating income $355 million, operating margin 9.3%, EPS $0.72, up 24% Y/Y. Inventory down 2% Y/Y, cash balance ~$2.2 billion, free cash flow $540 million YTD.

• Raised full-year outlook for net sales growth to between 1.5% and 2% Y/Y excluding 53rd week. • Raised full-year gross margin outlook to expand ~220 basis points vs fiscal 2023. • Raised full-year operating income outlook with growth in mid to high 60% range vs last year's adjusted operating income.

• Weather impact: Unseasonably warm weather in Q3 negatively impacted net sales growth, particularly in kids and baby business of Old Navy. • Macroeconomic uncertainties: Could affect consumer spending and inventory management.

Q: How did weather impact the business and what's the promotional tone outlook for the holiday season?

A: Weather caused store closures due to hurricanes and tropical storms, but business rebounded when weather turned. Promotional levels remain strategic, competing based on competitive environments.

Q: Update on OpEx and marketing shifts?

A: SG&A guided at $5.1 billion, with $550 million in cost actions over last two years; partnership with Omnicom to improve marketing effectiveness and media capabilities.

Q: Progress on Athleta and Zac Posen's impact?

A: Athleta comps up 5%, product, marketing, and in-store experience driving growth; Zac Posen contributes to cultural conversation and product execution across brands.

Q: Sustainability of low single-digit comps and margin leverage?

A: Reinvigoration playbook working, with 4th consecutive quarter of sales growth and 7th consecutive quarter of market share gains; ROD leverages on modestly positive sales growth.

Q: Strategic investments in customer experience and store refreshes?

A: Each brand at different reinvigoration stages; focusing on continuous improvement in product, marketing, in-store and online experiences.

Q: Margin structure and capital allocation?

A: Gross margin expanded 140 basis points due to inventory management and commodity costs; evaluating share repurchases as part of capital allocation to maximize shareholder value.

Q: Old Navy's priorities and customer insights?

A: Old Navy targeting acceleration in Q4, focusing on style and value space; market share gains from middle and higher income cohorts; merchandise margin improvement from disciplined inventory and marketing.

Q: Real estate footprint and gross margin details?

A: Evaluating and optimizing retail footprint with store refreshes; commodity tailwinds mostly lapped, focused on winning early in holiday season with strategic promotions.

Q: Kids and baby category impact and ROD leverage durability?

A: Kids and baby business impacted by unseasonably warm weather; ROD leverage in 2025 to be discussed further, with online sales and store closures contributing to current leverage.