GAP INC Q4 FY2024 earnings call

Management Statement and Operational Highlights

• Brand Reinvigoration:
  • Old Navy: Gained market share for eighth consecutive quarter, strong in active and denim categories, launched Studio Smooth collection in 2025.
  • Gap: Back in cultural conversation, comps accelerated to 7% in Q4, with momentum in women's, men's, kids, and baby; latest fashiontainment moment resonating.
  • Banana Republic: Made progress in reestablishing the brand in premium lifestyle space, comps up 4% in Q4 with market share gains, especially in women's.
  • Athleta: Stabilized revenue in 2024, maintained market share, but had a challenging Q4; work ongoing to reset the brand.
• Platform Strengthening: Navigated supply chain disruptions, began cultivating digital-first organization and mindset, stood up office of AI focused on employee enablement, and plans to develop AI monetization opportunities for consumer experience, product to market, and organizational productivity in 2025.

Segment Performance

• Old Navy: Fourth-quarter comparable sales up 3%; it was the number one specialty apparel brand and retailer in the US in 2024, with eighth consecutive quarter of market share gains. Delivered one of the highest annual net sales in its history.
• Gap: Fourth-quarter comparable sales accelerated to 7%, marking the fifth consecutive quarter of positive comps and the highest quarterly comp in three years. Achieved seventh consecutive quarter of share gains.
• Banana Republic: Fourth-quarter comparable sales up 4% with market share gains, showing signs of stabilization with improvements in women's and men's divisions.
• Athleta: Fourth-quarter comparable sales down 2% but maintained market share; stabilized revenue in 2024 with flat comp and improvements across key metrics, but had a challenging quarter in the fourth quarter.

Guidance

• 2025 Net Sales: Expect net sales to grow approximately 1 to 2% year over year, including an estimated 30 basis point unfavorable impact from foreign currency due to a stronger US dollar.
• Gross Margin: Expect gross margins to expand slightly for the year, with roughly equal amounts from ROD deleverage and merchandise margin.
• SG&A: Expect approximately $150 million in cost savings and efficiencies through better operations, with SG&A leveraging slightly for the full year.
• Operating Income: See clear path towards delivering 8 to 10% operating income growth in fiscal 2025, including an estimated 2 percentage point unfavorable impact from foreign currency due to a stronger US dollar.
• First Quarter 2025: Expect net sales in Q1 to be flat to up slightly year over year, with an estimated 50 basis point headwind related to foreign currency; gross margins expected to expand slightly; SG&A to leverage slightly.

Risks

• Macroeconomic Uncertainty: The highly dynamic macro environment poses risks to actual results differing from forward-looking statements.
• Tariff Policy: Any changes in tariff policy could impact the business, though in fiscal 2024 less than 10% of product was sourced from China, and less than 1% from Canada and Mexico combined.

Q: For Richard, dig in further on what exactly is driving the momentum of the Gap banner's monster fourth-quarter comps and how big the banner could grow to be; quick one for Katrina on full-year operating margin expansion.

A: Richard Dickson noted Gap's momentum was fueled by innovation, product newness, compelling marketing with social-first approach, and aim to get back into top ten in US apparel market. Katrina O'Connell said operating margin guidance reflects sales increase, slight gross margin expansion, and SG&A leverage contributing to 8 to 10% operating income growth.

Q: Lorraine Hutchinson asked about further expense cuts beyond $150 million and key buckets focused on.

A: Katrina O'Connell replied $150 million is across technology, marketing, overhead, and stores expenses; they'll continue discipline around SG&A and look to go after more if needed, with reinvestments in areas like AI for customer experiences, design, supply chain, etc.

Q: Matthew Boss asked about inflection to continuous improvement, new customer acquisition, category market share gains for Gap and Old Navy, and continued drivers of operating income dollar growth.

A: Richard Dickson talked about brands resonating with consumers, market share gains, and progress in each brand; Katrina O'Connell said operating margin progress made, expecting continued operating income growth as model returns to sales growth.

Q: Brooke Roach asked about plans to strengthen Athleta brand and bridging to sustainable comp growth.

A: Richard Dickson said Athleta is number three in women's active space, made improvements but had Q4 challenges; focus on finding right balance to excite core customer, manage inventory, and reset the brand.

Q: Adrienne Yih asked about Zac Posen's contribution and color on brands' merch margin journey.

A: Richard Dickson praised Zac Posen's contribution to elevating creative conversation; Katrina O'Connell said gross margin gains made, AURs up meaningfully higher than pre-pandemic levels except for Athleta.

Q: Dana Telsey asked about store and online channel performance, productivity gains, and appropriate store base.

A: Richard Dickson said approached channel strategy omnichannel, online sales up 4% in 2024, store sales flat; Katrina O'Connell mentioned optimizing retail footprint, testing new store experiences like Gap in Flatiron and Banana in SoHo.

Q: Ike Boruchow asked about consumer behaviors and stock buybacks.

A: Richard Dickson said saw growth across income cohorts in Q4, portfolio brands appeal to wide range of consumers; Katrina O'Connell said cash at $2.6 billion, capital investments increased, dividend raised, and $400 million remaining under share repurchase authorization, remaining opportunistic.