Categories Earnings Call Transcripts

Gap Inc (GPS) Q4 2020 Earnings Call Transcript

GPS Earnings Call - Final Transcript

Gap Inc (NYSE: GPS) Q4 2020 earnings call dated Mar. 04, 2021.

Corporate Participants:

Steve Austenfeld — Head of Investor Relations

Katrina O’Connell — Chief Financial Officer

Sonia Syngal — Chief Executive Officer

Analysts:

Matt Boss — JPMorgan — Analyst

Oliver Chen — Cowen and Company — Analyst

Ike Boruchow — Wells Fargo — Analyst

Kimberly Greenberger — Morgan Stanley — Analyst

Adrienne Yih — Barclays — Analyst

Janine Stichter — Jefferies — Analyst

Kate Fitzsimons — RBC Capital Markets — Analyst

Presentation:

Operator

Good afternoon, ladies and gentlemen. My name is James and I’ll be your conference operator today. At this time I’d like to welcome everyone to The Gap Inc. Fourth Quarter 2020 Conference Call. [Operator Instructions]

I would like to introduce your host, Steve Austenfeld, Head of Investor Relations.

Steve Austenfeld — Head of Investor Relations

Thanks, James. Hey, good afternoon everyone and welcome to The Gap Inc’s fourth quarter 2020 earnings conference call.

Before we begin, I’d like to remind you that the information made available on this webcast and earnings call contains forward-looking statements. For information on factors that could cause our actual results to differ materially from any forward-looking statements as well as a description and reconciliation of any financial measures not consistent with Generally Accepted Accounting Principles, please refer to Page 2 of the slides shown on the Investors section of our website gapinc.com, which supplement today’s remarks as well as today’s earnings release, our quarterly report on Form 10-Q filed with the Securities and Exchange Commission on June 9, 2020 and any subsequent filings. Again, all of which are available on gapinc.com. These forward-looking statements are based on information as of today, March 4, 2021, and we assume no obligation to publicly update or revise our forward-looking statements.

Joining me on the call today are Chief Executive Officer, Sonia Syngal; and Chief Financial Officer, Katrina O’Connell.

With that, I’ll turn the call over to Katrina.

Katrina O’Connell — Chief Financial Officer

Thank you, Steve, and thank you everyone for joining us today. It’s nice to be with you as we wrap up 2020. I want to share comments regarding the fourth quarter of the year, but more importantly provide our 2021 financial outlook, as noted in our earnings release today. Following my comments Sonia will then share her perspective, followed by Q&A.

We’re very pleased with our progress on our path to our sustainable economic model which I outlined at our Investor Day in October. Let’s talk first about some key accomplishments from 2020 that put us well on our path to achieving our Power Plan 2023. First, we remain very pleased with the performance of Old Navy and Athleta, which grew 5% and 29% respectively in Q4. Old Navy gained share to become the number two apparel brand in the US, second to Nike. And that let us surpass a $1 billion in sales and grew 16% for the full year, despite the pandemic. Combined, they represented 63% of company sales in 2020, on the way to our target of 70% by the end of 2023. Their standout sales performance reflected gains in market share during the fourth quarter, led by their brand strength, omnichannel offerings in relevant product categories. Sonia will talk more about how they compete to win a bit later.

There is meaningful progress at Gap brand, while total sales for Gap brand global were down in Q4, significantly impacted by pandemic related market closures and restrictions in international markets. Gap North America delivered a 1% comp. This underscores the progress the brand is making in the product and operations of its core business. We’re pleased to have new leadership at Banana Republic. Sandra Stangl and her team will be focused on repositioning Banana Republic for a post COVID world with relevant marketing and product. We are becoming digitally dominant. Our online business grew 54% in 2020 and closed the year at about 45% of total company sales, up from 25% at the end of last year. At over $6 billion, our online channel is ranked number two in US apparel e-commerce sales and when leveraged with our well located fleet is a strategic advantage in serving our customers through the omnichannel lens.

Our fleet rationalization is on track and driving significant economic value. In 2020, we closed 228 net Gap and Banana Republic stores globally, ahead of our 225 store closure target. These closures along with lease negotiations and rent abatements settlements as well as higher online sales contributed to over 400 basis points of ROD leverage in Q4. We are progressing on our goal of improving the profitability of Gap brand as we partner to amplify through asset light models. The Yeezy partnership is on track for launch in the latter part of the first half of 2021 and we continue to be excited by the creativity that partnership will bring to the brand.

Our strategic review of Europe market is underway and we are in process on several licensing deals that we believe will provide great extensions to the brand. We have driven meaningful improvements in product margins with good pricing discipline. And while freight and shipping costs as well as pandemic headwinds have persisted, this margin expansion has provided a partial offset against these rising costs. Several expense levers, strategic store closures and a reduction in force early in the year, helped us weather pandemic related costs this year, such as meaningful health and safety costs and allowed us to lean into demand-generating investments such as marketing. Marketing has been a strategic investment this year as we leverage this dislocated apparel market to gain market share.

We’ve undertaken a strategic review of our intermix business as we continue to focus on our four billion dollar brands to drive a more profitable portfolio. And we have generated meaningful free cash flow in the quarter, ending the year with $2.4 billion of cash on the balance sheet. Our reliable cash generation and strong balance sheet will enable us to continue investing in growth in 2021 through capital expenditures while also returning to our long-standing practice of returning cash to shareholders through paying the previously approved dividend in the first quarter and initiating a new dividend in the second quarter. Recognizing the COVID related challenges faced during 2020, I am very proud of our team and how we remain focused on driving these strategic initiatives to drive long-term shareholder value.

As we look to 2021, despite the significant uncertainty that remains related to the COVID pandemic, we are pleased to provide a 2021 outlook today. For 2021, we expect to deliver earnings per share in the range of $1.20 to $1.35. I will provide more context regarding this range in a moment, but it’s important to note that the 2021 guidance range we are providing today was fully contemplated in our Power Plan 2023 and in the 2023 estimated 10% operating margin target we provided in October, Investor Event.

So let me move on to recap of fourth quarter results, starting with sales. Net sales for the quarter were $4.4 billion, down 5% to last year and below our previous outlook. Fourth quarter sales were impacted by a mid quarter resurgence in the COVID pandemic that resulted in unplanned mandated store closures and restrictions across Canada, Japan, China and Europe as well as new US stay-at-home orders in select densely populated regions, such as California in the Northeast, which impacted store traffic. The pandemic related impact of fourth quarter sales is estimated to be approximately 4 percentage points. In addition, the sales declined related to strategically planned permanent store closures, had an estimated impact of about 5 percentage points. Overall store sales in Q4 were down 28% as a result of slower traffic in select US markets, COVID related closures and the strategic closures related to the company’s store rationalization initiative. Online sales grew 49% and contributed 46% of the sales in the quarter. We leveraged our omnichannel capabilities such as BOPUS and ship from store to serve the customer even as the pandemic surged. Comparable sales were flat in the quarter. Comp sales by brand are in our earnings press release.

Turning to gross margin. On a reported basis, fourth quarter gross profit totaled $1.7 billion and gross margin rate was 37.7%, nearly 200 basis points ahead of both last year and the guidance we provided last quarter. Our year-over-year margin expansion is as follows: ROD leveraged 400 basis points from rent and occupancy savings as online sales increased and as we continue to close unprofitable stores, favorably settle lease liabilities and derive benefit from rent negotiations and rent abatement resolution. Merchandise margins deleveraged 210 basis points, driven by 300 basis points of higher shipping costs associated with increased online sales and carrier surcharges, offset by higher product margin due to lower promotional activities, despite increases in air freight costs. Air costs were incurred in the quarter to navigate the port delays that mounted because of COVID imposed restrictions.

Turning to SG&A. Fourth quarter operating expenses were $1.5 billion and 34.7% of sales, leveraging 640 basis points versus last year. Recall that last year had $501 million in one-time SG&A costs primarily related to Flagship impairments as well as costs for previously planned separation from Old Navy. We have initiated a strategic review of our intermix business as we reshape the profitability of our portfolio of brands. As a result, fourth quarter operating expenses include a $56 million trademark and long-term asset impairment charge related to the intermix business. Excluding this impairment charge on an adjusted basis, fourth quarter total operating expenses were 33.4% of sales in line with our previous guidance for SG&A for the quarter of 33% to 34% of sales. When normalizing for the intermix impairment this year and the Flagship impairment charges last year, fourth quarter SG&A dollars increased $60 million versus last year.

Notably, store expense savings largely offset the investment in demand generation with nominal increase in expenses over last year being mostly driven by real estate termination fees and higher distribution center costs. Consistent with our strategy we generated store expense savings of approximately $133 million related to store closures and productivity efforts, partially offset by $40 million in higher health and safety costs to keep our employees and customers safe. These safety costs are likely to stay with us for the first half of 2021, but we are closely monitoring vaccination progress and infection rates and we’ll continue to invest in the safety of our customers and employees as long as necessary.

We invested in marketing as we pursue market share growth during this highly disrupted time in the apparel market. Marketing dollars were up $66 million year-over-year and deleveraged 150 basis points. As a result, Gap Inc gained 0.7 point in market share in Q4, ending the quarter at 6% of total US market share for the company. And we grew our customer file to $183 million global known customers. We incurred $19 million of costs in the quarter associated with strategic store closures, although from an earnings standpoint these costs were essentially offset in gross margin through lower rent and occupancy.

Turning to EBIT. On a reported basis, fourth quarter operating income totaled $134 million. Operating margin of 3% leveraged 820 basis points versus last year’s reported operating margin, due to the material year ago Flagship store impairments and costs associated with the previously planned Old Navy separation. On an adjusted basis, fourth quarter operating income totaled $190 million with operating margin of 4.3%.

Moving to taxes and interest. The effective tax rate was negative 204% for the quarter. Taxes were highly favorable in the quarter reflecting changes in the estimated benefit associated with the enactment of the CARES Act and the impact of the non-recurring income tax benefit related to legal entity structure changes. These tax items in the quarter delivered an EPS benefit of approximately $0.45. For the year the effective tax rate was 40% and fourth quarter net interest expense was $57 million.

Turning to EPS for the fourth quarter. Our fourth quarter reported earnings per share was $0.61 versus a loss of $0.49 in the prior year, including a current year benefit of approximately $0.45 from non-recurring tax items and approximately $0.12 in charges related to the impairment of the intermix business as a result of the strategic review.

Now let me provide some perspective on inventory. Total inventory was up 14% versus fourth quarter of last year, despite the higher year-over-year inventory, markdown inventory is below last year and we’re pleased with the current inventory composition. We are confident that first half assortments and the quality of the inventory composition will enable product margins in the first half of 2021 to be above last year’s levels.

There were three main drivers of the year-over-year increase, with the first two associated with the timing of inventory ownership. First, about 10 percentage points of the increase resulted from inventory the company strategically held back in the first half of fiscal year 2020 due to COVID related store closures, that will be re-introduced for sale during the first half of fiscal year 2021. While this does drive a temporary increase in our inventory balance, it was contemplated in our first half receipt plans which were adjusted accordingly. Second, new COVID related US port congestion and impacts on shipping lanes were unforeseen, and contributed to higher year-over-year in-transit inventory levels. And third, we continued to sell COVID related safety products such as masks and hand sanitizers in the near term and owned this new category of inventory at year end. We also ended the year with inventory levels above our prior guidance.

In addition to the impact from port congestion, the second driver of this increase is from longer living seasonal styles and basics that we purposely held at shallow promotions within Q4 to improve product margins while we balanced deeper discounts on seasonally liable products. While this did increase our year-end inventory levels of non-liable and basic products, we will leverage our responsive of supply chain to adjust replenishment within the first half of fiscal year ’21 and believe this strategy will enable us to maximize gross margin over the life of these products.

Looking forward, we expect inventory levels to decrease as we reached the end of the first half and to end Q2 with inventory up high-single-digits. This inventory outlook includes the expectation of continued port delays causing higher in-transit balances as well as set up inventory to support the Q3 launch of Old Navy Plus product, a strategic growth initiative the brand is proud to launch.

Moving to real estate and store closures. Regarding our previously announced real estate restructure program, our discussions with landlords have progressed quite well, and we are making quick and effective progress on our real estate goal. During the year we closed 228 Gap and Banana stores globally in line with our guidance of 225. In fiscal 2020, we incurred cash outlays of about $75 million related to closures. In 2021, we expect to meet our closure target of 75 Gap and Banana Republic stores in North America and estimate net cash outlays of about $135 million. We are still targeting to close about 350 Gap and Banana Republic stores in North America by the end of 2023 and we continue to expect total cash outlays of the program as shared during our October Investor Meeting to be about $210 million. For the full program as of the end of 2023, we continue to expect annualized pre-tax savings of about $100 million. This estimate does not include our strategic review of our Europe market. Fiscal 2020 capital expenditures were $392 million below our normal levels of investment as we responded to the pandemic impact on cash flows.

Regarding the balance sheet and cash flow, fiscal year 2020 free cash flow was negative $155 million compared with positive $709 million last year. Notably, following the challenges of the COVID pandemic earlier in the year, free cash flow during the last three quarters of the year was approximately $900 million. We ended the quarter with $2.4 billion of cash. We are committed to the uses of cash we laid out at our Investor Day. Number one, invest in growth through capital expenditures. Number two, return cash to shareholders, largely through a competitive dividend. And number three evaluate how we use excess cash to delever over time. In light of the continued pandemic uncertainty, we remain prudent in our approach to cash management with a balance between return of capital to shareholders, while maintaining financial flexibility to invest in the business. And our ending share count was 374 million shares.

So before I turn it over to Sonia, let me touch on our financial outlook for 2021. While the biggest impacts on the pandemic is likely largely behind us, we expect the lingering impacts as seen in the fourth quarter of international market closures and stay-at-home restriction, including in Canada, China and Japan and Europe as well as US COVID case counts to persist, particularly in the first half of 2021. However, as vaccines rollout and stimulus checks begin, we currently view the second half of 2021 favorably, reflecting a likely return to a more normalized pre-pandemic level.

With that in mind, I would like to provide the following guidance for fiscal year 2021. Excluding costs associated with strategic reviews we are conducting in Europe or with our intermix business, we expect earnings per share to be in the range of $1.20 to $1.35. Now let me provide you with some additional guidance metrics for 2021. We anticipate full year net sales growth to be in the range of mid to high teens versus fiscal year 2020. We expect to deliver an operating margin of approximately 5% in 2021. The outlook for 2021 is consistent with the company’s Power Plan 2023 objective of achieving at least 10% EBIT margin by the end of 2023. We expect to open 30 to 40 Old Navy stores and 20 to 30 Athleta stores. And consistent with our strategy, we plan to close approximately 100 Gap and Banana Republic stores globally, including 75 closures in North America. This will put us at 75% of our targeted North America closures by the end of fiscal ’21. We expect the annual effective tax rate to be about 25%.

Our reliable cash generation and balance sheet remain strong. As we look to 2021, our capital allocation philosophy and priorities remain consistent. First and foremost, we plan to invest adequately but responsibility — responsibly in the business to drive growth. With that, we expect capital expenditures for the year to be about $800 million. We will shift our capital spend to higher ROIC projects as we distort our investments for its higher returning customer facing growth initiatives such as digital, customer acquisition programs like loyalty, DC capacity to accommodate online growth and store growth for Old Navy and Athleta. Second, we remain committed to returning to paying a dividend. With that, we will pay the previously declared and deferred Q1 fiscal ’20 dividend of just over $0.24 per share in Q1 of fiscal ’21. In addition, the company expects to initiate a new dividend in Q2 of 2021 at a level that balances the return of capital to shareholders with the financial flexibility to face continued uncertainty and invest in growth. In light of the current uncertainty related to the pandemic recovery, we do not anticipate share repurchases in the first half of 2021. We believe this outlook reflects the company’s progress even amidst a challenging 2020 and as we transition to a strong 2021. And most importantly is consistent with the strategic objectives and long-term goals we shared with you during our October Investor Meeting, including improving our cost structure, particularly through store fleet rationalization, strongly supporting the growth of our brands and returning cash to shareholders.

Looking forward, we remain on track to delivering our 2023 EBIT margin target of about 10%. Our progress in 2020 and our guidance for 2021 continue to provide important milestones and progress on our journey towards that goal. Continued improvements beyond 2021 will be accomplished by progressing the following initiatives. One, completing our North America store closure plan. Two, sunsetting COVID costs such as health and safety. Three, completing strategic reviews of select international markets and domestic businesses. Four, making meaningful progress on engineering fixed operating costs. Five, launching sourcing logic and inventory initiatives targeted at growing gross margins as we look to defray growing pressures from the continued shift into online and six leveraging increases in marketing from 2020 and 2021, we made to proactively gain share.

And so with that I will turn the call over to Sonia.

Sonia Syngal — Chief Executive Officer

Thank you, Katrina, and good afternoon everyone. Before we look ahead, I want to take a minute to reflect on 2020. COVID-19 presented the biggest crisis our company, our industry has ever faced, and alongside our employees, our customers, our communities and the rest of the world we faced challenges that defined a new path for every one of us. It’s also true that every crisis is an opportunity and this one met Gap Inc at a crucial pivot point. We used this opportunity to lead with our competitive advantages, while embracing the values of company was founded on to emerge in a place of strength and with a clear path forward. Our teams showed resiliency and the ability to try fast, learn fast and think big to meet customers’ needs.

First, we gained meaningful market share quarter-over-quarter by investing in growth across our purpose led brands during this period of market dislocation. We grew our global known customer file by 14% in 2020 to over 183 million and introduced communicating ways for them to shop with us by expanding our buy online pickup in store capabilities to curbside pickup and launching new payment methods like Afterpay and introducing our loyalty program. Our online business reached over $6 billion in sales and delivered 54% annual sales growth, leveraging our powerful omnichannel platform. Following the shutdown we reopened our fleet of more than 3,000 stores quickly, while permanently closing a group of over 20 — 200 unprofitable stores as part of our fleet rationalization strategy.

With the increased casualization of style we played into our product category strength with disproportionate sales coming from Active and Fleece, Sleep and Kids & Baby. We also quickly pivoted to produce masks, a new top category, which represented 3% of sales in 2020 and drove new customer growth. We met our customers e-commerce shipping expectations at scale with on-time delivery of approximately 130 million products well above the industry average. And finally we helped to develop the gold standard and health and safety practices allowing employees and customers to feel confident working and shopping in our stores.

Now as we turn the page to 2021, we’re pleased with the traction we’re seeing in the business. However, we understand retail is highly volatile and that we will continue to face challenges that we will remain agile and face that. I recently had the honor to speak with President, Biden; Vice President, Harris and other members of the new administration alongside several other CEOs. I represented our business in broader industry, discussing the urgent actions required to recover from this crisis and rebuild an equitable and inclusive economy. And while uncertainty remains, I’m confident in our agility in Gap Inc’s speed and flexibility and then all that will serve us well. Through it all, we understand this is a long game and are squarely focused on executing against our Power Plan 2003 and delivering profitable growth in 2021.

Let me walk you through how our strategy will show up this year, starting with the power of our brands. Each of our brands are poised to deliver growth to world-class branding, relevant product and unbeatable experiences that will inspire our customers to become loyalists, each with a distinct point of view deeply rooted in value. Let me first talk about Old Navy. Old Navy’s results were very strong in Q4, driving 5% sales growth year-over-year, while also delivering margin expansion. According to NPD Group, Old Navy has made continuous market share gains each quarter, year-to-date on a trailing 12-month basis. The brand’s strong value proposition, leadership in key categories like Active and Fleece and Kids & Baby, and commitment to leading with values has allowed Old Navy to win in today’s dislocated market and they will lean on these strengths moving forward. The future looks bright for Old Navy and we’re confident in their ability to grow to $10 billion over the next three years. This year Old Navy deliver on the democracy of style to its commitment to inclusivity and the rollout of Plus to the entire store fleet later this year. They will focus on the market rising service through a differentiated experience powered by new and highly scaled omni capabilities as well as their Navy at loyalty program that will accelerate value creation for both our customers and for our business.

Next, Gap. Gap stands for modern American optimism and we have seen customers respond well over the last year to a more consistent point of view as we leaned into relevant product and culture defining conversations and creative. We are positioning Gap to win for the long-term by creating a profitable store fleet, a shift to digital and by delivering effortless style and quality in market share gaining categories, and partnering to amplify brand reach. This transformation is well underway and we’re excited to build upon it this year. The number one question mark get asked and I as well is about our Yeezy Gap partnership. We are on track to launch in the first half of this year and I’m impressed with how the team is unleashing their creativity and innovation in both the development of the product and the experience for the customer. We cannot wait to share with you. Additionally, we’re excited about the licensing work underway with IMG and are set to deliver new categories like Gap Home and Baby Gap gear later this year.

Moving to Banana Republic. Since the appointment of Sandra Stangl, our head of Banana Republic in December, the team is moving fast to position the brand for health by redefining affordable luxury and building a roadmap for growth that meet customer needs today and in the future. We’re excited to see how this comes to life later this year. In January, we launched BR Standard, a collection of Luxe performance wear, an elevated essentials for everyday, more in line with current customer trends as well as creative repositioning in February that is beautiful and right for brand. The team is also highly focused on the store experience, from transforming allocation of inventory to better align with our customer, improving digital merchandising and transforming our field culture from operational to one of style and service.

And finally Athleta. With 29% sales growth in Q4, yes 29% we have never been more confident in that path forward and its ability to reach $2 billion by 2023. Athleta is our highest margin business and like Old Navy has made continuous market share gains each quarter year-to-date. The brand is positioned in the growing active category and a powerful mission to support confident women and girls, gives the team permission to grow in multiple directions, across product categories, digital and physical locations, internationally, and through distributed commerce by leveraging the power of our platform and portfolio.

Athleta had two exciting product launches in January. First, they brought sleepwear to the market using a rapid customer-centric product innovation approach that they will apply to other opportunities going forward. This will develop with the customer at the center. Next, to bring life to it’s mission of inclusivity, Athleta announced the expansion into inclusive sizing. For spring 2021, 70% of the Athleta collection will be available in sizes 1x to 3x now. As part of this Athleta launched a new holistic brand campaign entitled All Powerful. A multiplatform celebration of the beauty and power in all women. We believe both of these product expansions will be major growth drivers in 2021.

Our vision is to grow our purpose led billion dollar lifestyle brands and as Katrina mentioned earlier, in line with our strategy, we have performed a strategic review of our intermix business. This move allows us to prioritize our strategic focus and resources behind the brands of the most potential and that generate the most sales and profit.

Next, the power of our portfolio. Together, our brands have huge reach, targeting approximately 80% of the $200 billion addressable apparel market. The power of our portfolio is extending that reach to new customers. Each brand is playing their part to, to create differentiation, pricing segmentation and product expansions like Teen, Plus and Sleep. It’s also leveraging the brands collective power to make big products like we did last year with masks. We’re also using the collective power to grow our customer profile and so as said about this we welcomed new customers and are building stronger relationships with the ones we have. As I’ve said before, it is our goal to turn every customer into a loyalist.

We launched our Navyist, Gap Good, Banana Republic and Athleta rewards at the end of September, and in Q4 alone enrolled 6.4 million new loyalists across the company into the program. But the biggest value drivers for us in 2021 will be the full implementation and integration of our loyalty program across all of our brands this summer. We know members of our loyalty program outspend non- loyalty customers by more than 80%. This integrated program will offer our loyalists, benefits across our entire portfolio, while still providing unique and emotional brand connection. If we can get a customer from a single transaction to multiple transactions, to multiple channels and to multiple brands, we see value accretion at every step.

Another focus across the portfolio is the profitability of our store fleet. We are on track with our fleet restructuring efforts across Gap and Banana Republic, while we’re opening stores across Old Navy and Athleta to fuel growth. Additionally, we are moving forward with the strategic review of our Europe business and we’ll have more to share later this year.

Finally, the power of our platform. Powering our brands to the strength of our platform and capabilities at scale. At number two in the US apparel e-commerce sales of $6 billion, we believe Gap Inc is uniquely advantaged to win in digital. Our online business grew 54% in 2020 and closed the year at about 45% of total company sales. To meet the rising demand of online shopping and our target of increasing digital penetration to 50% by 2023, we’re focused on personalization at scale and enhancing capabilities across mobile, all supported by a highly automated fulfillment network.

Mobile has become our customers’ preferred way to shop with us online. And we know it can deliver further degrees of personalization and inspiration as well as enable the entire omni shopping journey. We now have over 50% of traffic and 75% of sales annually through mobile. With mobile as the primary engagement platform, we’re working quickly to create frictionless mobile shopping, as new digital experiences as devices, network and customer preferences evolve. Fueling the growth of our online business is our investment in distribution center capacity.

Last month, we announced plans to open a new state-of-the-art DC in Texas to support Old Navy’s growing online business. By delivering inventory faster and more efficiently to customers across the country, this new campus will allow us to meet the rising customer demand for online shopping. Key elements of our Power Plan will also take shape in our thousands of stores by making customer facing improvements that will also help us reduce store operating costs. We will apply automation to key customer touch points that will enable greater levels of service and engagement with our shoppers, including exploring the introduction of self checkout later this year. We will begin work on optimizing our store operating model starting with Old Navy by leaning on lessons and talent from our distribution centers. Through store closures, strategic reviews and our focus on reducing fixed operating costs, we are building a virtuous cycle where productivity can fuel demand generation, fundedly our investments in technology and marketing.

As Katrina mentioned we are making progress against SG&A and our effort to systemize and digitize our operations will be the rocket fuel for growth across our brands. As America’s largest clothing company with reach around the world and a collection of purpose led lifestyle brands, we’re proud to create product experiences our customers love while doing right by our employees, communities and planning. We are led by our purpose inclusive by design and in the coming year our steadfast in delivering on our commitments to racial equality and increasing representation at all levels of the company. We fundamentally believe the diversity of experience, thought and prospective increases creativity and innovation, promotes high quality decisions and enhances business growth, not to mention a deeper reflection of our customers.

Today, we announced that Salaam Coleman Smith has been elected to serve on the Gap Inc Board of Directors. Salaam is a proven creator and innovator bringing more than 20 years of leadership experience from top brands and entertainment, including Walt Disney Company, Comcast NBCUniversal and Viacom. She has the perfect blend of art and science, sounds and creative vision with strong business insight. Salaam connects deeply to Gap Inc’s value, having hard and led one of the most diverse and inclusive management teams in her industry. We look forward to her energy, guidance and leadership as we work to serve and represent the voice of the interest of millions of customers.

Now before I turn it over to Q&A, I want to thank the team. A year ago, I was asked to lead this incredible company and I could not be prouder of what our nearly 120,000 employees, along with the 2 million around the world in our value chain have accomplished together. This year allowed us to unleash our potential and we’re ready to deliver the next phase of work ahead. Through the power of our brands, our portfolio and our platform, we are ready to deliver profitable growth, value for our shareholders and a future we can all be proud of.

With that I will open it up for questions.

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