I'm Beth Reed, Senior Softlines Analyst at RBC. We're pleased to have with us today from Gap Inc, CEO Sonia Syngal and CFO Katrina O'Connell. Thank you both so much for being here. Before we jump into the Q&A portion of the meeting, I'm going to turn it over to Sonia for some opening comments. Thank you, Beth. Hi, everybody. We're happy to be here, Katrina and I are looking forward to talking about what we're working on here at Gap. I think that for us, driving against our Power Plan 2023, which we laid out last October, is taking hold, and it's grounded in the power of our brands, these four incredible values-driven, iconic American brands, billion-dollar-plus revenue, the power of our platform, which is all about the operational and technology prowess that the scale of our business allows us and is a factor in our acceleration, and then the power of our portfolio with these four brands addressing 80% of apparel end use as well as our customer file that's 188 million strong. That's the core tenets of our strategy. We are really pleased about our Q1 results and also about reinstating our dividend with the cash generation that we've seen and the health that's back in the business. With that, happy to take any questions you might have, Beth. All right. Great. Thank you for that context. I guess just wanted to kick it off with a big picture question on the consumer. Consumer balance sheets are generally pretty healthy right now, and of course, there's this heightened demand for clothes as we all emerge from our houses. I'm curious how you think about the longevity of this eagerness to spend on the part of the consumer. Is this a matter of weeks, months, quarters, years? How do you think about it? Yeah, I think the consumer is in a good place. As you know, between the savings rates and the stimulus and the spending and the post-COVID exuberance, as you said, Beth, we're seeing the power of the and show up in our business, right? The staying in clothes, the going out clothes, the workout, as well as the dress up. All of that is happening. How long that lasts, we think it'll be here for a while. Certainly, there's a different range of forecasts. People believe it'll be enduring in the out years. More than a quarter, more than a year. We think it could be a wave, a Roaring Twenties wave, if you will. That's one school of thought. For us, the way we are planning for the environment is to be ready in any situation, because we believe underneath it all, our performance is being driven by our strategy first and foremost, and is buoyed by the consumer. It's really our Power Plan strategy that's driving the performance that we're seeing and the market share consolidation that's happened and grown for the last three quarters for us. Got it. Okay. Just in terms of stimulus, I get that it's difficult to quantify, but just curious, on the most recent quarter, how do you think about the magnitude of the impact, particularly at Old Navy, but maybe across the other brands as well? Yeah, Katrina, do you want to comment on that? Yeah, that'd be great. Yeah, sure. We haven't publicly quantified it. We would say that certainly it was a tailwind in the quarter that combined with the earlier rollout of the vaccines, which I think surprised us all and really helped to get the stores, in particular, open faster to consumers than we had expected. The history would say that, yes, Old Navy has in the past benefited more from stimulus. I think what Sonia said is true, which is even though we carve off a little bit of the tailwinds for stimulus and the faster rollout of the vaccines, fundamentally, we believe that Old Navy and Athleta, in particular, are benefiting from the market share consolidation they've done in their key categories, the strength of those brands, and the health of the way they've been competing. I'm sure you saw that our Gap North America comp was a positive nine, which also tells us that there's health. I think what Sonia said is healthy, growing, and cool, that brand here in the U.S. and Canada. All of our brands are doing well with Banana coming up quickly, and some of that is stimulus, but a large part of that is just great execution on the creative end product. Got it. I was actually just going to ask on Gap North America, specifically, what's driving this positive momentum. It sounds like most of it's on the product side. Then, I guess, just any color there, and then as well as are you seeing signs that in terms of that brand, that consideration is moving in a positive direction relative to brand awareness? Yeah. Thanks, Beth. Listen, I love to talk about our brands. It's the core tenet of our strategy. What is a brand? A brand is very simply three things. It is marketing that is purposeful and purpose-led, and Gap doubled down on that creative clarity, and you're seeing that cut through. You're seeing their marketing cut through. Then it is the product, of course, and the product has to be great. It has to be great against the value equation that our customers demand, which is a great style, a great fit, great quality, sustainability, which is a core tenet to Gap's product, as well as price. Then it is about the experience, the digital experience and the physical experience. What Gap has done is raise the game on all of those dimensions, right? In addition to the hard restructuring work that has been needed, the shedding of the unprofitable stores, the strategic review of our international markets, which have been underproductive for us. It is about excellence at the core tenets of brand management that I've articulated. The marketing we've invested in, both the creative execution as well as more of it, has been key. The product, particularly the adult product, I'm really pleased with the leadership team that we've put over the adult product, which that had been leading our kids and baby product for Gap, had a proven track record, and we're seeing that take hold in the adult side. Kids and baby, Gap is the sixth-largest U.S. retailer and certainly with a reach around the world. Our largest brand with reach around the world. A very strong component was their kids and baby business, and now the whole product line, we believe, is heading in the right direction. The experience. The digital site, if you've been on it lately, it looks cool, it looks relevant. It's also much less friction, much more efficient, and great new capabilities. That's all of those technology investments we've been making for the entire company. The physical experience, the stores. Our go-forward fleet is now light, bright, and happy. We've invested in remodels. We're more than halfway done with the go-forward fleet, and we plan to get the rest complete. We're focused on the fundamentals and excellence at the fundamentals, and I think you're seeing that now in the performance of the brand in North America in particular. Yep, certainly. Just on the Old Navy, also clearly a great quarter. On kids and baby, you talked to share gains there. Some retailers in those categories go out of business. Also curious, what other key categories are you taking share in Old Navy? Maybe just some color on the intimates launch in April and how that's doing, albeit early days. Yeah, thanks, Beth. I think one of the biggest areas that Old Navy doubled down on with respect to product was the active and fleece business. Anything cozy as well as active. They distorted in a pretty material way. They called it right at the beginning of COVID. They already had strength there, and now you'll see it. That's where they've seen the biggest gain. Old Navy is actually the fastest-growing active brand in the U.S. based on how much that has accelerated. It's about a $2 billion business as a part of the Old Navy business and growing very fast. By the way, active, as you know, is the category that's growing the fastest within the apparel sector at large. Active matters. Kids and baby, as you mentioned, very important for Old Navy. They are neck and neck with the top brand in the U.S., and we think we'll outstrip that. Old Navy and Gap combined are about 10% of the U.S. kids and baby market share. As we head into back to school, we think a pretty major area of acceleration for us there. Certainly all of the fashion products, right? Old Navy has always been known for family fun, fashion, and value. All the fashion products, the dresses, the shorts, the Fourth of July wear, great execution there. The dresses business, all of those have been top search items for us as COVID has receded and spring and summer have emerged. They're really going from strength to strength on product. Category extensions, whether it is the intimates launch, very quiet intimates launch in April that already has them at the top 20 intimates brands in the U.S. and now build. The body inclusivity launch that they have planned for fall, which we think will be a very big game changer for them as well. They've had a very good online business with extended sizing to take that to their fleet of 1,300 stores roughly, is going to be something to watch. They've worked for a few years to make sure to get that right. Great. It doesn't sound like it, but as we're buying more going-out clothes, if you will, are there any shift away from the activewear side of the business? I don't know about you, Beth, but I feel like I'm excited to go out, and then I cannot wait to run home and put on my sweatpants again, right, after I've worked out. That's a little bit of what we're seeing in the consumer behavior is this and factor, the party dress and the sweatpants and the active gear. We expect that. I think that people are just enjoying clothes. They're enjoying expressing their own personal style and doing it with brands that have values that are aligned to their values, and that's what we're betting on. Yeah, for sure. I'm also in the camp of put on my pajamas as soon as I get home. Yeah. Jeans aren't comfortable enough these days. Totally. It's worth mentioning pajamas because that's been a big category for Old Navy, for all of our brands, as pajamas have become a new fashion item. I think people are paying a lot more attention to what they sleep in. Then denim is coming back. I think we're pleased with how relevant our denim is for the company. With the silhouette change, with everyone's bodies changing during the COVID period, whether kids grew or whether people lost or gained weight, all of that is a reason to buy a new pair of jeans with new leg shapes because the leg shapes are changing. Got it. I was just going to touch on that as well. Given that Old Navy, Gap, and Banana were all comping positively in 2012 with the colored denim cycle, sounds like you're feeling pretty optimistic now that we're heading into another cycle. Just curious how each brand is positioned to benefit and if you're seeing any differences this cycle versus prior cycles. No one loves a good denim cycle change more than I do. You're absolutely right. Good call on the color denim phenomenon, which mostly affected Gap and Old Navy. I would tell you, this denim cycle, which is about moving from the skinny jean to a range of leg shapes. Whether it's the mom jean, the straight jean, the wide leg, the high rise, there's just a lot of variety, and the shift away from the distorted emphasis on skinny, right. Two years ago, skinny might have been 70%, 80%, maybe, and sometimes close to 90% of the Old Navy business. Certainly for all of our brands, we're seeing now it's about half and half. Half is that skinny silhouette, half is emerging to be this range of fashion silhouettes and fashion bottoms. Of course, when you change your bottom, guess what you have to do? You change your top. Now your high rise requires a more cropped top, or the leg shape requires something a little more tight fitting, or the proportions have changed somehow. It's good for fashion when we go through a denim cycle. Absolutely. I want to touch on margins in a second, but just a quick one on Banana before that. Comps are down year-over-year, and then down versus 2019. Just want some color maybe around your level of confidence that the brand can get back to comp positive on a sustained basis, and how do you get there? Banana Republic entered the COVID crisis in a pretty healthy place. A very nice, profitable, multibillion-dollar business, with end use that people need, right? I mean, look at the pretty top you're wearing. Look at suiting that I'm wearing. These are the things when you have a high stakes occasion or a high occasion, whether it's a date or a dinner or a wedding or what have you want to dress up. The end use is relevant. I think they were hard hit during COVID, particularly with their city centers, which is where they had a lot of their real estate. Certainly, people were mostly in their sweatpants. That's changing. We're seeing that take hold. We're seeing the accessible luxury positioning be relevant. Through the power of our scale, between the platform and the portfolio, we can all enable Banana Republic's reemergence, right? The tech platform that they sit on is common across our brands. The insights we have on apparel for such a large customer file, Banana benefits from. Those are helping, and then the creative clarity that the new management team is bringing, Beth, I'm really pleased with. We've seen some cut-throughs already. If you go into a Banana store or on their site today, I think you'll see a difference, and we're excited about the future. Okay, great. Just in terms of your margin outlook. As we think about the path to 10% operating margins by 2023, and recognizing that Old Navy and Athleta are probably the principal drivers, what do you need to see happen at Gap and Banana to get there, Gap brand and Banana? Yeah, I'm happy to take that, Beth. I would say, I'd answer that in two ways. First of all, as you say, we are pleased with the healthy margins that we get at both our Old Navy and Athleta brands. As those grow disproportionately, we do see that being beneficial to the long-term operating margin outlook. That said, many of our initiatives are around restructuring the fixed cost base of the company. A lot of that hits the Gap and Banana Republic brands, and that is intended to actually rebase the profitability of those two brands. Sonia and I expect that all of our brands will be healthy, profitable brands that are growing, maybe at different rates, but growing, and probably in different ways. Our expectation is that the operating margin expansion comes from both of the growth of Athleta and Old Navy with healthy margins, but also the restructuring of Gap and Banana. I think we've said that as we aspire to our 10% operating margin goal, there's a couple of big levers. The restructuring of our North America fleet, which we are well underway on. The partnering of select international markets where we believe that the cost of operating in those markets is not worth wholly owned, but certainly serving those customers is important, and so a partner model will be advantaged, and we've said Europe's an example of that. Also as we look to invest in demand generation, more like some of our peers that run great brands like a Nike, we are also looking at restructuring some of our fixed costs through some productivity initiatives to start to get that flywheel going. All of that will help us bridge to what we're saying is about a 10% operating margin by 2023. Okay, that's helpful. Given that you explicitly said shipping cost headwinds, I think you expect those to be pretty material over the balance of the year. I believe maybe you said in the neighborhood of 200 basis points. Is there anything you can do in the near term to reduce some of that pressure? In 2022, do you see it more or less going away, a little bit better than 2021? What's your outlook? I'll start with a little bit of thinking on that, Beth. We think that the new normal is this kind of uncertainty, and that's what we're planning for, right? Our whole insight, particularly through last year, is that agility is the advantage. Whether it's a shipping headwind today or another commodity headwind next year or the next COVID, what have you, we will be prepared, and we've laid out some of those risks, certainly in our outlook. Those are embedded in the outlook for this year that we've taken out the guidance on, as well as embedded in our long range plan, which Q1 puts us ahead on. We feel like that agility and the shipping cost, as you say, is today's, but tomorrow it could be something different. Our scale and our strategy, a very simple strategy, will compensate for those and help us navigate the volatility that is the norm now. Okay, great. Shifting gears maybe a bit, I wanted to spend some time talking about Gap Home, recent announcement that you're partnering with Walmart in the home space. Just curious, what drove your decision to partner with Walmart specifically? Obviously, you're not even really off the ground and running yet, but any kind of margin implications that we should be thinking about, or profit, anything on that front? When we declared, Beth, that we're all about growing purpose-led lifestyle brands, billion-dollar lifestyle brands, an obvious extension of lifestyle from apparel are the ones that we've been talking about, the intimates, for example, or home. For home, you've seen us make partnership decisions. Partner to Amplify has been a core tenet of our strategy, whether it was Yeezy or the IMG relationship and now Walmart for home. It's a great partnership. There's a lot of synergies. Walmart's the largest home goods provider in the U.S. We think the scale of Walmart, the cool of Gap, and introducing Gap to Walmart's very young customer, their online customer, which is where we'll be launching Gap Home, is Gen Z and millennials. They have an affluence that is nice, the product elements are Gap through and through. They're modern design. It's American optimism in the color palette, very high quality, sustainable, all made for the planet. The value equation on price is great. A lot of synergies. We're excited to see what comes. It's coming very soon. Okay, great. It looks like we got a question in from the audience, so I'll just read that out to you guys. Says, "A number of your peers are rationalizing SKU bases, buying deeper, and increasing marketing spend behind bestsellers. Why is it the correct strategic decision to get broader with the launch of intimates, relaunch of GapKids, and plus size expansions across brands? Yeah, I think it's back to the and. We don't think those are in conflict. We're doing similar things of focusing on the key elements, and you're seeing that in the growth of intimates, the growth of kids and baby, the growth in active. Those are all accelerating for us across our brands. We agree with that question, by the way. We just think we can do that and have a very capital light, low overhead partner model, leveraging our Gap license to expand into home, and don't believe it's a distraction factor. We think that the value of the advertising that Walmart will be putting behind Gap Home will halo onto Gap brand, more to come, we think it's and. All right. Thanks for that. Maybe just quickly on the real estate front. After this year, you'll be 75% of the way through your store rationalization efforts. Just curious about when you close a store, what percent of customers migrate online or to another store, and do the retention rates differ between Gap North America and Banana Republic brands? We're learning so much right now, Beth, in terms of the power of the customer and how do we engage with them, make them loyalists, and some of our fun facts I'm really proud of. We know 188 million customers, 62 million of them are active. The average transaction value has grown substantially in Q1. We have a big integrated loyalty launch planned for the fall on the back of adding about six million loyalists in our pilot phase for the last six months. The integration and the intimacy with the customer, and the scale of the file is a competitive advantage for us, we believe. As we close stores, often our customers are omni-customers. They shop online with us. We monitor the omni-channel customer very carefully. I think we saw a multiple expansion of our online customers, like a 5x growth of online customers during COVID, which was one of the benefits. The e-com strength is one of the big compensating elements to the risk of losing a customer when we shut down a store. That being said, we're very focused on ensuring we have market coverage with our stores. Stores matter. They really matter. If we're going to have stores, they're going to be in the right locations to ensure the market coverage, and they're going to be proud in terms of the experience, and unique. That's some of the journey, and hopefully that's helpful. Yep, certainly is. Thank you. One of the themes of our conference this year is the world post-COVID, which I'm so happy we get to talk about. I guess as you think about how that looks and all the big changes in consumer behavior that we've seen over the past year, what do you expect to be the most lasting and sticky versus what's maybe more temporary? Yeah, great question. Boy, if we knew the for sure answer to that, I think we'd all be lying on a beach in the Bahamas. I would say that certainly we think the homebody trend is going to continue, this home centricity and the home being the center of much. That's important. Certainly, the digital acceleration we think is critical, and we're seeing that in our numbers. We're investing in our technology to support that bet. We also think that women's empowerment, that's a very big trend, and we're seeing that with the strength of the Athleta business as an example, as well as some of the partners that we're bringing in across all of our brands as the long-term trend. These are a few examples. There's maybe five or six main trends that we're tracking. I don't know, Katrina, if I've missed any that you'd mention. Yeah, I'd broaden the sustainability overall and the fact the values sort of based culture that is starting to crop up as an importance for brands to have values and to also be good for people and good for the planet, which we think we're well-positioned to capitalize on as well. Other than that, I think you captured a lot of the trends, Sonia. Yeah, no, that's a really good point, Katrina. It's something I should've spoken about a little bit more. Look, for 52 years, this company was founded very uniquely by two co-founders putting in $21,000 of their respective money, Don and Doris Fisher, to start, right? That's just an example of the platform of equality that the company started on. We were never afraid to be first. We've always been proud to be first, actually, in the ESG space, whether it was the first to be certified to pay men and women equally back in 2014 by Stanford, and this is at every job in every country, at every level, or we were first this past quarter ensuring that the two and a half million workers in our value chain and supply chain were paid electronically, which is a critical stepping stone to financial freedom. That's about around equality. In the community side, we're one of the largest employers in the U.S., and we've committed to 20,000 underserved youth from places like the Boys and Girls Club that will be employees in our organizations. That's about supporting our communities, and then certainly the environment is very big on our minds in terms of sustainability, and we're proud to be often in the top 10% list of companies that are sustainable. That doesn't rest, right? You have to keep working on that. With Old Navy's announcement to eliminate plastic bags or Gap's 100% sustainable teen line that they've launched, a couple of examples. Athleta's stores that are 100% powered by solar, and we could go on and on. We are proud to be first in many of these areas, and we'll continue to do so. We think it matters to consumers, and it's our heritage. Well, thank you for answering my ESG question. It's almost like you knew it was coming, so I appreciate all the color there. If I could, just one more since we're about out of time. It's kind of back to the post-pandemic world and back to school. How is the team planning back to school different maybe this year than versus pre-COVID? I think this is a year with two back to schools. We had back to school in the spring, and we're going to have a back to school in the fall. The accelerated market share that Gap and Old Navy in particular, and then add in Athleta Girl, which is being really buoyed by the Simone Biles announcement as she's the face of Athleta Girl. We've got three brands that are playing to win for back to school from a place of strength. We're buying into that opportunity. We think we're well-positioned. Whether it's here, as well as around the world for Gap, frankly, there's a lot of affinity for these brands for back to school. It's a major family event. This year more poignant than ever for parents to send their kids back with confidence and with style, such that they can have a year of productive learning after the year that we just had. We're planning to connect with emotionally what families are needed and also have all the product that is required and the kids want. All right. Great. I think that'll pretty much wrap it up. Thank you again both for joining us, and hopefully we can see you again. Thanks, Beth, for hosting us today. Sure thing.