Good afternoon, ladies and gentlemen. My name is Justin, and I will be your conference operator today. At this time, I would like to welcome everyone to the Gap Inc Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. For those analysts who wish to participate in the question answer session after the presentation, you may now press star one to enter the Q&A queue. As a reminder, please limit your questions to one per participant. If anyone should require assistance during the call, please press the star key followed by the zero key on your touchtone phone. I would now like to introduce your host, Joe Scheeline, Head of Corporate Finance and Investor- Good afternoon, everyone. Welcome to Gap Inc's third quarter 2021 earnings conference call. Before we begin, I'd like to remind you that the information made available on this webcast and conference 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 two of the slides shown on the investor section of our website, gapinc.com, which supplement today's remarks. As well as today's earnings release, the company's annual report on Form 10-K filed with the Securities and Exchange Commission on March 16, 2021, 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, November 23rd, twenty twenty-one, 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 Sonia. Thank you, Joe, and good afternoon, everyone. Thanks for joining us today. As I reflect on the last 18 months, I'm inspired by the incredible transformation our teams have made in such a short time, despite an ongoing pandemic-related disruption to our business and the broader economy. Coming off record sales performance in Q2, we had accelerated momentum heading into the back half before facing disruption to our supply chain, driven by the two and a half-month closure of our top manufacturing country, Vietnam, as well as port congestion, both of which affected our ability to fully meet strong customer demand. While we had planned into the known supply chain constraints as we entered the quarter, including COVID-related closures in Vietnam, the shock to our business persisted longer than anticipated as weeks turned into months. We have been all hands on deck to address these headwinds and the resulting impact on our business, proactively navigating holiday and beyond, ensuring that the customer is at the center of every decision we make. To secure our supply and meet the needs of our customers, we chose air freight over ocean vessels for a significant portion of our assortment, taking on extreme transitory costs. We're disappointed in the short-term impact on earnings, but we made the choice to invest in our customer promise and build loyalty that will help sustain growth over the long term. Katrina will go into greater detail on our mitigation efforts later. Overall, we continue to believe the scale of our supply chain is a material advantage. We have deep relationships with our manufacturers across multiple countries of origin optimized for cost, speed, and expertise. We have strong transportation partners offering speed advantage and industry-leading rates. That said, learnings from this crisis will not go to waste. We're using them as an opportunity to accelerate digitization efforts that were already underway across our product to market process. There was a sizable increase in the enterprise clock speed on transformative initiatives as we combated the current crisis with an eye on a better future faster. For example, we're adding supply chain capabilities that will allow us to better anticipate the unexpected. We've made significant progress digitizing core operating processes with a targeted focus on inventory management, loyalty, and personalization. We're transforming product creation by using digital tools to unlock speed and efficiency. All this work will pay forward in 2022 and beyond. These near-term pressures have not distracted us from our core strategy. We have an acute focus on what really matters, our unique ownable assets. It's because of the simple, consumable, and executable strategy we shared in October of last year, our Power Plan 2023, that Gap Inc. is in a stronger, more resilient position today than we were entering this fiscal year. Even in the face of current headwinds, I'm confident this is true. Our brands are healthy. Demand for our product is strong, and we have pricing power, with average unit retail contributing to the highest growth margins in over a decade. We are becoming digitally led. Online sales grew 48% in the quarter compared to 2019, representing 38% of total sales. Our migration to the cloud has unlocked innovation in our tech portfolio. We will strategically shed an estimated $1 billion in sales by year-end versus 2019 by closing unproductive stores, divesting smaller brands, and partnering our European business to drive focus and profitability. Nearly three-quarters of active customers are loyalty shoppers, and they are spending twice as much as non-loyalty customers. We have fortified our strong balance sheet by restructuring long-term debt, allowing us to invest for growth while continuing to return cash to shareholders. To our team and partners around the world, thank you. I have watched you navigate, persevere, and accelerate through these near-term challenges while executing our long-term strategy. Despite the supply chain disruption, comp sales were up 5% on a two-year basis, with three of our four brands delivering positive two-year comps. Net sales were down 1% to 2019, which includes an estimated eight percentage point impact due to supply chain headwinds. Our strategy is on track and is working. Let me walk you through how our Power Plan came to life in Q3, starting with the power of our brands. Each of our billion-dollar brands is finding new and relevant ways to expand reach and cut through to the consumer. This is driving an increase in brand power and a decrease in discounting. Let me start with Old Navy. Old Navy delivered 8% sales growth versus 2019. A deceleration from the first half as the brand was disproportionately affected by inventory lateness during the quarter. Old Navy maintained its number one rank in kids market share according to NPD and sustained its kids and baby growth trend from the first half with strong back-to-school performance. BODEQUALITY, Old Navy's inclusive sizing initiative, launched successfully in August. The brand more than doubled its extended size customer file since launch. 15% of customers who shopped extended sizes are new to the brand, and more than a third have shopped Old Navy before but are new to the category. We are seeing strong extended size demand across fashion categories, a clear signal that our customer is craving trend choice lacking in the market. Moving to Gap. The momentum continues at Gap brand, particularly North America, with comparable sales up 13% versus 2019 and net sales nearly flat despite the almost 18 percentage points of revenue we shed through strategic store closures. This marks the third consecutive quarter of positive comparable two-year sales growth in North America as Gap brand improves the core health of the business from tighter assortments and better quality product to an increase in digital penetration and lighter and brighter stores. Gap reached a critical milestone in our Power Plan, concluding its strategic review of the European market, driving a more profitable business model by shuttering our U.K. stores and working with local partners to amplify growth. We have identified strong partners in the U.K., Ireland, France and Italy, and together are committed to serving and growing our Gap customers in Europe. Our newest Yeezy Gap icon, the Perfect Hoodie, delivered the most sales by an item in a single day in gap.com history. With over 70% of Yeezy Gap customers shopping with us for the first time, this partnership is unlocking the power of a new audience for Gap, Gen Z plus Gen X men from diverse backgrounds. Next, Banana Republic, which successfully launched new brand positioning focused on accessible luxury. Through unique storytelling and experiences, the brand is going back to its roots, igniting the adventure in all of us. Banana Republic reported a net sales decline of 18% versus 2019 and a negative 10% two-year comp. Like Gap, we walked away from about 10 percentage points of unprofitable revenue due to strategic store closures. Product margins expanded during the quarter as luxury products like merino, leather, cashmere, and silk resulted in increased average transaction, drawing higher value customers willing to pay for great quality. Finally, Athleta delivered an outstanding quarter with 48% to the power of she. The brand is investing in new touch points that increase awareness and drove new customer acquisition, which has more than doubled versus Q3 2019. Athleta grew brand awareness to 33% versus 27% last year, according to YouGov, by embracing celebrity partnerships, Simone Biles and Allyson Felix, who took to the world stage in Tokyo. The brand expanded into Canada with the launch of its online business and its first company-operated store in Vancouver and Toronto. Customers are quickly embracing AthletaWell, their new immersive digital community rooted in well-being, with the active user base growing 50% every month since launch. We believe this platform in the coming years to revolutionize how we monetize ownable brand experiences. Platform and portfolio. We've leveraged our size and scale to drive advantage for our four purpose-led billion-dollar brands. Our leading omni platform provides customer convenience and engaging experiences, whether in store, on mobile or through our curbside pickup. Our online sales grew 48% in the quarter compared to 2019, and we maintained our rank as No. 2 in U.S. apparel e-commerce sales. Our sizable active customer file sits at 64 million, and those customers are spending more on average than they were two years ago. What's more important is that the health of our customer file is improving. Compared to 2019, newly acquired customers are spending more with us than our existing customers, with increased average transactions, average unit retail, and basket size. We're pleased with the launch of our integrated rewards program and our ability to build customer lifetime value. Now, with more than 45 million members, our loyalists are 2x more likely to shop across brands and 3x more likely to shop across channels. We fuel our brands through our scale technology advantage operation. We are investing capital to drive growth, reduce costs, and increase speed and agility. To diversify and strengthen our business, we are also seeding new capabilities that will unlock additional value. For example, we acquired Drapr, which we expect will power new e-commerce tools with 3D fit technology, and we acquired CB4, our machine learning and AI acquisition, with broad potential across sales, inventory, and consumer insights. We have plans to scale these solutions in 2022 to build our core digital capability. This will help our brands lower returns, boost in-stock levels, increase margins, and deliver better customer experiences online and in stores across all four brands. The power of our portfolio comes to life through our leadership in key categories. Our strong active and fleece business and our denim business are expected to generate revenues of $4 billion and $2 billion respectively this year. Our kids and baby business owns 9% market share across Old Navy, Gap, and Athleta. Even as occasion and wear to work categories have strengthened, it's clear comfort and style will sustain. We're extending our customer reach across every age, body, and occasion, from value to premium, through category expansion and new addressable markets. We can test and pilot in one brand and then leverage learnings to scale across the rest. For example, starting our inclusive sizing rollout in Athleta and scaling at Old Navy with BODEQUALITY, or using Old Navy, Gap, and Banana Republic's strong presence and infrastructure in Canada to enable Athleta's quick and seamless entry into the market. It's the collective power of our brands that gives us scale advantage. We continue to innovate in sustainable sourcing with a focus on empowering women, enabling opportunity, and enriching communities. Every industry will be impacted by climate change, and we are doing our part to mitigate its impact, both in our supply chain and on the communities where we operate. Earlier this month, the USAID Gap Inc. Women + Water Alliance announced that we have empowered 1 million people to improve their access to clean water and sanitation, already halfway to our goal of reaching 2 million by 2023. Looking ahead, we anticipate robust apparel and accessory retail sales across the industry for the remainder of the year and into the next. That said, we are balancing the favorable consumer climate against current supply constraints. As I mentioned earlier, we are doing everything we can to improve our on-hand inventories versus fall, and still, we remain cautious given the current environment. One last thought before I hand it over to Katrina. While the near-term headwinds and resulting impact on our performance are difficult, we remain focused on executing our strategy for long-term sustainable growth. We are focused on what matters: demand-generating investments in our billion-dollar brands fueled by cut-through creative, deploying data and science to drive efficiency in the way we work, and restructuring our business to reduce cost. All of this allows us to emerge from the crisis, growing share, increasing brand health, and delivering profitable growth long term. With that, I wish you and your families a Happy Thanksgiving. Katrina O'Connell? Thanks, Sonia, and good afternoon, everyone. As Sonia said, we're deeply proud of the progress we're making to transform Gap Inc. through our Power Plan 2023. We have strong demand for our brands and our fleet optimization through store closures, international partnerships, and divestitures is progressing well and adding value. Our operating margin remains on track to hit 10% by 2023, in line with our plan, even as we navigate these near-term disruptions. Our balance sheet, fortified with our recent debt restructuring, enables us to invest in our business to drive growth while returning cash to shareholders. The core tenets of our Power Plan 2023 strategy are well underway in delivering value. While we're confident with our strategy, widely reported worsening global supply chain issues meaningfully impacted our third quarter performance. We lost approximately $300 million of revenue or 8 percentage points of sales growth on a two-year basis due to longer transit times and lost weeks of production, which led to on-hand inventory shortages in the quarter. The backlog at U.S. ports deteriorated meaningfully from the first half of the year, resulting in up to three continuous weeks of unanticipated delays to fall product deliveries throughout the quarter. In addition, while our production capacity is largely globally diversified, approximately 30% of our product is produced in Vietnam, where factory closures extended to over two and a half months, significantly longer than initially anticipated. Our average on-hand inventory in Q3 was 11% below fiscal year 2019. Despite strong sell-through trends, we lost volume as a result of limited supply. While our brands all experienced delays in styles and sizes that limited their ability to fully meet strong demand, Old Navy was disproportionately impacted. We believe these supply chain disruption impacts to our sales and margins are transitory, although will persist in Q4 and potentially into early next year. With that, we've taken some near-term actions to proactively improve supply for holiday, and we're using the learnings from acute supply crisis to accelerate new capabilities for 2022 that we believe will help to better mitigate logistics challenges and more profitably increase speed to market go forward. Let me touch on some efforts. First, in the near term, we've secured incremental air capacity to support holiday inventory. In addition to an estimated $100 million of air costs incurred in Q3, we've also invested approximately $350 million in Q4 air freight to further expedite holiday deliveries. Second, where possible, we have routed a modest portion of our inventory to East Coast ports to bypass the congestion in the L.A. Long Beach port. While we aspire to improve our on-time deliveries for holiday by adding air capacity and utilizing alternate ports, the supply chain situation continues to be volatile. Newly opened Vietnam factories are behind on holiday pre-production, ramping up slowly. Ongoing port delays are worsening and air charters are causing new airport congestion. Our mitigation efforts are driving significant transitory costs, but we're focused on the long-term impact that delighting our customers with the products they love during the holiday season has on preserving market share and maintaining customer loyalty. We remain cautious in our outlook for the balance of the year and are updating our full year 2021 EPS guidance range to $0.45-$0.60 per share on a reported basis and $1.25-$1.40 per share on an adjusted basis. We are updating our guidance solely based on the acute revenue and margin impacts from supply chain disruptions. This range now reflects the estimated lost sales from supply disruptions in the second half of 2021 to be $550 million-$650 million. In addition, our updated guidance range reflects approximately $450 million of transitory air freight costs we have chosen to incur as we seek to meet as much customer demand as possible. We are confident that when adjusting for these substantial disruptive impacts to 2021, our underlying business is ahead of plan and we will emerge strong in 2022 and beyond. As we look to 2022, we are adding new capabilities that will enable us to navigate these disruptions with more flexibility and significantly less air freight. Beginning with summer 2022, our teams have added the expected longer port delay times into product booking deadlines, which we believe will enable us to ship goods largely by ocean for on-time deliveries. In addition, Old Navy has now accelerated its use of digital product creation for the majority of its fall orders with vendors. This has added speed to the pipeline and is a breakthrough in efficiency for the brand. Also, to increase geographic diversification and flexibility, we expect to leverage more multinational vendors. We will begin to deploy AI from our recent CB4 acquisition to better drive inventory in-stock in our stores. AI, combined with ongoing inventory management transformation efforts and the leverage of our new loyalty program, gives us confidence in the sustainability of strong average unit retails in 2022. Now, turning to third quarter financials. Before I get into specific results, I'd like to note that there are select charges we incurred in the quarter that are excluded from our adjusted financials, specifically costs related to restructuring our long-term debt and the transition of our European market to a partnership model. I'll provide more details on these as I talk through the results. Starting with sales. Net sales of $3.9 billion for the quarter were down 1% to 2019, with our Q3 sales deceleration from the first half of the year due to supply chain issues. Comp sales improved 5% on a two-year basis. We're particularly pleased that three of our four brands delivered strong two-year comp growth, with Old Navy up 6%, Gap Global up 3% and Gap North America up 13%, and Athleta up 41%, all while navigating acute supply issues. While Banana Republic's two-year comp was down 10%, the brand made progress in the quarter through its product and customer experience relaunch. Our strong e-commerce channel continues to be an advantage as online sales were up 48% compared to 2019, contributing 38% of sales in the quarter, up from 25% of total sales in Q3 2019. Moving to gross margin. Third quarter reported gross margin was 42.1%, an increase of 310 basis points versus 2019. Excluding impacts related to the transition of our European business to a partnership model, adjusted gross margin of 41.9% for the quarter represents the highest Q3 gross margin rate in over 10 years, expanding 290 basis points versus 2019 gross margin. This is primarily driven by 300 basis points in gross leverage from higher online sales and lower rent, occupancy and depreciation as a result of strategic store closures and renegotiated rents. Merchandise margins were down just 10 basis points, despite nearly 200 basis points of higher online shipping costs and about 250 basis points in short-term headwinds related to air freight. Product acceptance was strong across all brands, with our overall Q3 discount rate at the lowest level in five years. Turning to SG&A. Reported SG&A, which includes $26 million in charges related to the transition of our European operating model, was 38.3% of sales, deleveraging 470 basis points compared to Q3 2019. On an adjusted basis, SG&A was 37.6% of sales, 610 basis points above 2019 adjusted SG&A. We continue to execute our strategy of driving down fixed costs while investing a portion of those costs into demand generation in the form of marketing and technology. Fixed costs have been significantly reduced as we successfully closed stores in North America, divested of two brands earlier this year, and reached partnership agreements for our European markets. Marketing, up 360 basis points versus 2019, supported the rollout of our new initiatives, particularly loyalty, inclusive sizing at Old Navy, and the brand relaunch at Banana Republic, and is a major contributor to our low discount rates. The balance of Q3 investments were primarily focused on technology to build out our digital and supply chain capabilities, as well as higher bonus accruals versus a low 2019 baseline as no meaningful incentive payouts were granted in that year based on performance. The investments we're making today are long-term differentiators, and we're committed to our strategy while remaining prudent, even in the face of near-term supply headwinds. Regarding operating margin, operating margin for the quarter was 3.9% on a reported basis. Excluding $17 million in charges related to our European market transition, adjusted operating margin was 4.3%, which, as I noted earlier, includes the impact of an estimated $300 million in lost sales due to constrained inventory, in addition to approximately $100 million in non-structural air freight costs. Moving on to interest and tax. During the quarter, we restructured our long-term debt by retiring all of our $2.25 billion senior secured notes and issuing $1.5 billion of lower coupon unsecured senior notes. Through this debt restructuring, we were able to reduce our overall debt balance, achieve material interest savings, approximately $140 million on an annual basis beginning in 2022, and unencumber our real estate assets previously pledged as collateral. We incurred a $325 million non-recurring charge related to debt extinguishment in the quarter. Q3 net interest was $43 million. Full year net interest is now expected to be $163 million. Looking beyond 2021, we expect annual net interest expense of around $70 million. The effective tax rate was 29% for the third quarter. Excluding the impact from fees related to debt extinguishment and the charge changes to our European operating model, the adjusted effective tax rate was 20%. We expect the full year effective tax rate to be about 23% on a reported basis and about 26% on an adjusted basis. Regarding earnings on the quarter, Q3 reported earnings reflect a loss of $0.40 per share. Excluding fees associated with our long-term debt restructuring and the transition of our European markets to a partnership model, adjusted earnings per share for the quarter were $0.27. Turning to inventory. Inventory delays worsened throughout the quarter, and our Q3 sales, down 1% versus 2019, outpaced average on-hand inventory of down 11% to 2019. Third quarter inventory ended flat to 2019 and down 1% versus 2020, with average on-hand inventory down 7% and in-transit up 16% versus last year. On-hand inventory at the end of the quarter remained seasonally relevant, with markdowns below Q3 fiscal 2019 quarter end levels. We expect Q4 ending inventory to be up high single digits versus last year, although this point-in-time outlook may change given continued volatility in the supply chain. Regarding the balance sheet and cash flow, we ended Q3 with $1.1 billion in cash equivalents, and short-term investments. During the quarter, we continued to return cash to shareholders, paying a Q3 dividend of $0.12 per share and repurchasing $73 million in shares as part of our current plan to offset dilution. Earlier this month, we announced a Q4 dividend of $0.12 per share. Looking at our global store fleet, our plan to close 350 Gap and Banana Republic North America stores is expected to be approximately 75% complete by the end of the year. With the recent announcement of our agreement to transition to a partner model in Italy, we've now concluded an important phase of the restructure of our European market. All markets are expected to be transferred to our new partners in early 2022. Now I'd like to provide an update on our full year financial outlook, which we are downwardly revising solely based on the acute impact on sales and margins from the supply chain disruptions. Full year 2021 reported earnings per share are now expected to be in the range of $0.45-$0.60, which includes net charges of $445 million, comprised of $325 million in fees related to the restructuring of our long-term debt and approximately $120 million related to divestitures and the transition of our European business to a partnership model. Excluding these charges and associated tax impacts, full year 2021 adjusted EPS is expected to be in the range of $1.25-$1.40. This updated guidance now includes the following assumptions. First, we expect 2021 full year revenue growth of about 20% versus 2020. This range now reflects the expected lost sales from supply disruptions in the second half of 2021 of approximately $550 million-$650 million, including an estimated $300 million from Q3 and an estimated $250 million-$350 million in Q4. Second, we expect full year non-structural air freight to be approximately $450 million. We consciously chose to air approximately 35% of our holiday product, given the two and a half-month delays from Vietnam closures in Q3 and the over three-week West Coast port delays, so that we can give our customers as much holiday product as we can to deliver on their expectations. While this is material to our profitability, we believe it is necessary to further mitigate sales losses and retain customers for the long term. With the added air costs and the meaningful sales impact from supply constraints, we now expect full year 2021 reported operating margin to be about 4.5%, with adjusted operating margin at about 5% for fiscal 2021. This is inclusive of short term air costs in the back half, impacting operating margin by about 270 basis points. Full year capital spend is still expected to be approximately $800 million. In summary, when adjusting for the acute impacts of supply chain disruptions, we are still expecting the year to end at or above our original plan for 2021, demonstrating that our underlying business trends are quite strong and providing real momentum. The progress we've made on our Power Plan 2023 strategy in the face of these challenges highlights the strength of our core business and the health of our brands, and we remain confident in our path as we move toward a 10% operating margin in 2023. With that, we'll open it up for Q&A. Thank you. As a reminder for those analysts who wish to participate in the question and answer session, after the presentation, you may press star one to enter the queue. Our first question will come from Brooke Roach with Goldman Sachs. Good afternoon, and thank you so much for taking the question. Sonia, Katrina, I was wondering if you could help us a little bit with understanding the impact of some of these inventory planning and supply chain delays. As you're thinking about the inventory cadence into the fourth quarter and holiday, it sounds like there may be some shipments that may be stuck on boats in the ports right around the time where those customers are really looking for that holiday season. How are you thinking about carryover inventory into January and February, and perhaps the more lasting impacts of some of these supply chain delays and Vietnam's slow restarts into 1Q of next year? Thank you. Hi, Brooke. It's Katrina. As we said on the call, we have amped up the air freight for holiday in an effort to really navigate the lengthening port delays as well as the late opening of Vietnam. There's a range of possible outcomes for how that could play through the holiday season. We'll see where that lands with holiday inventory. As it relates to the carryover into January and February, the teams have been really looking at, for Vietnam in particular, what units based on the closures do we need to cancel so that we didn't take them at all? What units can get reflowed into a future season? What units are we going to potentially pack and hold for next year? We proved this past year in the front half that pack and hold was a good strategy for us. You know, if we think that things are gonna be too late for the holiday season, we won't put them in stores or online and have them generate markdowns. Instead, we'll hold them for next year. We're using a variety of things to help really navigate the current inventory situation so that we don't end up with a January or February inventory liability issue. Thanks so much. I'll pass it on. Our next question will come from Lorraine Hutchinson with Bank of America. Thanks. Good afternoon. When you think about the supply chain costs, how much of these costs do you view as structural? Are there any actions you can take to take price points higher to offset some of the headwinds? Hi, Lorraine, it's Sonia here. We do think that the Q3 miss and the cost that we're incurring with air is transitory. You know, that's why we have made that bet, because we wanted to maintain the customer promise. Our brands are resonating. We have 10-year high margins through price realization. Our bet was to stay on the offense and have product here to service in holiday, and that's what's included in our outlook. We do think that even with the lumpiness of the quarter, we are on track to our Power Plan first year. As we move into next year, you know, we'll share more at the year-end, but we're confident about navigating that. You know, I think that through the price gains we've seen across all four of our brands, as exemplified by the Q3 margins, we think that can continue through a combination of the investments we've made in marketing, the strong product acceptance we're seeing, as well as the enabling capabilities such as personalized pricing and inventory management optimization as key levers to continue the charge, over the coming years in price gains, across the company. We're really pleased with the level of discounting we've been able to stymie, and we expect that in order to drive health in brands sequentially, that will continue. Thank you. Next will be Matthew Boss with JP Morgan. Great. Thanks. Sonia, at Old Navy, if we think about the 12-point sequential deceleration in comps, how much exactly was due to inventory, and what was the timeline of exactly what went wrong versus the plan that you had in late August? Have you seen trends improve at Old Navy in November? Then Katrina, on the 10% operating margin target, what's the split of the 500 basis points from here if we think between gross margin and SG&A? Thanks, Matt. As you know, we left the first half of this year with really strong momentum at Old Navy with 24% sales growth. When we guided, you know, we had baked in some disruption from Vietnam as we've seen in other countries, about two to three-week closures, as well as a five-day port delay. Because that is what we had seen, that's what we had forecasted, therefore, go forward. What actualized was, as you know, much more dramatic. We had a two and a half month shutdown of Vietnam, which is our top sourcing country, and for Old Navy, slightly higher, particularly for women. The compounding effect of that as well as the worsening port is the new news. As we thought about the health of Old Navy, the momentum even in Q3, the growth in the Net Promoter Score and the growth in brand awareness through its product quality launch, we made the decision to invest in air freight in a substantial way to compete in holiday. That's where we are right now. We think that the majority of the sales loss, all the sales loss, in fact, is due to supply chain loss. You know, Old Navy entered the quarter quite lean in inventory because of the strong demand in the first half, leaner than the portfolio. Then you exacerbate that with the out-of-stocks due to the supply constraints out of Vietnam and the port. That's really what we're navigating in the short term. We do believe it's transitory. We do believe that Old Navy is incredibly healthy and has had, you know, I think all the indicators, the price realization, the brand health, the net promoter score, the loyalty customers, the age of the customer with new customers joining that are younger, you know, all of that bodes well for the right bet to play offense at Old Navy. Matt, as it relates to the 10% operating margin, we remain confident in that for 2023. When you look at our guidance for this year with a 5% operating margin, that includes about a 270 basis point impact from the transitory air freight costs that we're incurring this year. In addition to that, it includes the close to $500 million of sales impact from supply constraints. All of that gives us confidence that this year, when you take out the supply chain impacts, would have been well ahead of our original Power Plan 2023 for this year and more in line with the guidance we provided back in August. We're confident that we'll get through this. As we talked about before, we are looking forward. We're adding the supply chain delays from the ports to our buying timelines for summer. Old Navy is accelerating its move to digitizing product creation for fall, all of which we think will enable us to navigate next year with much less air freight. We can see line of sight then to recovering the lost sales with better supply. You know, more to come when we get into next year, but we do see that this year would have been ahead of plan, and we have line of sight to mitigating these costs and sales losses going forward. Our next question will come from Kimberly Greenberger with Morgan Stanley. Great. Thank you so much. I wanted to ask about the level of SG&A spending that we're seeing. Should we assume that this is the new baseline of spending going forward? When you realized during the third quarter that Old Navy would be low on inventory, was there any thought to perhaps cut back on marketing during the quarter so as not to disappoint the customer? Because obviously with the lack of inventory and driving traffic to the stores through marketing, the potential certainly would have existed. Thank you so much. Yeah. On the SG&A side, Kimberly, as we said, the SG&A deleverage in the quarter was impacted partially by the drop in sales, and then partially by the commitment that we had to really staying the course on marketing as you call out. It was offset by pullbacks in stores expenses, which we did do in the quarter. We really targeted anything that was not customer-facing, to try to pull back on the SG&A in the face of the sales declines that we were seeing from the supply constraints that emerged in the middle of the quarter. I'll let Sonia talk a little bit about the marketing piece. Yeah. I'll just add on, look, we pulled back on payroll and other fixed costs that don't add value in the face of lower sales, as you suggest, Kimberly. Fundamentally, our strategy is working, and we have a fair amount of rigor around marketing effectiveness and marketing spend that gave us confidence that it was the right level of investment. As we look at Q3 for Old Navy, in particular, with Net Promoter Score being up Despite the fact that we had stockouts where we know we did, we had some disappointment. With the fact that the brand awareness is up 8 points for a brand of Old Navy size, that's really dramatic and strong based on BODEQUALITY, their BODEQUALITY launch, that we think the marketing investments were right. We're focused on fixed cost elimination. That's automating our stores processes. That's removing unproductive sales through store closures, and the transition of our, you know, unprofitable international markets. Those are areas that we've made a lot of progress on that affect run rate at SG&A, as well as our store operations. Hopefully, that gives a little bit more color on SG&A. We're very, very committed to digitizing our core operations so that our fixed SG&A costs in our three-year plan continues to be a competitive advantage. Great. Thanks for the color on that. I just wanted to ask a clarifying question. Katrina, could you just tell us what the AUR increase was in third quarter? Thanks so much. Yeah, no problem. We didn't quantify that. What we did say, though, Kimberly, is that in our merchandise margins, they were only down 10 basis points on the quarter, and that was with 200 basis points of online deleverage, as well as 250 basis points of the transitory air freight cost. Hopefully that's helpful. That would tell you that the AUR was up meaningfully if with that 450 basis points of headwinds, we only lost about 10 basis points of merch margin. Understood. Thanks so much. Mm-hmm. Moving on to Ike Boruchow with Wells Fargo. Hi, thank you. Katrina, I wanted to ask about two questions on margin. Trying to understand the air freight dynamic. I mean, is this transitory in the sense that it is in your mind one time? I'm just trying to bridge the 5% margin today versus your 10% target in two years. You know, that's 250 basis points, I think, for the full year. If my math is right, that would get you halfway there to 7.5 and then to 10. I guess it's two questions. One, is that the right way to think about it? Is it one time or is some of this gonna stick? As we build to 10, is this gonna be kind of an even build over the next 24 months, or is this more backloaded to 2023? Just to help us think about that would be great. Thanks. Sure. You're thinking about that right, Ike. This year includes 270 basis points of headwind from what we would say is, air freight cost that is solely attributable to navigating the supply crisis, and so not something that we would see continue. We'll see next year how much of it continues in the front half of the year. Fundamentally, this year would have been that 270 basis points higher without having to navigate these current issues. You're thinking about that correctly. Then we'll give you more, on how it will pace out 2022 versus 2023. I think what Sonia and I would say is, by the end of this year, we're really proud that I would say 75% of the core restructuring of the company is largely behind us. When you think about closing the North America stores, divesting of our two smaller brands, getting our three countries in Europe partnered, we do feel like, you know, we got the debt restructured in the third quarter. We do feel like we've made really good progress against the restructuring plan. The next two years really are going to be about driving now the optimization of that healthy core with these digitization efforts that we think will start to add value, as we talked about through inventory management, through lower return rates, and through automation of some of our core processes to try and drive costs out. We'll talk more about pacing when we get to the end of the year. That's the way to think about that 10% operating margin. Yeah. I'd just add on, I think fundamentally, going through a quarter like this, we have, you know, looked at our strategy and are very resolved in that it is the right strategy. We are putting the customer at the center. Our commitment to sales growth, driven by these four brands that are growing in health with a double-digit operating return is our objective, and we think we're still on plan to meet that. The quarter is a lumpier than we would like, certainly. Not happy with this quarter. If you step back and you look at the year, we will still be on track to that plan that we communicated last October. There is, you know, I think, that to look to as well as the commitment to the next couple of years. Thank you so much. Our next question will come from Adrienne Yih with Barclays. Thank you for taking my question. Sonia, I'm trying to understand, for the quarter, you had probably one of the biggest deltas versus other retailers on the third quarter in particular. So I'm wondering, is there something that's happening with your lead times? I know that there was an initiative to shorten up and tighten up those lead times. Have they become, you know, too short that these types of events can actually have a very, you know, near impact? Then, Katrina, we didn't talk much about, any average hourly rate pressure in that SG&A line. Numbers are floating out there, $15-$17. Historically, Gap's been at the forefront of leading that AHR initiative. So how are you thinking about that, and how should we think about that wage inflation annually? Thank you very much. Look, certainly as a vertically integrated apparel retailer with about 30% of our manufacturing in Vietnam, we were disproportionately impacted, and those who don't manufacture there had a natural advantage. We continue to believe that the scale of our supply chain has always been an advantage, right? It shows up in better rates, in better unit cost and access to last mile. That's advantage. Now that said, we are using this as an opportunity to find ways to further insulate ourselves. While we expected the shutdown to be similar to other countries, a couple of weeks, for example, I think the government delay was substantially longer in Vietnam, especially South Vietnam, where we were most exposed and in Old Navy women's, where we were most exposed. So it was outside of our expectations. Going forward, we're focused on multinational vendors as opposed to single point partners, as well as the digitizing of the product creation process, which will really let us reduce cycle times and lead times in our product to market model. You know, I think we're using this crisis as an opportunity, as we did last year, to accelerate some of the key components of our Power Plan 2023, including digitization, including supply chain transformation and inventory management transformation, which are all opportunities that we see leaning into to move us forward. Adrienne, on the AHR pressure, I mean, we are definitely seeing average hourly rate pressure, primarily in our distribution centers, but in our stores as well. So far, the teams are doing a good job navigating that. You know, we haven't called it out because it's not, you know, sort of one of the biggest headlines, but it is definitely something that we are navigating within our cost structure, as others are. Yeah. It's contemplated in our outlook. You know, what I would say is the automation levels we have in our DCs are a great hedge for us. That being said, we are absorbing some of those AHRs. Then, our stores, we have embedded some headwind into the back half. Okay. Have you given what your AHR actually is? No, we haven't. Okay. No. Thank you very much. Thanks. Best of luck. Thank you. Happy Thanksgiving. Thanks. You too, Adrienne. We have a question from Dana Telsey with Telsey Advisory Group. Good afternoon, everyone. As you think about the supply chain obstacles that happen now, and you think about going forward into 2022 and even into 2023, what are the learnings from this that adjust how you adjust your supply chain going forward? How do you operate differently, do you think, that may help to manage the inventory even better going forward? Thank you. I would say first and foremost, it starts with digitizing the information so that we know exactly where every unit is in our end-to-end supply chain. We had that information, but now we're going to a greater level of detail and more real-time visibility, and that all links to the technology investments we're making in digitizing our end-to-end supply chain. I'd say that's first and foremost. Second is we've always had a supply chain that has given us cost advantage, and now we'll be putting a greater emphasis on resiliency and flexibility. You know, whether that's sourcing more near shore, whether that's multiple countries of origin, we're looking at a variety of levers to enhance our competitive advantage in our scaled supply chain. Dana, particular to 2022, for spring, we have moved a lot of our West Coast port volume to the East Coast, which we believe will help us navigate better. In summer, we've built in the much longer port delay lead times into our buying cycles. Then, as we said, for fall, the Old Navy teams fully pulled forward the digitization of their fall lines so that they are seeing much better speed and flexibility. I think sequentially next year, we feel like we've been incorporating the learnings. Then as Sonia said, you know, digitization has always been that next leg of Power Plan 2023, but we've used this as a way to really accelerate some of that work to make sure that we're getting more advantage faster. Yeah. As we reflect on the 18 months, I would say I'd much rather have a supply problem than a demand problem. On the demand side, we've been, you know, I think, pleased with the response and the customer sentiment. Really it's about navigating the short term transitory issues as we lean into the pricing power, the brand health, the customer acquisition into our loyalty program, which has exceeded our expectations. Thank you so much. Best of luck on the holiday. Thank you. Thank you. Our last question will come from Paul Lejuez with Citi. Hey, thanks, guys. I'm curious how you go about measuring the missed sales in the quarter. I'm wondering, you know, on a related note, can you maybe talk about by brand traffic versus conversion and how that differed in 3Q versus 2Q? Thanks. Yeah. For the missed sales, Paul, we took a pretty literal approach to really looking at what inventory wasn't here to sell, and quantifying what that would have sold for. You could say that there was actually a larger impact than that when you think about the fact that, our customers don't often buy just one unit. They often buy a basket of units. And so there's what you would consider maybe a halo effect to not having those units. But the way we quantify the sales loss is really that literal, don't have the unit, don't get the sale. And then as it relates to brand by brand, maybe Sonia can talk about brand by brand. I don't know that we'll break out the components, but we're certainly happy to give you our thoughts on the Q2 trend versus Q3. Yeah, I mean, I'd say I'm really pleased with three out of four of our brands showing comp, with Gap North America showing a nice acceleration at 13% comp in North America. You know, great quarter for partnerships for Gap, whether it's the Walmart.com growth or the Yeezy Gap icon item with the Perfect Hoodie being launched. The stores really continuing to build momentum. I'd say Gap, we feel great about in terms of momentum. The Banana Republic since relaunch, and the positioning ticks up to the luxury. We've been pleased with the momentum there with customer response. Athleta really just had a spectacular quarter, with 46% sales growth over 2019. The partnerships that, you know, have been a cornerstone and a tailwind for us across the company, the Simone Biles and Allyson Felix partnerships with which accelerated the brand awareness for Athleta, which has been a driver of their sales momentum. I'd say, you know, for our brands and for Old Navy, I think while we had, as I said, healthy customer indicators, we simply were just not able to meet the demand, to the level that we wanted. We'll continue to then navigate that for the back half, and are planning to compete as best as we can in Q4. Thanks, Sonny. Did that show up in lower conversion in 3Q versus 2Q or lower UPTs? Any metrics you can share that help quantify the decel in from 2Q to 3Q as a result of this lower inventory? Yeah. I know, Paul, we don't actually break out those comp components. I think what we've said is the deceleration that we saw from Q3 was totally attributable to the lack of supply, and inventory was down 11%, and Old Navy was down more than that. You know, hopefully, that's helpful, but we don't, as a practice, break out traffic and conversion. Okay. Thank you. Good luck. Thank you. That does conclude the question and answer session. I'll now turn the conference back over to you for any additional remarks. Thanks for joining, and have a great Thanksgiving. Thank you. That does conclude today's conference. We do thank you for your participation. Have an excellent day.