Gap Executive Insights: Confident Outlook and Costs

On Thursday, Gap, Inc. (NYSE:GPS) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what executives shared with investors and analysts.

Confident Outlook

Kimberly Greenberger – Morgan Stanley: Glenn and Sabrina, I wanted to just ask about the outlook here for the rest of the year. We saw just an incredibly good first quarter, it sounds like there is a little more caution as you would look out to the second, third fourth quarter of the year. Is this just trying to maintain expectations as – and let the results kind of speak for themselves or are there some benefits perhaps in the first quarter that you are worried won’t repeat in rest of the year or just trying to square the great performance we saw so far this year with what seems to be a most conservative outlook for the rest of the year?

A Closer Look: Gap Earnings Cheat Sheet>>

Sabrina Simmons – EVP and CFO: So, I guess, I am going to start by saying that we actually feel really confident internally about the progress we are making. So, I think, that’s the important headline. That said, we are only finishing here the first quarter and entering the second, so as I said in my remarks we have three big important quarters ahead of us, so we really want to just remain measured in our outlook. In addition to that, I’m just going to do three quick reminders on themes that we outlined since the Q4 earnings call that are still true, which is, although we feel good about our average unit costing in the back half, we are reinvesting some of that into quality and assortment mix decisions that obviously we feel good about, but it’s the AUR piece that will need to play out as the year goes on. Second reminder is that if our momentum continues as we had in the first quarter, we definitely plan on continuing investments in these areas like store payroll, store-related expense, and marketing. So that’s something we’d like to do after four years of really, really tight expense discipline. Then finally, and this is a really important point, as I said, we are committed to distributing excess cash, but we’ve always been very opportunistic about our program, and so, I think it’s going to be really important to take into account the fact that the share of purchases in the first quarter were minimal, and that it’s really going to impact sort of how everyone models out their weighted average shares. Obviously, the more back half weighted share repurchase becomes, the less impact it’s going to have on the share count for the year.

Costs

Adrienne Tennant – Janney Capital Markets: Glenn or Sabrina, can you talk about your average unit cost trajectory? You probably evolved well through third quarter and into holidays. We know that the fall was up 20%. So, can you give us any color as to, do you get half of that back, do you reinvest half, any sort of color there would be very helpful? Then, kind of on the same path, really the same question is, inventory unit plans?

Sabrina Simmons – EVP and CFO: So, I’ll start that, Adrienne. Last year just to be clear not all was in that 20% we said our entire back half was up about 20% and that included holiday which was actually the peak costing was in holiday last year. So, that’s just a nuance that I just wanted to make sure we’re grounded on. With regards to this year, you’re right we’re not done with the second half, we’re not done with holiday yet, but we feel good about our costing. We’re not going to quantify numbers this year it was highly unusual for us to ever do that. Last year we did that because the escalation was so unprecedented and meaningful to our P&L. So, we’re not going to get into precise numbers, but again we do feel good about that, which is why we said we feel confident about healthier margins this year. But we will be reinvesting some of that in important key categories. We’re not reinvesting everywhere. It’s going to be in categories that are important assets to the brands like suiting at Banana Republic, Denim at Gap Brand, etcetera and then there is important mix shift. So, a good example of that would be investing in more Gap fit, the athletic pant putting it in more stores and that’s a higher AUC than things like panties that it might be replacing. So, those are examples directionally of where we’re headed.

Adrienne Tennant – Janney Capital Markets: I guess directionally units would they be up?

Sabrina Simmons – EVP and CFO: Then on the units as the pressure on AUC eases it will depend on divisions, but I’m going to use Old Navy as an example since they had that deepest escalation last year, we pulled back the most units out of Old Navy and that’s a value business so of course we’d like to get to a more normalized level of kind of units per store there. We’re going to watch out total inventory dollars. But as AUC comes down we would like to add more units there, yes.

Adrienne Tennant – Janney Capital Markets: Okay, so up year-on-year.