蓋璞 (GPS) 2014 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen.

My name is Amber and I will be your conference operator today.

At this time, I would like to welcome everyone to the Gap Inc.

fourth-quarter 2014 conference call.

(Operator Instructions)

I would now like to introduce your host, Katrina O'Connell, Vice President of Investor Relations.

Good afternoon, everyone.

Welcome to Gap Inc.'s fourth-quarter 2014 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 the forward-looking statements, as well as reconciliations or descriptions of measures we're required to reconcile to GAAP financial measures, please refer to today's earnings press release as well as our most recent Annual Report on Form 10-K and our subsequent filings with the SEC, all of which are available on gapinc.com.

These forward-looking statements are based on information as of February 26, 2015, and we assume no obligation to publicly update or revise our forward-looking statements.

I also want to mention that Sabrina will be using slides to supplement her remarks, which you can view by going to the Investor Relations Section at gapinc.com.

Joining us on the call today are CEO Art Peck and Executive Vice President and CFO Sabrina Simmons.

Now I'd like to turn the call over to Sabrina.

Thank you, Katrina.

Good afternoon, everyone.

Let me start with some highlights for the year, and then I'll go through Q4 results before turning to the outlook for 2015.

For the full-year, EPS grew about 10%, excluding the estimated year-over-year impact from foreign exchange.

On a reported basis our earnings-per-share for the full-year grew 5%.

Our largest brand, Old Navy, delivered positive comps in each quarter and finished the year with a strong 11 comp in Q4.

We achieved our goal of leveraging expenses at 25.6% of sales; our SG&A rate was the lowest since 2005.

We generated free cash flow of $1.4 billion and distributed about $1.6 billion to shareholders through share repurchases and dividends.

Moving to the fourth-quarter and full-year financial results: regarding earnings, there's been quite a bit of focus on the recent strengthening of the US dollar and its impact to 2015 earnings, which I'll address, of course, in the outlook.

But it's important to note that we've already absorbed a great deal of foreign exchange headwind in 2014.

Full-year net earnings were $1.26 billion and earnings-per-share were $2.87.

This includes about a 14-penny unfavorable impact from foreign exchange.

The FX impact was most pronounced in the fourth quarter.

Excluding the estimated year-over-year impact from foreign exchange, Q4 earnings-per-share grew about 20% versus last year.

On a reported basis, net income was $319 million and earnings-per-share increased 10% to $0.75 per share.

Turning to sales, sales for the fourth-quarter were $4.7 billion and increased 5% on a constant currency basis.

Comp sales were up 2%.

For the full year, net sales were up 2% to $16.4 billion and up 3% on a constant currency basis, driven by Old Navy's strength.

Comparable sales were flat for the year.

Moving to gross margin, fourth-quarter gross profit increased by $65 million to $1.7 billion and gross margin expanded by 40 basis points to 35.2%.

Merchandise margins were up 60 basis points for the quarter, and rent and occupancy deleveraged 20 basis points.

For the full year, gross profit was $6.3 billion and gross margin was down 70 basis points to 38.3%.

At the beginning of 2014, we stated that foreign exchange would likely pressure our merchandise margins.

For the year, merchandise margins were down 40 basis points, driven by this FX impact, as well as disappointing performance at Gap brand.

As anticipated, rent and occupancy deleverage by 30 basis points.

Regarding SG&A, for the fourth-quarter total operating expenses were $1.1 billion with marketing expenses at $178 million, slightly below last year.

Total operating expenses for the year were $4.2 billion and leveraged 10 basis points, despite moving $160 million of credit card income out of SG&A and into merchandise margins.

Marketing expenses for the year were $639 million, about flat to last year.

Regarding stores and capital expenditures, we opened 116 new Company-operated stores in 2014 net of closures.

In line with our strategy, international store growth was focused primarily in Asia.

In North America, store growth was focused on our outlet channel and Athleta.

Not surprisingly, closures were focused on Gap's Specialty North America.

Our square footage grew by 2.4%, in line with our guidance.

Store counts and square footage by division are in our press release.

Regarding the balance sheet and cash flow, as we stated would be the case, we improved inventory levels throughout the year.

Inventory dollars per store were down 5.5% at the end of the fourth quarter.

This was better than our previous guidance, driven by foreign exchange favorability and stronger than expected sell-through at Old Navy.

We ended the year with about $1.5 billion in cash after having distributed about $1.6 billion to shareholders.

Ending share count was 421 million shares.

And now I'd like to share our outlook for 2015.

Regarding earnings per share, on a reported basis, we expect earnings per share to be in the range of $2.75 to $2.80.

Included in this guidance is an estimated unfavorable impact from foreign exchange at current spot rates of about $0.16, an unfavorable impact of about 13 pennies, due to the West Coast port situation, and an expectation for a slower turnaround at Gap Brands.

Excluding the impacts of foreign exchange, the port issues and last year's gain on sale, our underlying expected EPS growth rate for 2015 would be about 12 percentage points higher or about 9% EPS growth at its midpoint.

Now let me address the port issue.

While we've been managing the slowdown at the ports for some time, it's the additional weekend closures in February and the resulting additional backlog that are driving the expected negative impact to earnings.

In simple terms, the first quarter is impacted by having fewer units available for sale.

It's important to note that this is particularly impactful to Old Navy, given the importance of the Easter holiday to Old Navy's business.

Additionally, the second quarter is impacted by late units arriving in Q2 and potentially being sold at lower margins, given that fall slows come in slowly thereafter.

Regarding our inventory guidance, excluding the impact from the port situation, we would have expected inventory dollars per store to be slightly down at the end of the first quarter.

Given the fluidity of the situation, we'll provide an update on inventory later in the quarter.

Moving on to the impact of foreign exchange to the year ahead.

At current spot rates, we estimate that foreign exchange will negatively impact our reported EPS growth rate by about 6 percentage points.

This equates to about $0.16, or over $100 million of pretax earnings.

While comp is reported on a constant currency basis, the remainder of our reported performance is subject to currency fluctuations.

As a reminder, our largest foreign subsidiaries are in Canada and Japan, with combined sales in these two countries of over $2 billion.

Both the Japanese yen and the Canadian dollar have depreciated by about 30% over the past two years.

With the continuing depreciation of these and other currencies against the dollar, our reported results have been and are expected to be negatively impacted.

There are two primary impacts of foreign exchange.

The first is translation and the second impact is the economic impact to our merchandise margins.

We hedged the majority of our inventory purchases for our foreign subsidiaries 12 to 18 months in advance.

Effectively, this delays the impact of depreciating foreign currencies on most of our cost of goods.

However, as the old hedge rates lapse and new less favorable hedge rates come on, the cost of goods in local currencies will increase.

In addition, unhedged inventory purchases will be subject to foreign exchange movements.

Moving to expenses and operating margins, we have a strong track record of managing expenses and we intend to continue that.

However, it's unlikely we'll leverage expenses in 2015.

As a reminder, we're lapping the $39 million gain on sale, as well as absorbing the increase to our minimum hourly wage that we announced last year.

Given the negative impact from foreign exchange, the port issues, and last year's gain on sale, we expect operating margins to be down about a point to 2014 on a reported basis.

However, excluding these three factors, we expect that operating margin on an underlying basis would modestly expand.

Here are some other guidance metrics.

We expect to add 115 net new stores, with our year-end store base in China growing to over 150 stores and Athleta store base growing to 120 total stores.

Square footage is expected to increase about 2.5%.

We expect capital expenditures to be about $800 million, with the increase focused on OmniChannel and supply chain capabilities.

We expect depreciation and amortization to be about $525 million, and we expect our full-year effective tax rate to be about 38%.

Finally, we remain very committed to our principle of returning excess cash to shareholders.

Underscoring that commitment, we're pleased to have announced a new $1 billion share repurchase authorization and our intent to again increase the dividend to $0.92 per share.

As we enter 2015, we remain focused on using all of our levers to further drive value for our shareholders.

Thank you, and now I'll turn it over to Art.

Thank you, Sabrina, and good afternoon.

It's really a pleasure to be here addressing all of you.

And before I go into anything concerning the business, and looking forward, I would be remiss not to thank Glenn for everything that he has done for the Company, his tireless effort over the last eight years, what he brought the Company in terms of vision, strategy, discipline and, most importantly, results.

And I have to thank him, as well, for everything he did as we worked shoulder-to-shoulder over the last few months during this transition time.

We, as a team, feel that he was incredibly helpful to all of us in effecting a smooth transition, in sharing his perspective on what we need to do going forward, and then allowing the team to get settled in to hit the ground running in 2015.

So, again, I need to thank him on behalf of myself and the team for everything that he has done.

So I've been in the job now for officially about three weeks.

I am very bullish on the future of this Company.

We have great brands with tremendous potential.

I'm extremely pleased with the team that is now in place.

And equally pleased with the consistent sense of urgency that every member of my team has in making the changes that we need to make to compete successfully and consistently.

Product is critical for us and consistent product, season after season, appropriate to our brands, is a nonnegotiable.

As I look forward, I first want to talk about where we are today.

Let me spend a moment and talk about the guidance that Sabrina gave to you.

To be clear, I fully believe in the economic model that we have articulated and that we have been executing over the last several years.

That said, there are three issues that are going to affect our performance in 2015.

The two are macro issues, the foreign exchange and the port situation, and the third is the performance of Gap Brand.

I want to double-click for a moment on Gap.

None of us are satisfied with the performance that we're seeing at Gap.

I made a very quick change with senior leadership there.

I did this because we were not seeing the performance improvement in the business that we needed to see.

And specifically, I was not seeing the women's product back on track the way it needed to be for the brand to perform to its potential.

Jeff and I are, together, focused on what we need to do in order to get the brand back on track and it starts with righting the women's business.

There's an aesthetic issue, which we're working on today with urgency.

We're pleased to see that the denim business seems to be showing signs of life, but Gap has a brand is much more than denim, and we need to have the women's business hitting on all cylinders in order for the business to deliver the performance that we expect.

2015 is largely bought, really through fall right now.

Jeff and the team are focused on making product changes that they can make, but those will be modest and incremental until we get to late in the year.

Holiday is under significant scrutiny now.

I have looked at it.

Jeff has looked at it.

The team is focused on it to make as much improvement as we can before we buy the product.

Let me quickly refresh your memory.

In early 2011, I sat in the same seat that Jeff is sitting in right now at Gap Brand.

I know from my experience, and I'm sharing this with Jeff, that we can get the brand back on track quickly with a relentless focus on product.

When Jeff got into his role, he moved quickly to make some changes on his team.

The obvious hole has been the leader of design and I'm very pleased to announce today that Jeff has hired Wendy Goldman, who will be rejoining our Company in a new role as head of design and product development for the brand.

I've gotten to know Wendy over the course of the last few months, and I feel very confident that she will be a strong, creative leader and a significant addition to the team.

She knows our Company from eight years here early in her career and, more importantly, she brings her experience from a very successful 11-year run at Limited Brands.

Again, 2015 is going to be a year of hard work and getting the brand back on track.

But I'm very pleased that we have the team largely in place who will be doing that work.

Now, that said, I am bullish on where we are overall as a Company.

The consistency of performance that we've seen with Old Navy really premised on the back of the season after season good product that is on trend and on brand gives me a good deal of confidence.

And it's the product of work that Stephan and the team have done around how they think about trend, how they build the assortment, and how they line up all elements of the business to express the brand consistently through marketing, product and in stores.

I'm very happy with what I'm seeing with the team at Banana Republic.

Andi has excellent taste; she understands the brand and she has been one of our most consistent operators inside the Company, having worked directly with me in a number of roles.

Andi and I both expect more from the brand.

April is Marissa's first product flow.

We saw fall presented last week at fashion week to a very good reception and reaction.

And so we are committed to continuing to move Banana forward.

The proof is always in the product that we're putting in the stores, but we're excited about what we see and have high expectations.

Let me spend just a moment, then, on Athleta.

We're excited about what we're seeing there and we're excited about the continued growth, both in the active space and in the space where active meets her ready-to-wear wardrobe.

You also have seen, given how excited we are, the fact that we continue to push on Fit inside of Gap, and on the active expression inside of Old Navy, as well.

So this is a space that, not only through Athleta, but as a Company, we are very committed to.

Over the course of 2014, we made significant progress in the OmniChannel space.

And we're very excited about the customer response there so far.

And we're pushing forward to roll out all of the capabilities across our brands in North America as quickly as possible.

On top of OmniChannel, I just want to spend a moment really more broadly on experience.

And if you've been following some of the changes that we have made, you would have noted that we brought together the traditional marketing activities and our digital business inside both Gap and Banana Republic.

Why am very excited about that?

I'm excited about that because today, the digital expression of our brand is the primary way that our customers engage our brands.

And if you look at our traffic, the bulk of our traffic is coming into our digital properties and I am convinced that, going forward, we will win or lose at our digital leased line.

Historically, our websites needed to be and have been tremendously effective and efficient channels that our customer bought through.

We need to continue to be that going forward, but our digital expression of the brand needs to be more than that.

It needs to be aspirational, holistic, emotional, in a way that few people have expressed their brands digitally, and we are focused on doing that across all of our businesses.

I want to spend a minute on global growth.

Glenn and I worked shoulder-to-shoulder to create the strategy and growth and we've been pursuing it consistently over the last several years.

It's my intent to continue to pursue growth and obviously through all of our brands, but most importantly through Old Navy's expansion into China and Japan.

We continue to open stores in China with the plan for this year being about 40 stores, which is consistent with our store opening over the last year or so, as well.

Let me close just by coming back a little bit to where I started.

I am very excited to be sitting in this role.

I am very optimistic about the prospects that this Company has in front of it.

I'm also very honest and objective and have a great deal of urgency about some of the work that we need to do to get parts of the business back on track.

I can give you my strong assurance that I and my team are resolutely committed to doing what's necessary in order to make that happen as quickly as possible.

Thank you.

Katrina, I will pass it back to you.

That concludes our prepared remarks.

We'll now open up the call to questions and we'd appreciate limiting your questions to one per person.

Thank you.

(Operator Instructions)

Barbara Wyckoff, CLSA.

When will Gap and Old Navy be in a place where they can react in season to accelerate the flow of bestsellers through the fabric platforming initiatives?

And if it's not happening yet, when will this start to occur?

Thanks.

Barbara, it's Art.

Thanks for asking that.

I really appreciate it.

So here's the reality is that we're actually set up to do that today and we are continuing to grow that capability, not just in Gap and Old Navy, but across all three of our big brands.

It logically connects to the question, obviously, of the port situation and so I'll address that proactively here, which is that with Gap in particular -- well, the port situation for one thing, that is something that is very short-term and really outside what we've built in terms of our response and supply chain.

We've reacted to that through logistics and I'll let Sabrina talk more about that.

I'm sure that will come up.

With Gap, and the aesthetic corrections that we need to do, what I'd like to be able to tell you is we can correct it with the response and supply chain capabilities that we've built.

The reality is that when we're more rebooting the aesthetic elements of the brand, those are capabilities that are set up to help us more in season with chase and open to buy and those types of things.

It's really a bit disconnected from the problem we have in Gap right now, but I'm working very closely with Sonia Syngal, who is our head of supply chain and product operations, as well as brand presidents.

These are capabilities we've talked about before, we are continuing to build them and we're very bullish about their ability to impact the business.

Great.

Thank you.

John Morris, BMO Capital Markets.

I guess kind of a big picture question for you, Art.

You touched on a number of the initiatives.

I think we can get a pretty clear sense of the priorities you've got mapped out, clearly likely beginning with Gap women's.

But beyond that, maybe first of all, if you can talk a little bit more about how you would rank those other priorities?

What you really want to address in the coming year, but also an eye towards any initiatives this year that might be different from the course that was charted most recently in the past under Glenn.

Thanks.

Sure, John, thanks.

So, clearly, Gap is at the top of my priority list.

As I said a few minutes ago, none of us are happy with the performance.

Not me, not Jeff, not the team.

And so we're very focused on fixing that as quickly as possible.

If I look back and step back from that a little bit, as Gap is doing that work to fix itself right now, there are broader strategic priorities and we'll talk more about those, obviously, over the course of the next several months.

I would remind everybody that I think I'm day 26 or something like that, so still bringing the team together.

That all said, and I said this before when we spoke a quarter ago, I don't want to communicate at all that there is going to be a big shift in our priorities.

Product is absolutely critical to us.

And underneath product as a priority, our response is supply-chain capabilities, our seamless inventory capabilities, fabric platforming, obviously design and design talent, all super critical.

And when I am talking product inside and outside the Company, its on-brand, on-trend product but consistently.

And that consistency issue is one of the things I'm really focused on.

And then the second issue is really for me, it's experience.

And under experience, it's the OmniChannel, the physical and the digital experience and how all of that comes together.

And so it's really, about in my words, powering up our focus on those as much as anything, rather than deviating from them.

And then, of course, global growth, which I referenced, and I want to come back to, which is we are committed to continuing to build out our global structure.

And to put consistent product into it appropriate to our brands and on-trend season after season.

Not a lot of deviation at all from those is our priorities.

Thanks.

Super helpful.

Thank you, Art.

Yes.

We will go next to [Adrianne Neve], Jana Capital Markets.

I was wondering if you could -- obviously it goes without saying that product is paramount, but if you could address where you see further opportunities to incorporate technology into the business to either drive sales or improve and enhance the operational aspects of the business?

Thank you.

Some of what -- I appreciate the question, it was a good one for me since I'm passionate about this as well as a number of other things.

I think as we've said, we're really continuing to push these OmniChannel capabilities, which have been for us, more what I would call spot capabilities, so reserve and store, shipping from store, find in store, and now we are testing mobile POS, which we've talked about before.

Knowing now how the customer is reacting to those, having learned a lot about how it comes together to form a customer value proposition, and now starting to integrate them into a more holistic offer, that's really the focus and it's going to be the focus over 2015.

We're testing mobile POS right now, which is really, as we've been talking about, as we push our POS to really a cloud-based POS that brings all of our web services in, we've been testing that on a small device in stores.

And both the sales associates and the customers have been reacting incredibly positively to that.

And so it starts to open up a number of things for us, different ways of interacting with our customers, giving the sales associate those tools, different ways of engaging with those customers in the fitting room where we can actually get a transaction done.

Of course you pivot back to what does that mean to the real estate that we currently have committed?

The church that we've built for Easter Sunday, if you will, with all the registers at the front of the store, and can we start thinking about putting some of that real estate to more efficient use than underutilized registers for much of the year?

And so those are all things that we're absolutely focused on.

It's well past proof of concept, both in terms of technology as well as how customers engage, and you'll see us continue to push those out over the course of this year.

Great.

Thank you.

Simeon Siegal with Nomura Securities.

What's the right way to think about the other segment sales and profitability line as you guys close Piperlime and any update on the intermix business and the opportunities there?

Thanks.

So the other growth, the other primarily is going to be Athleta, Intermix and Piperlime.

It is being impacted to your point, Simeon, by the fact that we're winding down Piperlime.

So that's one of the primary impacts.

Athleta continues to be on a very good path so we're very pleased with the year and how it's all gone.

Lorraine Hutchinson, Bank of America Merrill Lynch.

As you think about product purchases for the back half, what are you seeing in terms of average unit cost and does that have an impact on how you plan on pricing your product in the back half?

I'll start with that, Lorraine, and then if Art wants to chime in, that would be great.

With regards to average unit cost, we've talked about the fact that spring didn't really have a lot of change because when we placed spring there wasn't a lot of difference in the cotton prices.

We start to see some benefit in summer and certainly in the back half, so that's all good news.

Directionally, though, when you do the math on what component cotton is to our total AUC, and I'll just do something high-level and illustrative for you, if you have a 20% improvement in cotton, it equates to roughly about a 2% improvement in AUC.

And that's before we make any mix decisions or any other changes to our assortment, so it's super helpful, it's a positive thing.

But it's not an enormous lever, even into the back half.

Again, but it's helpful.

With regard to pricing, I would say, given the promotional environment we've been living in, there's not really a great case, in my view, for changing pricing and giving that to the customer.

Of course, what we'll be looking to do is trying to return to healthier margins in 2015.

So that could be a lever, some of it offset by foreign exchange, but the cotton tailwind could be a lever.

And then we'll be managing our promotional cadence to try and also support healthier margins in 2015.

Thank you.

(Operator Instructions)

Matt McClintock, Barclays.

I was wondering if we could focus on Athleta for a minute.

Plans to only open 20 stores this year seems like a slowdown from growth over the past several years, so just wanted to think about how you're thinking about growth for that specific brand?

That would be helpful.

Thank you.

Thanks, Matt.

Art here.

I'm actually really glad you asked that question.

So let me just step back for a second and talk a little bit about the journey that Athleta is on.

Obviously started as a catalog and then an online retailer.

We only opened stores a few years ago.

And as we've opened these stores, the number one store in the market and then the follow-on stores in that market were really learning a lot about building a retailer from the digital world, if you will, into the physical world and how the two channels interact with each other.

And what we've learned is very positive, which is that we can build stores and we can continue to get the growth out of the direct channel at the same time, which is obviously great growth, accretive growth and really attractive from that standpoint, without having to put physical assets in the ground.

And so I have no modification in my mind in any way, shape or form about the growth rate and the growth prospects of the business.

Just as we're learning about how we get that between the two different channels, we're trying to be really responsible, obviously, and optimize the overall returns of the business by the differential growth rate of the two channels.

So if you or anyone is interpreting this as somehow we're losing a little bit of our optimism for the business, that's absolutely the wrong interpretation.

Thanks, Art.

Kimberly Greenberger, Morgan Stanley.

Great.

Thank you.

Art, I wanted to ask you about the supply chain and I'm trying to reconcile two comments that seem a little bit contradictory.

You indicated that you've got current capabilities to be able to respond in season to bestsellers and adjust your merchandise flows.

But I think during your prepared remarks, you said that you're basically in 2015 already bought through fall here at the end of February.

So I'm just trying to understand how those two things happened simultaneously?

And is there a point in future years where you think we'll be sitting at the end of February, not bought out for the next six to eight months?

Yes.

So I think I can resolve the potential inconsistency that you see there.

And part of the issue is that, just being very straightforward on this, with everything that's been going on at Gap, they are probably on the lagging side of having implemented some of these supply-chain capabilities.

And so even now with Jeff coming in, Kimberly, we're actually taking a pause and we will be shortening our product calendar, number one at Gap.

And then, number two, pushing much more aggressively on some of those things that in season or close to being in season allow us to be very responsive, like an aggressive push on fabric platforming and those kinds of things.

And so why I'm bullish on this?

I see this working in our other businesses.

I wish Gap had pushed farther forward, because it would give us the ability to be a little bit more responsive right now.

They're not as far as they will be very quickly.

And then the other issue is if you look at it, let's rewind from fall.

Fall is sometime probably in early August, so it's actually not that far away right now, if you consider the production cycle on Ocean time, et cetera, et cetera.

And so I don't think it's contradictory at all and we are definitely pushing forward on this.

I wish Gap was in a different place, but they're the laggard as it's come to implementing this and that's something we're correcting right now.

Thanks so much.

Susan Anderson, FBR Capital Markets.

I was wondering if you could maybe expand just on your vision for the Gap segment, what needs to transform there?

Do you think it's all product or is there any other structural pressures going on, given the entrance of new competitors?

And then do you feel comfortable with its store base, given the focus on e-commerce and OmniChannel?

Thank you.

That's funny, because I remember sitting in our design center in 55 Thomas in October of 2012 -- I'm sorry, of 2011.

And a question was asked that was very similar to that when I was in Jeff's seat.

And as of February of 2012, when we really had on-brand and appropriate product that was really aligned with the trend of the season, that was the Be Bright marketing campaign that we brought it to market with.

And then we saw a very, very good numbers come out of the brand almost instantaneously with getting the product back on track.

And so I'll be honest with you, right now, Susan, I'm really much more focused on reestablishing the aesthetic direction of the women's business and getting product in our stores that reflects what our customers expect, which is product that is feminine, product that has an optimism associated with it, obviously casual product with an estimate American aesthetic.

And I know there is upside associated with doing that.

And then we do that and that gives us the time to then look at any other issues.

I would also just refresh the memory that when I was sitting in that seat, we closed a couple hundred stores.

And had made very good progress there from a standpoint of really rationalizing the fleet to be in the kind of real estate that we felt a brand like Gap should be exposed in.

And so right now I want to stay focused with Jeff and the team that he's pulled together on getting the product aesthetic right.

The other thing I'll say here, again, is that -- and as we talked about the product aesthetic, we have a very good men's business' the kids and baby business remains healthy for us' and the Fit and Gapbody business is a good business also.

And so for me largely this is a women's business right now and it's what our focus is on.

Great.

Thanks.

Good luck next quarter.

Thanks.

Oliver Chen, Cowen and Company.

Regarding your focus on your feature here, regarding the aesthetic direction, are you thinking that the women's tops -- which classifications might have the most opportunity?

And then how do you think you can attempt to marry the great efforts for consistency versus creative and balancing the art and the science of retail?

I'm most curious about the Gap division and what kind of observations we should look for as we check the stores.

Appreciate the question, Oliver.

And I can see you are thinking about the business in the right way.

Not surprising.

Right now, as I mentioned, we're seeing a little bit of life in denim and the Resolution Denim has gotten a pretty good reception from customers.

They're really finding that they like the whole notion of it, the fit, the fabric, et cetera.

Obviously denim has been -- I characterize it as the customer has taken a bit of a pause in denim over the course of the last several quarters.

And I would say, as much from our business but also having just been in New York during fashion week and seeing what was being talked about, what was in the showrooms, what the news was in denim, I'm not going to call a turn in the denim business, but I'm feeling, for the most part -- I'm feeling now differently than I felt for a while, which is that she's probably coming back to denim in a way that we haven't seen her be for several quarters.

So encouraged there.

But it's early days.

Tops is tough right now.

And it's wovens and knits.

It's a fit issue.

It's a fit intent issue.

It's an aesthetic issue.

And so we're very much focused on that.

And very much focused on fixing that as quickly as possible.

And so if I had to go to one category, I would definitely say it's in the tops business.

And obviously both knits and wovens for Gap Brand are very material categories and the product is just not -- she's just not responding to the product there right now at all.

So let me just stop there.

That's work that we need to do.

On the issue of the tension of consistency and creativity, I actually think that's a false dichotomy, to tell you the truth.

And let me just give you an example.

Fit.

Fit in bottoms -- so fit for us, which is a huge issue with respect to a women's loyalty towards her pants, we should be the experts at fit.

We had been the experts at fit and shame on us when we lose consistency on fit because then she can't count on us.

It also, as you might imagine, has an impact on the digital business because if she counts on the fit and the fit has changed, then we obviously have an issue with returns right now.

And so fit consistency is a science.

It's a discipline.

In no way does it impede what we need in terms of the great creativity of our design teams.

So I guess I've worked in other creative businesses during my career and I've always found that, rather than being a trade-off between consistency and discipline and creativity on the other side, consistency and discipline enables creativity.

And, frankly, takes a lot to work away from what the team has to do at the end of the day.

So this is really the reaction I see from our design teams as well.

They want to win and they want to have a foundation that they can build on every season.

Thank you.

That's great to hear.

Thanks a lot.

Dorothy Lakner, Topeka Capital Markets.

Just going back to Gap Brand again, for a second, Art, I just wondered, you've described what you're going to be doing, but what should we look for?

What should we see in the stores as we move through this year of transition, I guess?

So the words that I use when I describe Gap, which I think are very relevant, are casual, optimistic and American.

And if you haven't been in our stores and looked at the women's assortment, I would suggest that you do, but I suspect that you have.

And I would challenge you to find that we are consistently expressing casual American optimism through the product expression that we have in our stores.

And so those are the words that we're using.

And what does that mean tangibly?

In summer what you will see is there some more -- it was a very neutral summer that we had last year.

You will see more color, brand-appropriate color, coming back into the business by the time we get to summer.

So that's a change that has been made.

Print and pattern, obviously, as we get into late spring and summer -- not so much in spring, but you'll see a bit more of that when we get into summer as well.

And then as we move into fall there's a little bit more.

And then the work that's going on right now on holiday is holiday for Gap is really a time for very a optimistic oppression of the brand.

At a time when a lot of the industry tends to go to a very dark and neutral place, we have done very good business over many years with a more optimistic expression of the brand during that timeframe.

That doesn't mean go nuts on crazy stripe again, go nuts on Fair Isle or some of the other cliche trends, perhaps, that you see during holiday, but we have an opportunity to express the brand in a very optimistic and colorful way there.

But also, obviously, in a feminine way, which is the other piece that's missing from the women's business.

And so I'm not going to call a turn on the business right now.

I'm being very honest with you about the work that's going on and when you will start to see some change and I'm not promising anything until we get later in the year.

But I think even as we get to summer and the fall, we'll start to see the brand shift a little more to be expressed through the appropriate filters of the brand.

Great.

That's very helpful.

Thanks so much and good luck.

Thomas Calandra, Susquehanna International (sic) Group.

Question about the marketing.

I think the overall spend was only up slightly, so I was hoping you could remind us what the incremental spend was for the Gap Brand in 2014.

And, Art, given your digital expression comments, how should we think about dollar spend in 2015 and any adjustments to the mix in the spending?

Thank you.

I'll let Sabrina grab the specific number, if she wants to talk about that.

I'd rather go to a slightly different place, which is to really talk about this change that we've made in the structure of digital and marketing.

And it's something that I did very intentionally.

And I did it very intentionally in the two brands that we did it in under two leaders who I know very well and I think are very enlightened and very capable leaders.

Now, you're going to want to know what does that mean at the end of the day?

And let me give you a couple things that we'll probably continue to talk about.

Our brands are being engaged digitally much more so than through traditional marketing vehicles.

And the good news about digital engagement is we have a much better line of sight to the return of our spend in digital engagement versus some of the traditional marketing vehicles, like a billboard or a transit shelter or those kinds of things.

And so part of what I'm trying to do by bringing those two things together is to really get our arms holistically around how the customer is engaging our brand and then start managing that for the highest returns in our overall spend.

And I'm not going to say that we are going to spend less marketing, but, honestly, I'm pretty confident that we are going to be able to see a path towards evolving to higher returns on the marketing spend that we have across a number of different vehicles.

The second thing which I've highlighted, but I want to highlight again, is that we have had the luxury of living with our digital expressions of our brands, our websites as being very efficient transactional channels.

Today, to me, it becomes an end, which is those digital properties also have to carry the aspiration and the emotion of the brand, as well as being very efficient channels.

And by bringing those two things together, we really now have leaders and an organization that's going to be thinking digitally first in everything they do.

And it starts with very simple things, which is if you're shooting marketing assets for traditional marketing vehicles, oftentimes those assets don't manifest themselves in the best way possible for digital use.

And we just need to put to a digital first mindset, and I do believe we'll get some efficiency out of doing that.

I'm much more excited about the effectiveness of our overall spend that we're going to see.

Thank you, Art.

Paul Lejuez, Wells Fargo.

As you think about the issues facing Gap Brand, Art, I'm just wondering if Gap internationally is facing similar issues, or have they out-comped the North American business?

And also specifically, if you could comment on how Gap China has performed both for the full year and in the fourth quarter?

Thanks.

So it's kind of a mixed bag, quite honestly.

And really depends as a function of a couple of things.

Obviously how the assortment was bought and how a team in a given part of the world put pressure on different parts of the business.

In some places in the world, like in China as an example, our kids and baby business indexes much higher into the overall business than the adult business.

And that business has been pretty consistent and pretty strong.

And so here's what I would say is we have had the same -- product issues that have been the product issues in North America have been product issues everywhere, in that we have brought the business different and the customer engages the business different.

We've seen levels of strength in China, as an example, that have been better than what we've seen in other parts of the world.

I don't know, Sabrina, if you want to talk at all about specifics of the China business?

We don't break out very much, so I think directionally that's appropriate.

I think we had our success in China, certainly, than we saw in North America with the assortment.

And a lot of that is, as Art said, is how it was bought in China and the favorable mix to kids and baby, which has continued to be more of a relative strength.

The other thing I'll say, just to put a period at the end of the sentence is, we're confident that as we make progress in the women's business, it will have an impact around the world.

Thanks, guys.

Betty Chen, Mizuho Securities.

I was wondering if we can shift gears for a moment, Art, and talk about Old Navy?

Just had a great quarter to wrap up a nice year.

As you look at the brand, what are some potential opportunities for the brand going forward and when we may see that play out to 2015?

Thanks for the question, Betty.

So if I step back and look at opportunities for the brand, opportunity number one, is consistency, season after season, and that's what gets me probably more excited than anything about the fact now that we've had a little bit of a run there with consistent product, which the customer has consistently responded to.

I would also really point you to the expression of the brand and our marketing.

I follow them -- probably the best place that I go to, honestly, to see it is on Instagram.

I follow Old Navy and a number of our other brands, as well as a number of other brands.

And there are honestly times when I look at Old Navy's imagery on Instagram, and it's hard for me to distinguish between a premium or a premium contemporary brand in terms of the aspiration of the fashion that we're presenting.

And so Stephen uses the word naspirational.

I think it's a great expression that you see when you see those brands juxtaposed against each other and how Old Navy is really communicating the fact that it's got current trend that is right where it needs to be right now.

And clearly, that's what she and the overall family is responding to.

Still bullish, obviously, for Old Navy, so that's in the domestic business.

Given consistency, there's a long runway in front of us there in terms of opportunity.

Very bullish on the international business and the expansion that we have in both Japan and in China.

And then a couple places worth highlighting inside the assortment.

I touched on the fact that Old Navy has a family-wide active expression.

We've had tremendous customer reaction to that.

She's really engaged and she is engaged on behalf of the family.

Kids, the men's business and her business, the active expression.

And that's a place where, if that's a trend, that's a trend that's got a long runway in front of it.

So we're excited about being able to build out that business and it's a business that is, essentially, purely incremental for us inside of Old Navy.

There's real estate to house the business.

We're not having to trade off other key categories, so it's a very nice incremental business for us that allows us to build the business, build productivity in the real estate and give her another reason to come inside the store.

Thanks so much for that.

Lindsay Drucker Mann, Goldman Sachs.

Sabrina, I wanted to follow up on currency.

The guidance that you have for the translational and transactional headwind in this year's earnings guide, does that also include some of the cushion or the protection you got from hedges that have been in place?

And as a result, as we're thinking about our 2016 model, I know you haven't given any specific guidance, but as we're looking at out-years, should we also be thinking about a currency headwind to factor in?

And then as part of that question, this isn't your first moment dealing with currency, do you guys have an approach, a plan of attack, on how to defend margins, whether it's through pricing or cost savings?

Have you considered, maybe in Europe, diversifying your sourcing capabilities to include some local manufacturing or any other initiatives you're taking to protect margins from this?

Thanks.

On the first question, it definitely, Lindsay, includes the hedge rates embedded, so the guidance includes the hedge rates for 2015.

And as I mentioned, we hedged 12 to 18 months in advance, so the hedge rates tend to lag spot by about 12 to 18 months.

So they worsened again, but they didn't worsen to the degree that they did coming out of 2013 to 2014.

But that is all embedded.

With regard to how we look at defending margin rate, I would say we look country by country, certainly, and we don't feel like, in a lot of our countries, given the competitive landscape and the orientation toward value of the customer, that there's a lot of room to just full sail increase prices, given the increase in AUC driven by the stronger dollar.

What we look at more is how do we assess and address the issue through our promotional cadence, through our sales and markdowns.

That's what we've been trying to do overall for the last year and half as we've been facing the pressure already.

And we'll continue to look at sourcing mechanisms as well as we move forward, since we'll probably be in a dollar strong environment for a little while here.

Great.

Thank you.

Anna Andreeva, Oppenheimer.

Happy to have made it.

I guess the question to Art, as you think about reinvigorating the Gap Brand, how do you think the target customer demographic has changed here over the last couple years?

And how do you segment the market between Gap and Old Navy, just to make sure the brands are different enough to coexist in the marketplace?

And to Sabrina, just to follow up on the guidance, are you embedding any of the buyback activity for 2015?

Thanks.

Okay.

So I'll take a quick pass at this and then I'll hand it off to Sabrina.

So let's be clear.

We participate in an almost $2 trillion global marketplace for apparel and accessories.

So as a Company that has $16 [billion], roughly, in revenue, there's a lot of space out there.

As to the target customer for Gap, I think I am less focused on the target customer than I am on the fact that Gap, at its best, has historically been a pretty democratic brand.

And what gives me the greatest pleasure is to see a woman with her daughter, either a young daughter or her adult daughter, shopping in the brand.

And that is exactly what we saw back in 2012 and in 2013 when we had product, well-priced, appropriate for the brand, that was on trend in our stores.

And so I'm a little less inclined to embrace the two-dimensional cutout of the target customer, rather than great product that's right for the brand and for the aesthetics filters of the brand.

We'll power a good business.

And so then as to our brands competing with each other?

My basic perspective on that is get the best product you can through your brand filters.

And there's a lot of competition out there to go and beat.

And I'm less inclined to think about our brands competing against each other than competing with both fists against our competitors and winning every day.

Sabrina?

Yes, briefly on the buybacks, our range always includes various scenarios.

And given our track record, I think it's safe to say our scenarios would include some level of buyback.

Great.

I'd like to thank everyone for joining us on the call today.

As a reminder, the press release, which is available on gapinc.com, contains a full recap of our fourth-quarter results, as well as the forward-looking guidance included in our prepared remarks.

And as always the Investor Relations team is available after the call for further questions.

Thank you.

That does conclude our conference.

Thank you for your participation.