蓋璞 (GPS) 2015 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen.

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

At this time I'd like to welcome everyone to the Gap Inc.

third-quarter 2015 conference call.

(Operator Instructions)

I would now like to introduce your host, Jack Calandra, Senior Vice President of Corporate Finance and Investor Relations.

Please go ahead, sir.

Good afternoon, everyone.

Welcome to Gap Inc.'s third-quarter 2015 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 are required to compare 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 November 19, 2015, and we assume no obligation to publicly update or revise our forward-looking statements.

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

Sabrina will be using slides to supplement her remarks which you can view by going to the investor section at gapinc.com.

With that, I'd like to turn the call over to Art.

Thank you, Jack.

I'm going to be pretty short today.

And I just want to reiterate some of the key points as I look at Q3, Q4 and then spring and beyond next year.

Q3 was challenging for Gap and Banana.

And, again, largely due to the acceptance in women's product which was not what we wanted it to be.

Let me make something very clear.

We know what the issues are with our product and we are addressing those pretty systematically.

I spend a lot of time reading reviews of our product online, and our customers are very clear in telling us what we are doing well and what we are not doing well.

And I'm very confident, having seen the product, having been with the teams, that we are addressing these issues and that as we get into spring of next year, we are going to see a material improvement across both Banana and Gap in the product that we are putting in front of our customers.

So I have confidence in the work that we're doing across the Company.

And I've spoken to about how we are essentially lifting processes and capabilities from Old Navy and installing them in Gap and Banana Republic.

I've seen the product in spring now and in summer, across all of the brands, and I'm really excited about how we will be back on track in spring and beyond next year.

I'm also confident in the momentum of the business at Old Navy and I'm looking forward to the product that they're putting in at the beginning of next year as well.

So let me focus on inventory for a moment.

We spent a lot of time in Q3 focused on inventory and getting clean.

And I'm really pleased --and Sabrina will provide detail on this -- that we've come into Q4 with our inventories in very good shape.

That said, we are in a competitive environment.

And, regardless, Q4 is always a very promotional quarter and so we've reflected the fact that our expectation is that it is going to be a very promotional environment in Q4 and we are prepared to play there.

One of the things that we have done very well and we've been very committed to is expense control.

We were prudent and delivered against this in Q3 and you have my commitment that we are going to continue to remain very disciplined as we go through Q4.

I'll hand it off to Sabrina in a minute, but I want to say something about where my head is relative to looking forward at the prospects of this Company.

I'm very confident that we can win.

And I'm confident that we can win not on the basis of anything other than the work that the teams are doing to position all of our brands for better and more consistent performance as we get into 2016.

Now I'll turn it over to Sabrina.

Good afternoon, everyone.

As usual, I'll begin today by reviewing third-quarter performance and then provide an update on our full-year guidance.

I'd like to note that our third-quarter reported results include about $13 million in costs related to our previously announced strategic actions.

About $7 million of that total is in SG&A with $6 million in gross margin.

This brings our year-to-date costs related to our strategic actions to $107 million.

So, starting with sales for the third quarter, on a constant-currency basis, net sales were about flat.

Foreign-exchange negatively impacted our reported net sales by about $100 million in the third quarter.

As reported, net sales were $3.9 billion, down 3% versus last year.

Total sales and comps by division are in our press release.

Moving to inventory and gross margin.

As previously disclosed, elevated promotional activity pressured margins as we managed through units during the quarter.

We did, however, exceed our goal on inventory and ended the third quarter with inventory per store down 4% year-over-year, beating our previous guidance.

We expect fourth quarter ending inventory per store to be about flat on top of last year's decline of 6%.

Third-quarter gross margin was down 290 basis points to 37.3%, with about 60 basis points of the decline driven by foreign exchange.

Merchandise margin deleveraged 240 basis points, with the greatest pressure at Banana Republic.

Rent and occupancy deleveraged 50 basis points.

Given the challenging business, we are pleased that our teams continued to manage expenses tightly during the quarter.

Marketing expenses were down $34 million, to $142 million, due largely to lower spend at Gap brand.

Third-quarter total operating expenses were below last year at $1 billion, including about a $26 million benefit from foreign exchange.

Turning to earnings, excluding the negative impact from the strategic actions which was about $0.02, earnings per share were $0.63 or $0.61 on a reported basis.

Foreign-exchange had about a $0.05 negative impact on third-quarter earnings per share, or a 6 percentage point negative impact to EPS growth.

Additionally, Q3 of 2014 benefited from a discrete tax item that resulted in a lower effective tax rate of 34.5% in the quarter compared with 37.4% this year.

Regarding cash and distributions, during the quarter we closed on a $400 million term loan.

The new funds provide us with additional flexibility, including the opportunity to repurchase shares at what we consider an attractive valuation.

Including the proceeds from the loan, we ended the quarter with over $1 billion in cash.

Consistent with our commitment to return cash to shareholders, we spent $200 million repurchasing shares during the third quarter and over $800 million year-to-date.

We ended the quarter with 404 million shares outstanding.

Including our dividend, year-to-date shareholder distributions have totaled about $1.1 billion.

Regarding capital expenditures and store count, year-to-date capital expenditures were $505 million, and on a net basis we opened 66 Company-operated stores year-to-date and ended the quarter with 3,346 stores.

Store count and square-footage details are in our release.

And now I'd like to share our outlook for the rest of the year.

We are revising our full-year earnings-per-share guidance to $2.38 to $2.42, and we now expect operating margin to be about 10.5%.

Our guidance excludes the charges related to our strategic actions which we continue to estimate at around $130 million to $140 million.

All other full-year guidance metrics remain substantially unchanged.

Now let me take a step back and briefly outline two major factors that have changed meaningfully since we set our initial guidance at the beginning of the year.

First, Banana Republic significantly decelerated with fall product when we had expected some marginal improvement.

Second, it appears to us that the consumer more broadly pulled back on apparel purchasing in Q3, especially outside of value, leaving the sector with inventories probably more elevated than desired entering Q4.

While we've done the work to position ourselves for a successful holiday season, entering with tight inventories, we feel our guidance reflects a prudent outlook given what will likely continue to be a highly promotional environment.

As a reminder, 2015 has been negatively impacted by several other items, the two largest of which are foreign exchange and the first- half port issues.

Normalizing for these items, our guidance range implies an underlying EPS decline of about 5% to 6%.

In closing, as we enter the fourth quarter, we will continue to push forward the turnaround efforts at Gap and Banana and work to maintain the solid year-to-date performance at Old Navy.

Thank you, and now I will turn it back over to Jack.

That concludes our prepared remarks.

We will now open the call to questions.

We'd appreciate limiting your questions to one per person.

Thank you, sir.

John Morris, BMO Capital Markets.

Thanks.

Good afternoon, everybody.

Tough environment out there, as we've heard.

Art, I think -- intriguing with your comments, so I want to get a little bit more color about it in terms of what you are learning about the product as you do your own research and discussions with the merchants there.

You know, maybe talk a little bit about by the divisions Gap and Old Navy.

But also, I'm just thinking there are probably some things that are working as well as what may not be working.

So if you can kind of touch on those items?

Thanks.

Yes, thanks for the question.

I think it's a really on-target question.

You know, if I just go to Old Navy, what I would say is Old Navy continues to develop product very consistently, with the filters and processes that they been using over the course of the last couple of years.

If you look at what's in the store right now, the good news is that while we had to work through some inventory in Q3, we are seeing excellent product acceptance right now.

So, you know, you have your normal few styles that don't work.

But overall, the product acceptance is very good pretty systematically across the board.

It's just, as you know, as you noted upfront, it's a really tough macro environment right now from the standpoint of the customer.

And secondly, compounding that -- not to make excuses, but a statistic that October was the warmest October ever.

And we're still seeing the temperatures in the Northeast, et cetera, pretty warm, which, obviously means people aren't necessarily ready to buy into particularly sweaters and outerwear; but product acceptance is good.

In Gap, we are -- and that's really what we saw in October, obviously, we're waiting to see how Q4 kicks in, et cetera.

You know, as I mentioned in the call, I am very much deep in with the teams across all of our brands, Athleta included, and looking at product that is in development for next year.

And we've reference this before, in Gap, we know we have issues around femininity, around the optimism of the color palette, around the silhouettes that we bought in as big key items.

And we've specifically and intentionally corrected those.

Fit inconsistency has been an issue.

And I think I mentioned this before, we have a very senior person now in a critical role in the Company overseeing fit across the entire Company.

And really getting fit consistency, particularly in our bottoms business where it's critical at the end of the day.

And I mentioned on the call that I look at reviews.

What I would say is this, which is, if you look at reviews, if you get into our stores and talk to our customers, we have a process called voice of the customer where we listen to feedback very specifically.

We do consumer insights.

There's 100% consistency with what our customers want, what is not working for them across all of those touch points.

And those are the things the teams are acting on in both Gap and Banana to get the product back centered to where it needs to be.

So, I don't want to get through right now style by style or anything like that, but again, if I come back to Gap casual optimistic American, we have re-centered the development very much around those filters, with consistent fit, with femininity.

And if I go to Banana, which is really updated classics with a twist, which is how we've always talked about that business and quality fabrications, the product development has been very consistent with that as I look at the spring and summer.

Thanks, Art.

Lorraine Hutchinson, Bank of America.

Thank you; good afternoon.

There's obviously, a lot of optimism around spring and the new merchandising teams' assortments.

I was just curious to hear your thoughts on how you're thinking about inventory for both Gap and Banana going into the spring.

Are you buying inventory for a turn to allow those concepts to comp if those products really resonate or are you holding back a little bit and forcing them to prove that before you buy the product for it?

You know, Lorraine, I've been pretty consistent on this.

I think in -- hopefully, I'm consistent, you'll tell me if I'm not, but I really believe that as you're going into a place like this where there's a turnaround, that you buy tight and we're buying tight.

Our issue is that we are -- we don't have the pricing authority right now that we need to have, even from where we were a few periods ago.

And so, to me, you buy tight and you let some AUR come into the business.

And then we do have some capability to feed units into the business if we're seeing styles and programs that are working.

And I would rather go in tight with the ability to feed the business, than come in heavy and regret it at the end of the day.

So, obviously we are looking for comp.

We are always looking for comp, but I am not going to drive comp by just making a massive investment in units until we really have confidence about the product.

And so again, buy tight, feed the business, that's the strategy that we will take for both of those businesses over the course of the next couple of quarters next year.

Thank you

Matthew Boss, JPMorgan.

Hi, it's Phil.

Art, a higher-level question.

Since taking over the helm, what would you say has been your biggest disappointment versus initial expectations?

And then just any changes from the competition that has surprised you or forced you to change course in any of your initial game plan?

Yes, I would say my biggest disappointment, and Sabrina mentioned it in her comments, was I expected Banana to be in a better spot in the back half of the year.

And if you go back and look over my comments from earlier in the year, I was really hoping that we would get more traction with the new design direction.

Obviously, we've made some changes in design and we did that pretty quickly when we felt like we weren't where we needed to be.

I have confidence in the current team.

I have confidence in the team owning spring and summer, so it's not going to delay what we expect to see as we get into the beginning of next year.

But I was not expecting and am very disappointed by the deceleration that we've seen, particularly with Banana, in the back half.

I think I had a much better calibration as to where Gap was and what we were going to be working through, but less so with Banana.

And that's been a real disappointment to me and a bit of a surprise.

I would say, competitive context, probably the biggest issue here is just as we've gotten into Q4, I was surprised to see people carrying inventory in as heavy as they actually did.

And as I said in my remarks, we are prepared to play in a very promotional environment.

But I hope you would give us the benefit that we do really focus on managing inventories pretty aggressively.

And I think it's going to be a tough quarter.

I think we've had signals -- a tough quarter from the standpoint of the consumer promotional environment.

I think we've had signals for a while that the consumer was standing on the sidelines a little bit and it was just a little bit of a disappointment that we may have some excess inventory and a really promotional environment as we go into Q4.

But again, we are prepared to play.

It's why we spent what we spent in terms of getting clean in Q3, because we did not want to carry that inventory into Q4.

Great.

And then just one quick follow-up.

As we think beyond the near-term of the Gap brand and the expectations into the improved assortment in the spring, if all went according to plan, to achieve a return to positive comps, I guess is traffic the key inflection driver of that change?

And then is it possible, given the game plan, to achieve positive comps in the front half of the year or is it really a back half of the year P&L story?

So the way the levers move, in my mind, which is pretty consistent with the way that they have moved, so I'm a big believer in, what's history show us?

Is you improve your product.

We don't plan on making huge marketing investments as we get into the beginning of next year.

I think that's imprudent.

You improve your product, your customer discovers it, you start to see conversion move on the basis of the traffic that you have in the store.

Word-of-mouth, these days, is a super powerful form of marketing.

If you just think about Instagram and Pinterest and the other social media, that's a very powerful form of marketing and that will start to bring traffic in, but it's -- traffic is a lagging metric, not a leading metric.

And is it a possible comp?

Of course it's a possible comp.

But again, we are looking for comp out of getting pricing authority back, first and foremost, rather than loading a bunch of units into the business.

Great; best of luck.

Thanks.

Ladies and gentlemen, as a reminder, please limit your questions to one per participant.

Lindsey Drucker-Mann, Goldman Sachs.

Thank you for taking my question.

This is Eddie McLaughlin on for Lindsey.

Can you give us some more insight into what you saw for traffic over the quarter, whether the cadence changed?

And if you saw any difference by region or by on and off mall?

Sure.

So, not surprisingly, right, traffic has been strongest at Old Navy.

And so they're mostly an off-mall brand.

Banana and Gap are much more in the mall, probably vast majority of the stores are in the mall.

And I would say directionally, Gaps' traffic was the worst.

Banana was somewhere in the middle and Old Navy, like we said, in that value sector with their stronger product assortment, not surprisingly, did pretty nicely even against our leads of mall traffic.

With regard to regions, Northeast in the third quarter was probably the weakest.

But honestly, there was very little differentiation between all of the regions.

Got it.

And then one follow-up to that, at Old Navy, is there any more detail you can give on the breakdown of that comp between AURs versus units?

You know, we do monthly sales calls, so we give a lot of that every single month.

But I'd say overall for the quarter, given the fact that we came out of September a little heavy and needed to clear in October, units per transaction were probably one of our strongest positive drivers.

Got it.

Okay; thanks.

Sure.

Anna Andreeva, Oppenheimer.

Great.

Thanks so much.

Good afternoon.

I guess looking at Old Navy, lapping the 11% comp in the fourth quarter, maybe talk about specific product or marketing opportunities that you are especially excited about for the holiday?

And then as a follow-up, great to see the other segment rebound in the fourth quarter.

We were hoping you could talk about performance at Athleta.

Thanks.

Yes, as I look at Old Navy, I would say we hope, obviously, Old Navy is set to play in the categories that really matter in Q4.

It's an important outerwear business and important sweaters business.

As I mentioned, we haven't had that cold snap yet really across the country that starts to get those businesses going, but we've seen this before and when you get the cold, she comes in and she shops.

So I'm really confident about the product that we have in the stores, but with it being as warm as it has, we are still waiting for demand to really pick up.

Also pleased with the traction that Old Navy is getting in denim, and particularly in fashion denim.

They've been quite on trend, especially with Rise and Silhouette, and we are seeing, again, good product development there that I believe will carry us forward in Q4 as well.

And then last thing is that even in Q3, we saw a really encouraging consistency across all divisions in the business.

Now there's always going to be a difference between men's and women's and kids and baby, but it is nice to see it when all the businesses are registering good product acceptance.

And despite the fact that we are clearing through inventory, which put some pressure on the business, I do believe we have very good consistent product acceptance across the whole box.

And then the last thing I would just call out, which we really expressed in the last few seasons, is the full family active expression, which is in a category where there's, obviously higher than market growth.

We have that now in the box all the way down to baby in a full family.

Really put it in the stores without displacing any other programs, so it's about incremental productivity.

And I'm very bullish over the long run in terms of what that category is going to be able to drive for the brand.

Yes, the only thing I'd add to that is, from a marketing perspective, we definitely have been standing behind Old Navy.

So even though marketing dollars were down in the quarter, they definitely were not down at Old Navy.

And we will continue to stand behind marketing in Q4 at Old Navy.

So they'll have at least as much marketing in Q4 at Old Navy and likely more radio, maybe -- about the same TV, but more radio for sure, so we are clearly standing behind that one strongly.

Yes.

And I'm always looking, as we look at our Q4 commercial plan in particular, which is, what are we doing in terms of incremental non-comp events?

And I think we have a very strong commercial plan lined up for Q4 as we get into, obviously, next week and then the several weeks leading up to Christmas.

That's great.

Very helpful, thanks.

And just one Athleta follow-up?

Thank you, again.

With regard to their marketing plan?

This was on the other --

On the other (inaudible).

Oh, yes, so in terms of the other growth rate, I mean, you can see underlying, it's pretty healthy.

So you kind of, there too, have to take into account the fact that we're lacking having Piperlime sales last year and we don't have them this year.

And you guys knew, we had told you, that Piperlime for the full-year represented about $100 million in sales.

So when you correct for that, you can deduce that the underlying sales for Athleta are going to be very healthy numbers.

Thanks so much.

Dorothy Lakner, Topeka Capital Markets.

Thanks, and good afternoon, everyone.

Just wondered if you could give us some color on international trends across the brands?

Given the slowdowns that we've heard about and obviously, some newer security concerns, just wondered if you could give us a little bit of color on international?

I'll just start out, Dorothy, and say it's important to note because we show our sales table in the press release, of course, and we share the breakout by region.

And so what I will tell you from that is that we are really pleased with our Canada business.

It looks like on a reported basis that sales are down year over year, but we also called out that we are facing $100 million of headwinds in foreign exchange.

A lot of that is hitting Canada.

Asia also looks down year-over-year.

That, too, is fully explainable.

Both Canada and Asia's decline are all foreign-exchange driven, not underlying-business driven.

And then Europe is a little bit more mixed.

So there's probably a little bit of business performance as well as the foreign exchange in there.

I don't know, Art, if you want to add anything?

I think that pretty well covers it off.

I mean the -- in most cases, the businesses have done decently well.

Canada has been exceptional.

It is just that when you have a headwind like that, it obviously, depresses the reported performance.

Sure.

Great; thank you.

Next Adrienne Yee, Wolfe Research.

Hi, everybody, good afternoon.

My question is on the SG&A dollars.

Obviously, it's very, very controlled.

I was wondering what the impact has been of going to the $10 minimum wage in July?

And then that marketing spend down about $30 million, not from Old Navy.

So did it just come out a little bit half and half from both the other brands?

And when would you expect, I guess in the spring, would be the increase in marketing spend for those two brands?

Thank you.

So regarding minimum wage, we said at the beginning of the year, Adrienne, that we thought for the full-year the impact would be about $0.04 on earnings, so there's no change in our view.

Probably more back cap-weighted, because we stepped up the wages to $10 beginning in June.

So still about at that $0.04.

With regard to marketing, the decline was primarily -- in Q3 the decline was definitely primarily driven by Gap.

You might remember last year we had actually a television campaign, it wasn't a big, huge widespread television campaign, but we actually -- we did a lot of video and we were on TV somewhat.

So most of it is Gap.

We have slight declines in Banana and then, again, the absence of the marketing from Piperlime last year is the third reason that marketing is down in the third quarter.

When we get into next year, we'll talk about it a lot more, but I think Art and I are in agreement that we would like to see the signs of product acceptance come through in the important levers of conversion and average unit retail before we invest too much too early in marketing.

Okay, great.

Best of luck for the holidays.

From Cowen and Company, Oliver Chen.

Hi, thanks a lot.

Art, regarding the product evolution and what's happening for spring next year, you gave us a lot of good details.

But I was curious about the classifications where you saw the most opportunity or it sounds like it could be a combination of classifications?

And also from another angle, the opportunity in terms of product.

What do you think thoughts about the opportunity in terms of demographics and if there's any intersection between the demographics where you have opportunity relative to the products in that dimension as well?

Thank you.

Let me talk about categories.

And I'm glad you raised the question because part of how we're thinking about spring and Gap, as an example, is where did we not get our fair share?

And as a consequence, number one, where are we developing into it and then buying into it to support it?

So all of our knits is a great example, women's knits.

We underdeveloped in 2015.

We conceded a fair amount of market share in our women's knits' business just because we didn't have the range of development.

And as a consequence, as I've looked at spring and then summer, we have very intentional developments to reclaim and hopefully more than reclaim, our fair share of the knits business.

And it's silhouette; it is fabrication.

And it's for multiple uses.

And she comes to us, she comes to Gap brand.

Knits is an important part of that spring and summer assortment year-round, but spring and summer in particular.

And so it is part of how I look at this and I say, how much risk do I find versus opportunity?

And when I look and I say, it's a fair share opportunity of getting our fair share in terms of both development and buying, I'm pretty confident that there's some upside for us there.

Dresses is another example where, especially through later spring and summer, there should be a terrific accessible dress business in Gap, shirt dresses, and then a variety of knit dress fabrications in particular: short, median and long maxi dresses.

If you look at our [LY] assortment there, we were very underdeveloped with only a couple of silhouettes.

And, again, fair share, we left a bunch of money on the table because we really weren't playing with a range of development that we should have had.

So both of those are good examples of where I feel like there's opportunity.

I'll just go to a third, which is denim.

And when I look at products, we will always take last year's category development and compare it against this year's category development.

And so if I look at denim, what I saw last year was a lot of development that was relatively overlapping.

So if you had washes, the washes were quite similar across the same silhouette.

When I look at our development this year, I see much more intentional development to create multiple reasons to buy rather than reasons to buy this or that.

And so I feel good about the denim development and our opportunity there as well.

Those are the approaches that we've taken to every category, whether it's wovens or knits or denim.

But those are probably three standouts for me where I feel like there is a share opportunity.

On the demographic piece, I've said this before and I'll say it again, I feel like Gap is a brand when it's at its best -- and I saw this in spades in 2012, where we were on trend with products that our customers expected; we got a mom in there and a mom with her teenage or young 20s daughter in the store.

And if you look at where we are probably underpenetrated today, certainly in the millennial customer, the customer's an older customer in Gap, which we've talked about, and that represents a share opportunity for us across all of our businesses, for sure.

Great, that's really helpful.

Best regards.

Happy holidays.

Thanks a lot.

You, too.

Thomas Filandro, SIG.

Hi, thanks.

My first question is with the change, Art, in the leadership at Old Navy, I was wondering can we anticipate seeing any adjustments to the merchandising strategy or in-store point of view?

And if so, when might we see those changes?

And just a quick one for Sabrina.

As we think about 2016, considering the first half, the port issues this year, should we think about that as a full recovery opportunity in 2016?

Thank you.

Let me talk about any changes, Tom, and it's a good question.

I hope that you would give us credit for building on strength.

And whether it's [Stephen] in the building or not in the building or [Jill] now as interim leader, there's a team that has found their legs and is driving a great business.

And so this is much more about building on strength and maintaining the momentum than any particular need to do a reset of the business at all.

That said, we will always tune and tweak and look for opportunity.

And one of the things we always do, which hopefully you'll see when you go into our stores, is as we get into Q4, we tend to back away from more fashion visual merchandising in the stores towards a more key item presentation, just because of the volume and the capacity that that gives us in the stores and it's an easy shopping experience.

But that's about tuning and tweaking for the season, not about a reset as to where the brand is or a need to do anything or change anything fundamentally.

Sabrina, do you want to take on the port?

Yes.

It's a little early, Tom, to talk about the first half.

We are well aware of the opportunity we will be lapping in the port.

There's always puts and takes of what's going on in the environment when we get there, so I think we will talk more about that as we actually get an opportunity to talk to you guys every month.

So we will say more a little later, once we are past this important holiday season.

Okay, best of luck to you.

Happy Thanksgiving.

Thank you.

Thanks, Tom.

Royal Bank of Canada; Brian Tunick.

Thanks, good afternoon.

I guess two questions.

It feels like e-commerce growth the last couple years and some of these things you guys have done as well have helped to offset mall and store declines.

Do you feel like there's anything incremental you can do now on the e-com side or Omni Channel side to push on that button because clearly mall traffic and store declines are likely to get worse from here.

And then the second question for Sabrina, on the line of credit, and your appetite for buying the stock back here, is there a minimum cash balance or just kind of viewpoint as we look into next year what your appetite could look like to be buying back stock at the pace you have the last couple of years?

Thanks very much.

No problem.

Thank you.

I'll talk quickly about the e-commerce piece and then I'll hand it over to Sabrina on the other one.

So to me the big issue and the big opportunity, and it is both an issue and an opportunity, is the continued growth of mobile traffic.

Anybody who is telling you the truth will tell you that it's become probably a majority of their traffic growing very, very fast.

And so we are really aggressively focused on making sure that as our traffic pivots from a desktop or a laptop or even a tablet onto a mobile device, that we are able to monetize that traffic.

And so it's about a number of things that we've talked about before that we continue to push aggressively on, starting with responsive design that delivers a great mobile experience off of one website, but then making sure that the shopping experience is easy, greater use of inventory versus text, a great checkout experience, cap to applied promotion capabilities which we put in place.

And so making sure that the experience is both emotional, immersive, and aspirational on a mobile device as a brand experience, but also transactionally efficient as a customer buying on the mobile device.

That's probably the biggest opportunity that we've got right now and we're very aggressively focused on it.

It is moving very quickly.

We are excited about it.

Our traffic is growing, but the mobile device experience is different than a desktop experience and we need to make sure that we can make money there in the same way that we can make money on the other real estate.

Sabrina, do you want to -- ?

Sure.

I think I'm going to start by saying, broadly speaking, nothing has changed with regard to our view on our capital structure and our cash balances.

So for some time, Brian, you'll remember it's important to us -- we target investment grade ratios and we've targeted between $1 billion to $1.2 billion of balance sheet cash.

We've dipped a little bit below that at times, but that's broadly been our target and nothing has changed.

Now Q3 always tends to be, like it is for many retailers, sort of our lower point in cash flow because we're building inventories.

And then, of course, Q4 is a high cash inflow quarter for us.

So we really took the opportunity to execute this term loan, just to give us a little bit of flexibility timing-wise before all of these Q4 cash flows came in so that we could continue with our philosophy of being opportunistic and, you know, make some purchases on behalf of the shareholders perhaps before all of that Q4 cash flow comes in.

So again, broadly speaking, no major change in our philosophy at all.

Thanks very much.

Susan Anderson, FBR.

Hi, good evening.

Thanks for taking my question.

Sabrina, I was wondering, because it seemed like you guys ended third quarter pretty clean on inventory.

But it seems like you guys still expect the promotional environment out there to be pretty strong in fourth quarter, which is typical around the holiday, just based on your guidance.

Maybe if you could talk about just kind of like by brand where you expect the biggest impact?

It sounds like BR was the biggest and third quarter you expect that to continue and in fourth quarter or is it just really kind of across all brands?

Thanks.

Yes.

I would say it's fair to say, Susan, that we are not expecting big meaningful turns from the current trends we've seen both at Banana and Gap.

Now we know Gap's performance actually has marginally improved on a two-year basis when you look at the comps, et cetera.

But it's marginal, and so we are not expecting any big upswing there.

And then Banana's has decelerated, so we are certainly not expecting any, you know, major change in trend there.

I think more broadly speaking, we are just looking at the environment.

And as Art said, we need to be prepared to compete.

Even though our inventories, we're pleased that we exceeded our goal in terms of coming in clean.

We are just being realists about the promotional environment we may be facing and that is sort of where we landed in the area we landed.

Okay, thanks; that's helpful.

Sure.

Kimberly Greenberger, Morgan Stanley.

Great, thank you.

Good evening.

I guess afternoon, in your case.

I wanted to follow up on inventory.

It looks really very clean here at the end of third quarter.

I guess the only thing that surprised us a bit during the quarter is that Old Navy ended up with a bit of an inventory overage.

And it looks like you've effectively cleared through that product in October.

But Old Navy had a really terrific 4% comp, I think, if I got the numbers right in the quarter.

So I'm just wondering, does that suggest that the inventory bought for Old Navy was actually bought for an even higher comp?

And maybe you can talk about the risk parameters that you apply to each of the divisions as you're thinking about how much inventory risk you're willing to take.

Thanks so much.

Yes.

I'll back up a little bit, Kimberly, because we definitely try and buy to current demand; we never buy on hope.

So a lot of the work we do on inventory is to make sure that the teams are grounded in current trends, current traffic trends especially.

What happened with Old Navy was really all about September's trend dropping off from what we had seen.

So September, again, was that all-important five-week month and we never saw Labor Day come -- or, I'm sorry, five-week month and we never really saw Labor Day come.

And in a high-velocity business like Old Navy, where every day of a holiday and certainly every week is very meaningful, when you get backed up, it spells trouble for October.

We fortunately, earlier in the year, made a decision across all of our brands, especially Banana and Gap, that we were going to go into the last quarter much tighter.

So we had pulled back units across all of our brands and we feel comfortable that the combination of how we are entering with the much tighter receipting that will go on in the fourth quarter, we are going to be tight.

We are going to be in good shape in terms of inventory.

We've guided to that about flat at the end of the fourth quarter, but it's important to remember that that's lapping a minus 6. So we're going to -- a minus 6 on Q3's ending two-year minus 6, so we're feeling pretty good because we want to walk that line that we want to have enough inventory to give us a possibility of those positive comps.

And yet we want to be tight.

Great; thank you

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 third-quarter results, as well as the forward-looking guidance included in our prepared remarks.

As always, the Investor Relations team will be available after the call for further questions.

Thank you.

Ladies and gentlemen, that does conclude today's conference.

We would like to thank you all for your participation.