蓋璞 (GPS) 2015 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 2015 conference call.

(Operator instructions)

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

Good afternoon, everyone.

Welcome to Gap, Inc' fourth-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 and descriptions of non-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 25, 2016, 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.

Thanks, Jack, and good afternoon to everyone.

I'm pleased to be speaking to you as we kick off 2016.

We've got 2015 behind us, and I want to spend a reasonable amount of time going over my inventory of 2015, some of our accomplishments, and some places where I feel like we need to continue to accelerate progress.

I've spoken to you about this before, and we're on a journey that is going to continue to take time, both against our digital priorities, as well as our product priorities.

And so I want to spend a few minutes speaking to that, and then I will focus a little on 2016 and where we are.

So when I spoke to you a year ago, and frankly, each quarter that we've had this conversation, I've reiterated the fact that we have three core priorities in this Company.

The first one is product.

And so we are, at our core, a fashion apparel Company and our customers come to us for great, emotional, on-trend, on-brand product.

A lot of the work that we have been doing in 2015 is continuing to move our brands forward to get centered on their aesthetic, centered on the right trends, to restore the appropriate quality to our products, and to really put in place the product in our stores that we know that our customers love.

And I'm really pleased with the quality of the work and the quantity of the work and the pace of the work that we've been doing across the entire Company against our product priorities.

And I've spoken to you about my vision of how product is changing in this industry.

It's fascinating as you look at how the Fashion Week activities have played out over the last couple of weeks.

A lot of articles out there about how brands are now making product available on runway immediately to their consumers.

We did that in a small way also in Banana Republic.

To me what that illustrates is the increasing clock speed inside of this business.

How fast trend at the high end of the market disseminates down into the mass market.

And it's against that backdrop of increasing clock speed, increasing pace of this business, that we've been making very significant changes in our product process.

And I'm not going to go in to all of those today, but those are changes focused on getting better and better each season at managing buying risk; as we build our assortments; an increasingly responsive and short supply chain, using science blended with the art of creativity, design, and merchandising to build the best possible assortments for our brand, and putting in place a very solid commercial planning process that allows us to make sure that we're building a commercial assortment that is on trend, on brand, with the right quality, mapped against delivering and exceeding our budget priorities.

That is not all coming to fruition yet, but I'm again, pleased with the work that we're doing.

There are a couple of key components there that I want to call out.

I am a true believer in quality, a big believer in quality, and I believe that our customers are very sophisticated when it comes to understanding the value that we offer them in our products.

And I'm extremely pleased with the quality restoration that I see in Gap's products and in Banana Republic, as we look at the spring assortment and the summer assortment going forward.

Second issue is I've talked about responsiveness in our supply chain.

This is a journey, and again, I'm not going to tell you what yard line we're on or give you a numerical score, but we are making significant and rapid progress, progress that is reflected in platforming product where we're buying fabrics over multi-season buys, positioning that fabric with key strategic vendors, giving us responsive capabilities, in some cases to leave open to buy in season so that we can be back into product in season.

In essence, buying what's working rather than guessing what's going to work.

The third thing is progress on inventory management, and a big step that we took forward was a of couple years ago where we brought all of our inventory pools across our online and our stores together.

We've made further progress this year, where we've leveraged our retail DCs to provide direct fulfillment capacity for our online business.

And we're continuing to take steps to make sure that we are stranding the least amount of inventory and getting every penny of gross margin out of all of our units across the entire business, regardless of what store it's in or what channel it was brought to fulfill.

Second priority is experience, and on experience, I will call out a number of things that we're doing.

We're modernizing our POS; I've talked about that before.

We've built a number of omni-channel capabilities.

We've virtualized our inventory so that we have access to all of our inventory across all of our demand.

The thing that I am really excited about is the accelerating pace of mobile and the mobile experience that we have.

Historically, we've operated our websites on two separate platforms.

We're in the process of bringing those together on a fully responsibly designed website.

And most importantly, we're going through a cultural change inside the Company of really thinking digital first and mobile first.

Historically, in this business, the moment of truth is when a customer crossed the [lease] line into a store.

Today as a Company, we are increasingly seeing the moment of truth is when a customer, through their phone, comes into our digital store, and we either win or lose their affection, their engagement, and ultimately their sales, if we win or lose at that moment of truth.

That creates for us both an opportunity, but also an imperative to move as fast as the customer is moving in mobile.

This year the bulk of our traffic will be mobile traffic to our digital space.

That represents an opportunity because a great majority of that traffic is incremental, but it also means that we offer the customer an emotional, immersive, holistic, engaging brand experience, along with what we have historically done extremely well, which is a very efficient e-commerce transactional experience.

The last priority is talent, and the entire Company sits on a foundation of talent.

We've been able to attract and retain exceptional talent, and I am committed to making sure that this Company has the best talent in the industry, lined up in our businesses and our functions.

As you all know yet, I've not named a permanent head of our Old Navy brand.

When you have a seat like that as empty, which is one of the biggest seats in the business, I want to take my time to make sure that I understand looking forward what's the right profile of leadership for that seat, and to understand our talent inside and outside the Company in a way where I can make a decision that I feel is the best decision for the brand and the Company.

Part of what I've spent my time on over the last few months is getting very deep in to the Old Navy business, and I'll speak more about that in a moment, to really understand where the growth opportunities, which are significant, but where are those growth opportunities inside of Old Navy and how do we map a leadership role against the pursuit of those growth opportunities.

I knew Old Navy pretty well several months ago.

I've been much deeper with the team over there over the last few months.

And what I will honestly and directly say to you is as much as I was bullish about the opportunity in front of Old Navy before for long-term continuous growth, I'm even that much more bullish today.

I see a great brand and a compelling value proposition that I believe has the potential to hunt around the world, and I'm super excited about the growth prospects in front of that business.

So let's dive in, in a little bit more into each of the brands and just talk a little bit about my observations of 2015.

So just to be clear, and I'll start with Old Navy, since I was talking about Old Navy.

Four years of growth.

That is a business that has demonstrated that the brand is strong and that the value proposition for massperational fashion, on trend, appropriate to the brand, with great quality that she perceives and understands for the entire family, that's a compelling value proposition.

We hit a bump in the road in Q4, and let me be clear about this.

What happened in Q4 we have diagnosed, and it was a combination of factors that unfortunately came together.

First was we had a couple of style misses.

We had a little bit of excess clearance inventory that we carried through.

We had an unexpected drop of traffic, which has now, for the most part, corrected itself.

The team is on it; I know we're making the right changes, and I expect Old Navy to get back on track and continue to deliver the kind of market-share-leading performance that we've seen now over the course of the last four years.

Let me go to Banana for a moment.

I knew it was going to be a rebuilding year from a product and aesthetic standpoint.

We took Banana to a place where we were trying to lead on fashion and trend, and she does not want Banana to be that.

We've diagnosed it; we've fixed it.

I've seen the spring product.

I've seen the summer product.

But we got behind it in 2015, and I'm disappointed with the performance.

But here's, again, what I'm confident about in Banana, which is we've been doing the right work.

I feel we have a very strong team in place right now.

We have centered on the classic, appropriate, expected aesthetics of the brand, and I feel much more comfortable that we are on track as we get in to spring, summer, and then fall of this year.

So moving quickly to Athleta.

We delivered a very strong back-half performance in Athleta.

We have a business that is very well positioned for our customer.

It is right in the sweet spot of lifestyle trend.

It is fundamentally omni-channel, in that it came from being a catalog and online business with now over 100 stores in the portfolio.

And I continue to be very bullish about the upside of that business and the growth potential.

Just as a sidebar, I would point out that I've been very supportive in them continuing to look for incremental growth opportunities on top of that solid platform.

And a few weeks ago we announced that we are building out an assortment for all the way from a very young girl up to a teenager inside of the Athleta box.

We're not putting incremental real estate behind that; rather, we're putting it in our existing stores, and we feel that is a significant opportunity.

So a great business, one I'm super happy to have in our portfolio, and I expect that you will continue to hear more news about Athleta going forward.

Last, let me finish as I talk about our brands with Gap brand.

I was kind of starting and ending with Gap brand when we started speaking a year ago.

I knew we had a rebuilding year in front of us.

It started with new leadership, a new team around that leadership.

It worked to get the brand centered back on its casual, optimistic, American aesthetic, and then rebalancing the assortment to assert our rightful share in key categories where Gap has always played.

So the last couple weeks, I've been in stores.

I'm always in stores at the beginning of a big seasonal flow with a cross-functional team, after our customers have had an opportunity to engage our products.

The first thing I would highlight is a renewed energy in our stores.

It is partly a function of our field team, which is world-class; it is partly a function of the fact that we have product in the stores that lights the stores up.

It's optimistic.

It's colorful.

It's feminine for the women.

It's masculine for the man.

It's got the right level of sophistication for Gap as a brand, and it is much more centered in what the appropriate aesthetic is for the brand.

So I see the aesthetic coming through very strong, casual, optimistic American.

Second thing I see across key categories, a knits complex that is fully developed to both take advantage of share of wallet in knits.

We have silhouettes in fabrication that cover a wide range of uses.

We have color, we have print, we have pattern, we have neutrals, we have great quality in those knits, and I see strong progress forward just by asserting our right to actually play as we should be playing in knits.

Third, denim, core category of Gap.

It's what the spring campaign has been focused on.

Silhouettes, fabrications, wash and novelty, all right in the sweet spot of where denim trend is right now, and I'm really optimistic about what I see coming in the denim business across all of our brands, but particularly in Gap brand.

So again, I could go on and on about this.

I could talk about our woven shirts programs.

I could talk about intentional outerwear development.

But I couldn't be more pleased with the progress that the team has made against their diagnosis a year ago on what needed to happen and how the product now shows up in the stores in front of our customers.

One of the things I want to reiterate and just make sure everybody hears it, and I'll say this again every time we talk is I have strong conviction about the long-term growth prospects of this Company and the work that we are doing to re-establish our dominance in key categories in our businesses, to reassert appropriate aesthetic expression of our brands, the continued growth across all of our channels, and the broad-based geographic growth that we've put a structure in place to achieve.

I'm committed to that, and we will continue to move down that path.

Why I spend so much time talking about product is product is the foundation for gaining market share.

And so I want to emphasize the fact that our commitment for growth is not just a commitment of building new stores and new geographies or taking new channels to new places, it's also about moving these brands back to a place where they can gain market share in our core markets.

So 2015, a year of rebuilding, a year of focusing on getting our product back on track, re-establishing the path for a couple of our key brands.

I'm confident in Old Navy, a bump in the road, but I'm confident in the value proposition and what that brand means to our consumers.

What I can assure you is my team and I have a great deal of urgency.

I know what this Company is capable of at our best.

I know what these brands are capable of at their best.

And I and my team are focused on not just achieving that for a moment, but achieving that with consistency.

I'm looking forward to this coming year.

I'm looking forward to seeing these brands start to perform to their potential.

And I want to thank you for your support.

Now I'll turn it over to Sabrina.

Thank you, Art.

Good afternoon, everyone.

Let me begin with our fourth-quarter and full-year results before turning to our outlook for 2016.

It's important to note that our reported results include pre-tax costs related to our previously announced strategic actions totaling $25 million for the quarter and $132 million for the year.

That is at the low end of our guidance range of $130 million to $140 million.

$98 million of the total full-year charge is operating expense and the remainder hits gross margin.

Now, starting with sales.

Sales for the fourth quarter were $4.4 billion.

Comp sales were down 7%.

For the full year, comp sales were down 4%.

On a reported basis, 2015 net sales were $15.8 billion.

However, excluding the impact of foreign exchange, net sales would have totaled $16.2 billion, down 2%.

Moving to gross margin.

Fourth-quarter gross profit totaled $1.4 billion and gross margin contracted 240 basis points to 32.8%.

Merchandise margin was down 140 basis points as reported, but down only 80 basis points excluding the impact of our strategic actions and foreign exchange.

Rent and occupancy deleveraged 100 basis points.

For the full year, gross profit was $5.7 billion and gross margin was down 210 basis points to 36.2%.

Merchandise margin was down 130 basis points as reported, but down only 60 basis points excluding the impact of our strategic actions and foreign exchange.

Rent and occupancy deleveraged 80 basis points.

Regarding SG&A, for the fourth quarter, total operating expenses were $1.1 billion.

Marketing expenses totaled $169 million, $9 million below last year.

For the full year, marketing expenses declined $61 million to $578 million.

Total operating expenses for the year were $4.2 billion, about flat to last year.

Turning to earnings, on a reported basis, fourth-quarter earnings per share were $0.53 and full-year EPS totaled $2.23.

Excluding the impact of our strategic actions, adjusted EPS was $0.57 for the quarter and $2.43 for the year.

Additionally, it's important to remember that FX negatively impacted full-year EPS by an estimated $0.14, or about 5 percentage points of growth.

Regarding stores and capital expenditures, on a net basis, we closed five stores in 2015 and our square footage remained about flat.

This includes about 150 Gap specialty store closures, broadly in line with our guidance.

Store accounts and square footage are listed in our press release.

Capital expenditures totaled $726 million, which was below our guidance, as we prudently reacted to the tougher business performance.

Regarding balance sheet and cash flow, as a testament to the cash-generating power of our business, in an otherwise difficult year, free cash flow totaled about $870 million.

Consistent with our commitment to distributing excess cash, we paid $377 million in dividends and returned $1 billion through repurchases during the year.

We ended the year with $1.4 billion in cash and our ending share count was 397 million shares.

Inventory dollars per store were about flat at the end of the fourth quarter, in line with our previous guidance, and total inventory was down 1%.

Now I'd like to share our outlook for 2016.

We expect earnings per share to be in the range of $2.20 to $2.25, and operating margin to be about 9.5%.

Embedded in our full-year guidance is a negative impact from foreign exchange of over $120 million in EBIT, which equates to about $0.19 of EPS, or 8 percentage points of EPS growth off of 2015's $2.43.

Let me say more about foreign exchange, given its significance.

Our largest foreign subsidiaries are in Canada and Japan, with combined sales in these two countries of about $2 billion.

2016 will be the fourth consecutive year with meaningful headwinds from the strong US dollar.

Note that our hedges help to delay but not eliminate the impact of depreciating foreign currencies.

To paint the picture of how dramatically currency movements have impacted our results in recent years, I'd like to offer a few metrics.

The cumulative impact of weaker foreign currencies to our reported sales results was more than $700 million over the past three years.

Absent these headwinds, 2015 net sales would have totaled $16.5 billion, up about [$900 million] since 2012.

The impact to the bottom line is also meaningful.

We estimate that the impact to EPS has been about $0.40 since 2012.

Here are some additional 2016 guidance metrics.

We expect to add 40 net new stores with square footage to remain about flat.

In line with our strategy, openings will be focused on China, outlet, and Athleta, while closures will continue to be weighted toward Gap brand.

We are reducing capital spending in 2016 to support improvement in return on invested capital.

We expect capital expenditures to be about $650 million, with a continued focus on mobile and supply chain capabilities.

We expect depreciation and amortization to be about $560 million.

Given our comp includes both store and online sales, we decided to guide to total inventory in 2016.

We expect total inventory to be down in the low single digits at the end of the first quarter.

Regarding expenses, it's important to note that SG&A may deleverage against our 2015 reported levels, as we potentially restore some categories of expense, such as incentive-based comp.

And lastly, we expect our full-year effective tax rate to be about 38%.

Finally, underscoring our commitment to returning excess cash to shareholders, we announced a new $1 billion share repurchase authorization.

As a reminder, our $400 million term loan matures in 2016.

We currently intend to allocate a portion of our cash flow to repay this; therefore, 2016 repurchases will likely be meaningfully lower than our historic average.

In conclusion, 2015 was a challenging year for us and others in our sector.

Despite our disappointing performance, it's important to highlight some of our strengths as we enter 2016.

First, we believe that our size and portfolio of brands are a competitive advantage in areas such as sourcing, real estate, and e-commerce; second, as our track record has demonstrated, we of course plan to maintain our operating discipline; and finally, our reliable cash generation and strong balance sheet allow us to make investments in areas like technology and supply chain, needed to win in this evolving retail landscape over the long term.

Thank you.

And now I'll 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.

(Operator Instructions)

Our first question will come from Matthew Boss with JPMorgan.

Good afternoon.

My first question, as you think about your 2016 game plan and the sense of urgency that you spoke to, does the guidance embed positive comps at all three concepts for the year?

And then just along those lines, how should we think about same-store sales opportunity in the front half versus the second half?

Just any color around your expectation and the drivers associated would be really helpful.

Hi, Matthew.

I'll start and then if Art has anything to add, he can chime in, of course.

What I'll tell you is our guidance range always includes a range of scenarios, obviously.

We prefer -- it's our goal to try and return to positive comps this year.

So we'd prefer to drive to our range with positive comps.

But it doesn't necessarily require a positive comp to get to our guidance.

So again, it's a primary goal of ours to try and drive revenue growth and positive comps, but not necessarily required to meet our range.

The only other thing I'll add to that, Matthew, is what I've said now repeatedly, which is I have a strong bias, along with my Presidents and Sabrina, to make sure that we are tight on inventory, because obviously we've been very promotional.

We don't want to be as promotional.

And a step in that direction is to make sure we're buying tight, and then ideally where we can is to use our inventory responsive capabilities to chase upside if there is upside.

Great.

On your comment around the potential for deleverage this year, what is the fixed cost hurdle?

Can you lever on a negative comp as it relates to the SG&A that you were speaking to, that you said may delever?

Yes, what I'm suggesting is if we are meeting all our goals this year, there's especially two categories which there may be reinvestment in.

As you can imagine coming off of the 2015 year we came off of, incentive comp/bonus was absolutely minimal.

We also reported that marketing expenses were down over $60 million year over year.

Those, for example, are two categories that if we're tracking well to our goals and doing as we hoped to do, we would be happy to see reinvestment in, and that may cause some deleverage of expense.

Great.

Best of luck.

Thanks.

(Operator Instructions)

Your next question comes from the line of Richard Jaffe with Stifel.

Thanks very much, guys.

A question following on a comment you made about Old Navy, that the fourth quarter ended on a down note with traffic, but the traffic was back.

Could you talk about traffic for each division since Christmas or since the start of the quarter?

Yes, at a high level, Richard, I'll tell you that Banana has actually had the strongest traffic.

So consistently throughout the year and through the fourth quarter, they've had the strongest traffic, which is good news that when the product comes back as we're looking to it to start to come back this month, we're at least getting the footsteps in the door.

Gap has had the weakest traffic, on the other hand.

So the whole year, Gap has had the toughest traffic.

Old Navy for most of the year had pretty solid traffic, slightly negative, but certainly beating our read of mall traffic.

The surprise at Old Navy really came in the months of November and December where it fell off significantly.

It did return in January.

We're not getting overly excited about that because January is a clearance month.

So it's really important to see how we do on traffic in the first quarter.

But again, Banana was the strongest.

Gap was the weakest.

Old Navy's was pretty good up until November and December.

On top of that, one of the most important metrics I look at is what is our sales over traffic spread?

So that was what was really good.

And also it makes me feel good about Old Navy, even though there was a bump in the road, which is for a long time, they have had a very attractive sales over traffic spread, which to me really signifies the health of the brand.

That's helpful.

Thank you.

We will go next to Anne-Charlotte Windal with Bernstein.

Yes, good afternoon.

Thank you for taking my question.

A question for you, Art, on the competitive landscape, and in particular, obviously like Primark entered the US market last year.

So I'm sure it's something you're tracking very closely.

What type of impact have you seen from their store opening at King of Prussia?

And in Boston, why you have a Gap Factory store across the street from Primark?

Thank you.

Yes, something that's absolutely in our landscape.

I and my teams are always making sure that we are watching all the competition, and certainly a new entrant like Primark, which has had their track record of their success and growth very consistently, obviously, that they've had in Europe.

I was with the team, in fact Jack was there with me, in the Downtown Crossings store shortly after it opened.

We've been looking at it very carefully, in the King of Prussia the store as well.

And we have our eyes really on it.

Probably the one thing I'll call out is overall, two stores in a very large market haven't had a noticeable impact yet.

So if I look across our whole business, too early to call that at the end of the day.

Downtown Crossings specifically, where you note that we do have a Gap Factory store, business has remained strong in that store.

Traffic is strong in that area.

Big grand opening effect with Primark opening as well, but it's very early days.

And we're on it; we're watching it.

My issue there always with a new competitive, particularly one like Primark that does come in with very sharp price points, with an everyday low pricing policy, very intrigued to see how the American consumer responds to that against the backdrop of how the whole sector typically prices, which is obviously more promotional pricing.

So early days, watching it carefully.

Thank you.

We will go next to Lorraine Hutchinson with Bank of America.

Thank you.

Good afternoon.

Sabrina, you cut a significant amount of cost out of the fourth quarter.

And I was just curious how you're thinking about the sustainability of that.

If things don't track toward positive comps, are there more cuts that you could make to stay within your guidance range in 2016?

Yes, we have proven year over year, Lorraine, that we're very disciplined about our expenses.

Partially, our structure helps us.

So we've talked about the fact that over half of our expense base is related to our stores, and over half of that is variable to sales.

So when we have sales come down, as they did in the fourth quarter, we get some natural variability and expenses come down as well.

I mentioned in my previous response, as well as in my prepared remarks, that we obviously paid minimal bonus in 2015.

So that was a portion in the fourth quarter as well as throughout the year, but probably especially in the fourth quarter, of how we brought down the expenses.

And then finally, marketing as well.

So that is actually the very reason why I'm signaling that there may be some deleverage in 2016, as we hopefully are meeting our goals for the year.

That said, we're going to continue to manage our expenses very, very tightly.

So you can count on us from an absolute perspective to manage them quite tightly.

And I think we've proven that we're pretty adept at using the levers, depending on how business is performing to bring those in line.

Thank you.

We will go next to Simeon Siegel, Nomura Securities.

It's small, Sabrina, but just the other US revenues were down.

Is that residual Piperlime anniversarying?

And anything you guys can share on the expected Athleta sales growth and trajectory there, maybe ultimate store fleet size.

Thanks.

Thank you for asking that question.

The other is mostly made up of Piperlime, which, of course, we closed in the first quarter of last year, Athleta, and Intermix.

And so, yes, it looks down, driven by Piperlime.

If you exclude Piperlime, we're actually up a low double-digit in revenue growth there.

Great.

Thanks.

And then just given the commentary around the debt pay downs, any color on expected interest expense for the year?

No, it's pretty easy to calc.

We have the bond outstanding, and you guys know that's at a 5.95% interest rate.

Then the term loan is at LIBOR plus 75.

So it won't fluctuate that much.

Great.

Thanks a lot.

Best of luck for the year.

Thanks.

We will go next to Dorothy Lakner with Topeka Capital Markets.

Thanks.

Two quick things, one just on the style misses at Old Navy, for Art.

Are you -- you seem comfortable that that's behind the brand.

So just wanted to make sure on that.

And then for Sabrina, on the strategic actions, the cost, I know you broke it down between OpEx and gross margin for the year.

Just wondering how the $25 million in the fourth quarter breaks down.

Let me take on the style misses.

And so, to answer your question, am I comfortable that style misses are behind us?

No, we're always going to have some style misses, obviously.

Design's job is to push creatively, and merchandising's job is to counterbalance that with a commercial orientation.

We all, across our brands, and frankly across the industry, one of the bigger style misses of last year was tops went to a silhouette that was a little bit shorter and a little boxier.

And many women voted that it wasn't very feminine and wasn't very flattering.

And it was a style that was out there, but it was a style that, frankly, didn't really register with a lot of customers, and that's a good learning.

The word femininity is one that continues to be one that I'm pushing to the front, whether it's across tops or bottoms, probably a bigger issue.

Then there was a little bit of an issue where we got a little bit over-assorted.

We got pre-enthusiastic about some sweater styles where there was duplicative choice, and it meant that she came in and she bought -- it was an or versus an and.

And again, I'm confident that Sabrina and I have leaned in with the team and learned about the business and looked at how we brought it.

In February and March and April, obviously looking at that and making sure we're re-registering where we need to be from a style count and trend standpoint.

We're always going to have some misses.

The whole point of the work we're doing is to minimize the misses.

And as I keep saying, guess less, guess better, and fix faster.

Sabrina?

Yes, and then Dorothy, on your question, in the quarter we had $25 million from the strategic actions.

$19 million of that was operating expense and $6 million of that was in gross margin.

And I'll just, just to be helpful I'll say again that full year was $132 million; $98 million was expense and $34 million was gross margin.

Great, thanks.

Sure.

We will go next to Kimberly Greenberger with Morgan Stanley.

Thank you so much.

Art, you spent a lot of time talking about product initiatives at the beginning of the call, and you sound fairly confident that the various divisions are on the right track for 2016.

I'm just wondering is there some evidence you could put around that?

We're just trying to figure out what is it that gives you confidence that the adjustments that are being made at the brand level will resonate with customers and generate the sales growth you're looking for?

Thanks so much.

It's a lot of things, and I continue to ask myself this as well.

Which is -- because I'm very impatient on marching against the metrics that I know we need to do.

Let me highlight a bunch of things.

Again, I'm not going to go through specific quantitative analysis here, but several of the things that I feel very confident will register with our consumers as they start to flow back into the assortment.

So we just had huge quality misses.

Literally, places whether it was fit or the quality of the fabrication, it made the product very difficult to wear.

I think I've cited this before, but the blazers in Banana Republic women's assortment where it was extremely difficult for the average woman to actually get her arm into the arm hole.

If you just take those out and you get back to common sense quality that our customers expect, that is going to register with our customers.

A second place, places where we intentionally under-develop the product because of either we assumed it wasn't trending or it was the preference of an individual in a seat or whatever.

An example of that is knits in women's knits in Gap brand where we under-developed last year.

We left market share on the table.

And this year, we have very intentional development across fabrications and silhouettes that we believe play in the relevant wear categories and wear occasions for us.

And that's another place where I call it reasserting development to get our fair share of market share.

And I've been in the stores now and looked at that.

I'd encourage you to do that.

You can see where we actually have a significant knits complex built out, accessories would be the same.

There's a spectacular cinch ballet flat, I think it's in 10 colors that's now in the stores, and we do business all day long with that, and it wasn't in the stores a year ago.

Those are places where again, question why we did it, but we've gone back in and said our fair share.

We play here.

This is where the brand plays.

And then the last thing is, the more complicated question is around our responsive capabilities.

So again, that is a journey right now.

But we have in our [12] programs in spring as an example, and I've talked about this before, the ability to be much faster into product that is selling on our shelves through combination of owning the fabric, having the fabric positioned approximate to vendors who have the capacity reserve to cut and sell into it, and ideally those vendors, particularly for North America and the Caribbean basin so that we can cut, sew, wash, and dye, put it on a boat and have it back in our stores very quickly.

All of those things, to me are, kind of obvious that they will give us upside.

So the only issue on my mind right now isn't will these things work and impact, it's just the pace and the timing.

Sabrina noted in Gap brand that our traffic has been toughest there, frankly in my mind, because we've been off brand for longest there.

So the pace and the timing of when the customer comes back, discovers the product, embraces it, tweets about it, posts it on Instagram and Pinterest, that's really the unknown right now.

But I'm very optimistic.

Thank you.

We'll go next with Ike Boruchow with Wells Fargo.

Hi, everyone.

Thanks for taking my question.

I think either Art or Sabrina, I think there's been about 175 Gap stores that you guys outlined at your last Analyst Day for closure.

I think you did most of those.

When you're looking at the fleet right now, if you were to look -- you gave us your guidance for footage this year.

Bit if you were to look three years out, how does that look?

Are there fewer stores?

Are there similar amount but much smaller boxes?

I'm just curious how you think about the business over the next couple years.

I would say right now we feel comfortable with the fleet size.

We feel like that sweet spot where we are is a good number.

We work it continuously, and we're always looking at opportunities to either put a store in place, like the Times Square that we announced where there will be a Gap and an Old Navy going in to Times Square.

Or a store, if it's not delivering or if we feel like the real estate is not appropriate for the brand, we'll get out of that real estate.

But at this moment, I'm not ready to call a number different than we are as we look forward.

Second thing I would really focus on though, and I've talked about this is I'm a strong believer in the fact that we can do more business in less real estate in the same location.

That is what we're focused on.

Obviously, you can't flip the fleet overnight into smaller stores.

But every opportunity we have, whether it's a lease coming up or a reposition or an opportunity to give some space back and densify, we're going to be taking aggressively advantage of those opportunities.

Gap has got the biggest opportunity there, in my view.

We tried a store in China.

I was in that store a couple weeks ago and super pleased by what I saw.

It's a very small store footprint with a full expression of Gap brand, and most importantly, it worked for the consumer.

So the early days of really thinking aggressively about densifying through fixtures, through folding versus hanging, through how we use the total cube of the store, aisle width, all those kinds of things, I'm very encouraged by the opportunity there.

But again, that's not an overnight flip.

Thank you.

We will go next to Oliver Chen with Cowen and Company.

Thank you.

Art, regarding response to supply chain, is there an axis we should think about it with respect to store banners, in terms of being more opportunity to certain banners?

And then also the dimension of product category?

As you do the -- as you improve product, I just wanted to get briefed on how you'll sequence in marketing as you have more conviction that product is improving.

Lastly, Sabrina, on the guidance, is our merch margins assumed to be flattish?

That would just be helpful.

Thank you.

If I think about responsive, and again, responsive is a whole bunch of stuff bundled together.

But let's just basically talk about one of the things that cuts out many weeks, which is making a multi-season commitment to a fabric and then having that fabric pre-positioned to cut, wash, dye, and sew into.

That is most powerful as a capability in cotton fabrications, and so that applies to denim, to twill, to knits, et cetera, really consistently across all the brands.

If you start getting into synthetics and then obviously wool, silk, and those types of things, it's less an issue there, because you just can't necessarily platform those fabrics.

Although you can some of them, not all of them.

Importantly, you can also platform yarns for sweaters at the end of the day.

So if I think about the least relevant categories, probably accessories or outerwear.

Most relevant would be our core cotton fabrications, which we have and are an important part of the business across all our brands in denim, in twill, in knits, in fleece, et cetera.

So this is -- we wouldn't be pushing on something here if it wasn't meaningful for the entire business.

Importantly, it's actually also meaningful for Athleta in water and performance fabrics as well.

This is something that's largely applicable to the total Company.

And then with regard to merch margins, Oliver, we don't explicitly guide to merch margin, only the operating margin, which I gave you.

But to be helpful, there's sort of headwinds and tailwinds.

So the tailwinds in merch margin are clearly going to be the fact that we worked really hard for 12 months to put out new assortments this year, where we're hopeful that the customer votes in favor of higher product acceptance.

Also on the margin I would say, although I wouldn't -- I don't want to make any kind of big headline, but on the margin there's some average unit cost tailwind.

So those are the two tailwinds.

On the flip side, you have foreign exchange, which we've guided is actually growing in 2016.

And remember, in 2015, it hurt our merchandise margins by 50 basis points, and it's bound to be even bigger in 2016.

So underlying basis of course, we're hoping to get some merch margin expansion, but you kind of have to weigh that against the headwind of foreign exchange.

Okay.

Great.

Both of those remarks really help.

Thank you very much.

We will go next to Paul Lejuez with Citigroup.

Thanks, guys.

Can you talk a little bit about the profitability of China in 2015, what you expect for 2016, and just how you expect that business to grow over the next couple years?

Thanks.

Yes, I'll start, then Art can, I'm sure talk about it as well.

I think we said a few month back publicly that we expected Gap China to be profitable on a management basis in 2015.

And in fact, we achieved that goal.

So we're very pleased with that.

We would expect, of course, Gap China to continue to improve its profitability year over year as time goes on.

So that's Gap China.

If you look at China as a whole, of course, we launched Old Navy recently.

And as you can imagine just starting a new brand, that one is not profitable yet.

These things, especially in China, take a few years.

But the good news is Gap China met its big milestone of profitability this year, and we expect that to continue going forward.

Let me talk about Old Navy and just underline that there.

So we've opened a handful of stores, and I guess in my mind, the sequence here -- the responsible sequence is open some stores across some relatively heterogeneous real estate, and then start getting the four-wall model correct.

And that's what we have been working on right now.

I'm really, really big on making sure that we understand the best four-wall model, what kind of sites that's located in, whether it's a lifestyle center or a street-front store or value center or whatever, and also the store size.

And then once we are comfortable with that, put the hammer down on opening real estate after we've got the four-wall model done.

And with Old Navy, I am not worried about real estate availability.

When that business hunts, it hunts in a big way.

It also is a big traffic draw.

So there's a lot of landlord interest out there.

So the pace to me right now is going to be set by making sure that we've really got the four-wall model correctly.

But again, as I said before, I am very bullish on that value proposition around the world.

Thanks, guys.

Good luck.

We will go next to Betty Chen with Mizuho Securities.

Thanks.

Good afternoon, everyone.

I was wondering, Art, if you can talk a little bit about your initial thoughts having seen The Gap spring product inside the stores, and how it's returned to its heritage.

And what are some of the goal posts that you're looking for in order to feel more comfortable investing marketing dollars behind the brand?

Thanks.

Yes, again, as I said, you can imagine, I don't have very long fingernails right now as the spring product has gotten in to the stores and I've been out in stores a lot.

And I've been out in stores a lot on an unannounced basis, because I want to see what our customers are seeing versus what's been prepped for CEO visits.

I went in to the -- I'll just call one store out right now, went in to the store that we have, flagship store on 54th and 5th last week in New York.

Product was fully expressed there.

Spring.

We flipped that store.

We brought women's down from the second floor down to the first.

I walked in, and I have to honestly say I'm not sure I've ever felt like that store showed up better as an expression of Gap brand.

The color was evident.

The femininity was clear.

We have strong ownership.

It's clear why we're in the business from the standpoint of women's bottoms, whether it's twill, denim, or bistretch bottoms.

The accessory statement was very powerful.

And so if I think about a from-to of last year, neutral color pallets, unfeminine silhouettes, some quality issues in our business, lots of overlapping denim development, et cetera, I feel like the from-to is optimistic print pattern and color, feminine silhouettes, intentional denim development, ownership in the bottoms business, great accessories business.

So it's a big step in the right direction.

The most important metric I look at, and I'm not going to go in to the detail of this, is as we're obviously working our way through product from last year, clearance product, et cetera, I want to look at the new product that's current season code and understand how we bought it and then what kind of comp we're running off of it.

Those are the most important early leading-edge indicators of whether we're seeing good customer acceptance of the products.

So that's what I'm looking at right now.

Then it will eventually aggregate, obviously.

If we're seeing customer acceptance; we're over selling our buy plan.

That will aggregate the comp.

Thank you.

Good luck.

We will go next to Anna Andreeva with Oppenheimer.

Great.

Thanks so much.

Good afternoon, guys, and thanks for taking our question.

We had a question on athletic performance by brand.

Hoping, Art, you could talk about Athleta performance during the quarter and also Old Navy, where we think it's been a little bit softer as of late.

And we've seen additional promotions there.

And with 15 new store openings at Athleta for 2016, I think that's reined in a little bit from historic levels.

How do you think about this size of the footprint going forward?

Thanks.

That was a lot of questions embedded in one.

You did that artfully.

Let me comment on Athleta first.

Athleta has, and I think we mentioned this, and I'll underline it, very strong back half, and I was really pleased with that.

The assortment was in line, they were on trend, the product was well bought, and I was really pleased with the numbers.

If you look at Old Navy, because you raised that specifically, we have had excellent performance out of the full family expression of active wear inside of Old Navy.

We had been a little bit more promotional, so you're correct on that.

But that does not signal anything other than we still have excellent performance out of that business and we're seeing very strong growth.

I'm really encouraged, frankly, across the whole Company as I look at it right now, because if you take Athleta, Old Navy's full family active expression, add to it a young girl to tween expression inside of Athleta, and then a full family expression inside of Gap, we are present and accounted for in the mainstream of what is probably the most important ready-to-wear trend that we've seen since skinny denim maybe came on the scene.

I feel like we're very well represented there.

We have great fabrics, great development.

And as a Company we can share assets across the Company, across fabric platform and things like that.

So it's a powerful place for us to be.

If I specifically look at Athleta's growth rates, and again, I've said this before, we are learning every day what the right mix of online, catalog, and stores is in the Athleta business.

It's the opposite of what has happened in mainstream retail, where people have gone online from a store's business, where in Athleta, we've gone into stores from an online and catalog business.

Again, our initial expectation as we started to open stores was that it would probably be cannibalizing of our online business.

And as we've learned and seen how the store channel and the direct channel interact with each other, we're really pleased to see that the direct business continues to grow even as we open stores.

And that as she discovers it in a store, she goes to direct, et cetera.

So I can't tell you I know what the right fleet size is right now; what I can tell you is that if I can grow this business in a highly accretive way without putting additional CapEx and the fixed expenses of our operating stores into the ground and continue to see that growth happen through our existing stores and the online channel, that's a very attractive thing to do.

So we're taking it slow and easy right now as we continue to explore the channel dynamics.

But I am in no way signaling the fact that we have nothing but -- anything but very strong growth expectations out of that business.

Terrific.

Thanks so much.

Our last question will come from the line of Ed Yruma with KeyBanc Capital Markets.

Hey guys, thanks for squeezing me in here.

First, on the role of outlet online, you've shifted the presence and really developed full-fledged sites.

How should we think about the positioning relative to some of your full-price sites and whether you're intending to see some cannibalization going forward?

And then second, Sabrina, it sounds like a number of other chains are able to renegotiate leases with some of the REITs.

I know you guys have been very tight with your [ROD], but how should we think about ROD for this year?

Thanks.

Let me pick the outlet question up here.

We've gone slow into this space.

Frankly, the reason we've gone there is that's where the customer is, and we've got to go where the customer is right now.

The whole outlet business has continued to morph over the last decade.

It used to be a business that was highly physically isolated relative to the specialty business.

And obviously there's been a collision going on where outlets get closer to specialty, and the suburbs have spread out to where the outlet malls were built.

And the online channel is another extension of that, at the end of the day.

That's where our customer is, and we felt a need to have a presence there.

It's early days right now.

We're in our early days of having this channel.

It's very difficult to identify anything that's cannibalizing anything, frankly, versus the fact that it's complimentary to the existing outlet channel.

But we're watching it very carefully, and we are trying to understand how it interacts, number one, with our outlet stores, because that's critical, but then number two with the specialty business as well.

What I will say is when all the businesses are healthy, the channel distinctions, the price distinctions, et cetera, are very clear to the consumer, but we're watching it very carefully.

With regard to ROD, I would say, look, the team is very focused on always aggressively negotiating the best deals we can, especially given the size of our fleet and the size of our brand portfolio.

What is happening and has been happening for the last few years in ROD, we've gotten most of the unproductive stores behind us.

When we were closing and downsizing a lot of the unproductive square footage, we were able to leverage very easily, even on negative comps on some years, but that's all behind us now.

What's happening now is the international stores actually are a big headwind, because as a percent of sales, they are a higher percent to sales.

Within their country, every year we are trying to get them to leverage.

But from a mix perspective, they hurt the overall ROD profile.

So where we sit today is it takes sort of a low single-digit comp to leverage ROD.

Great.

Thanks so much, guys.

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.

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

Thank you.

Thank you.

That does conclude our conference.

You may now disconnect.