蓋璞 (GPS) 2016 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen.

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

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

first-quarter 2016 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's first quarter 2016 earnings conference call.

Before we begin, I would 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 May 19, 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 would like to turn the call over to Art.

Thanks, Jack.

I appreciate it.

I want to spend some time on where we are, and where the industry is strategically, and what we're doing.

You will recall that over a year ago, I spoke to you very directly about the fact that we were not where we needed to be in terms of product across our brands and how we needed to bring product to market.

And we have done a great deal of work across the Company over the last 12 months plus, to be focused on: product; focused on restoring the aesthetic of our brands; quality where it is appropriate; consistent fit; and a number of elements of product, including building responsive product capabilities.

I am pleased with the work.

It is the right work, and we will scale this work progressively period over period, as we go forward.

But clearly, we need to do more, faster.

And so with that, we have announced several other things that we're going to be taking on, with a high degree of urgency.

This is an environment that we are operating in today, that demands faster change.

We are present today, with our global footprint, where apparel dollars are being spent.

That said, that has never meant that we will compete in every geography, with every brand, in every channel.

I'm a strong believer in this Company of trying things, learning from them, making adjustments, and moving forward, and doing that with speed, and doing that decisively.

As part of this, we have announced that we will be winding down our Old Navy operations in Japan.

Partly due to the macro factors in that environment, and partly due to, frankly, needing to apply the resources to greater and higher potential opportunities.

I am obviously disappointed that we're going to be discontinuing operations, but I view it as a sign of a good company when you acknowledge that the business isn't going to deliver, and you make changes and move forward.

I am still, with respect to Old Navy, very bullish about its global growth opportunity; very excited about the potential that lies in front of that.

China has been and will continue to be a key area of focus for the entire Company.

And so far in Mexico, I have been very pleased with what I have seen as the growth potential and profitability potential there, as well.

I also want to call out the fact that part of the work that we're doing right now is making sure that we are taking every opportunity to exploit our scale, and our mass, and our size.

We believe very strongly that we have a structural advantage in our North American footprint.

There are other advantages in North America that I want to make sure that we are fully exploring, whether these are supply chain, logistics, our mobile and web presence, our CRM opportunity -- all coupled with our product engine, which I believe form a potent formula for winning in North America.

There is a tremendous CRM opportunity here, and when I say CRM, I really mean the opportunity to know our customers holistically, and increasingly communicate with them as individuals and personalize their experience.

We also have an opportunity, if I go back to mobile for a second, to move towards truly leveraging mobile traffic that we're getting on our website, and continue to get towards a fully responsive, deep integrated, super efficient mobile web experience.

These are all advantages that in our core North America market we have, we can see them, we can exploit them, but we haven't pushed fully down that path.

They are not unrepresented in our other markets as well, but with our home market being North America, they are powerful in terms of where we have structural advantage.

I want to highlight two words.

And I have mentioned these now frequently inside the Company and I just want to underline them for this conversation.

One is acceleration, and the other is distortion.

They are both critically important.

One is about moving faster on a broader front, and the other is about aligning our energy against fewer things deeper and better.

Acceleration is about the change that we have already been embarking on as a Company, but pushing harder and pushing faster.

We have an opportunity to tighten up our operating model, to accelerate that change, in order to be more nimble, to operate faster, and to be more efficient at the same time.

I intend that we will take advantage of every opportunity there as well, and accelerate the change that we are making.

I also do use the word distort.

What it means to me is to make sure that our energy, our resources, our investment, our talent, are pushed towards places where we can win, where we can create advantage that is meaningful in our economics, and advantages for our customers and win.

So what is a good example of that?

Our presence in active today.

It's a big business for us.

We are one of the largest players in active in North America today.

It is an opportunity to continue to build the business, to participate in the highest growth segment of the apparel space, and then bring our scale, our mass, and our capabilities to bear, in technical innovation, in fabrication, in design, and in trend; bring those to bear not just in our active business, but on behalf of our entire ready-to-wear portfolio.

Let me come back to Q1.

Top line, and bottom line, unacceptable.

We saw traffic volatility over the course of several weeks during the first quarter.

It obviously had a significant impact on demand, on promotional levels, and on top line and bottom line.

What I am very encouraged about is what we are seeing inside the business, and the customers' reaction to the product work that we have been doing over the course of last year.

Go into a Gap store, look at the product, feel the quality, see the color, the optimism, the consistent fit, really proud of the work that the team has done, and our customers are responding to it.

But I started this a year ago, and said, if we do not win at product first, we won't win.

And it is clear that we need to do more than product, but I am very pleased with the product work that we have done.

And again, how it is showing up in front of our stores.

You have heard me speak to Old Navy before.

Too much fashion, too much duplication in the assortment.

The most important thing to know about old Navy is the brand proposition, the value proposition is compelling.

I am very excited about the team getting the brand back on track.

I have zero doubts about how compelling the value proposition is.

Let me speak briefly about Banana for just a moment.

Obviously, again, very disappointing comp in that business, and we have more work to do, to make sure that all of the product in the stores is being brought into the stores through the filters that the brand has put in place.

That said, on key item buys where we have been relentless about quality fit and making sure that it honors the promise of versatility that Banana has always honored, I am seeing some very encouraging results there.

Last, I have not spoken to you much about Athleta, but I would be remiss not to call out the fact that Athleta continues to perform superbly for us.

It is positioned right in the sweet spot of the active space, which is growing faster than the overall rate of apparel, and it is a place where we are fundamentally omni-channel in our structure, and very innovative all the way down to the fiber and fabric level in terms of product fabrications.

So both as a growth driver in this Company but also as a source of innovation to the rest of our portfolio, I couldn't be happier having Athleta as part of the Gap Inc.

family.

Let me close by saying that again, to me, the change that is impacting this industry is obvious.

It has been obvious to us for a while, which is why we are moving with urgency against a multi-year plan to modernize this Company across many levels.

I am very excited about what this Company can do going forward.

Thank you, and let me now hand off to Sabrina.

Thank you, Art.

Good afternoon everyone.

As you heard from Art, we're committed to focusing the business to gain market share in key strategic markets, where we believe we are structurally advantaged and/or where there is significant runway for growth.

The decisions we disclose today will allow us to better align our talent and financial resources against our most important priorities.

First, we have made the decision to wind down our Old Navy business in Japan by the end of FY16.

Additionally, we are planning to close a number of dilutive Banana Republic stores, primarily internationally.

Further, we're taking steps to streamline our operating model.

Let me give you some detail.

Regarding Old Navy, as a reminder, we launched Old Navy Japan in 2012 and have 53 stores.

While Japan will continue to be an important market for the Company, with over 200 Gap and Banana Republic specialty and outlet stores remaining, the investment in terms of both financial and human capital to build a new brand in that market is significant.

Given the lack of growth in the apparel market there, we have decided this level of investment wasn't prudent.

In the near term, Old Navy's growth ambitions will be anchored in North America, including our newest market, Mexico, as well as China and the franchise business.

These opportunities present significant potential for us.

With regard to streamlining our operating model, we have an opportunity to become more nimble, and better leverage our scale.

This will allow us to deliver the continued expense discipline you have come to expect from us, and mitigate the natural upward momentum in SG&A.

Together, we expect these decisions to result in annualized savings of about $275 million, and operating margin improvement of nearly 2 percentage points.

It is important to note that we expect an annualized sales loss at about $250 million from the closure of approximately 75 stores.

We estimate restructuring costs of about $300 million, of which about $100 million is estimated to be non-cash.

Now, let me go back and speak to the results for the first quarter.

While we are disappointed with our first-quarter performance, it is important to note we have maintained our operating discipline in the areas we can control, as evidenced by continued expense management, ending inventory in line with our guidance, and delivering positive free cash flow.

With regard to sales, sales totaled $3.4 billion, comp sales were down 5%.

Foreign exchange negatively impacted net sales by about $20 million.

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

Moving to gross margin, first-quarter gross profit totaled $1.2 billion, and gross margin contracted 260 basis points to 35.2%.

Merchandise margins were down 170 basis points, driven by Old Navy and Banana Republic.

Rent and occupancy deleveraged 90 basis points.

Regarding SG&A, first-quarter total operating expenses were $987 million, slightly below last year.

Marketing expenses were down about $9 million versus last year, to $127 million.

Operating income for the first quarter was $222 million, and net earnings were $127 million.

Earnings per share were $0.32.

Regarding the balance sheet and cash flow, total inventory was down about 3% at the end of the first quarter, in line with our previous guidance.

We expect total inventory dollars at the end of the second quarter to be down in the low single digits year over year.

For the quarter, free cash flow was an inflow of about $30 million, and we ended the quarter with $1.3 billion of cash.

Regarding capital expenditures and store count, year-to-date capital expenditures were $139 million.

Square footage was down 1.3%, compared with last year.

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

With regard to our earnings outlook for the remainder of the year, we are operating in an evolving apparel retail environment, and it is unclear whether the trends in Q1 will play forward for the remainder of the year.

Therefore, we are not reaffirming our 2016 guidance.

For now, we believe the current First Call consensus EPS estimate of $1.92 falls within a reasonable range of potential outcomes, excluding the restructuring charges I outlined earlier.

To be clear, the Q1 trend would need to improve, in order to achieve this consensus estimate.

If the Q1 trend continues, this would present downward pressure on the estimate.

Regarding other guidance metrics, our cash flow generation and strong balance sheet have been, and continue to be strengths of our business model.

We intend to maintain that focus and therefore, we are reducing our 2016 capital spend guidance by about 20% or $125 million, to about $525 million.

We now expect depreciation and amortization of about $550 million.

Regarding square footage, we now expect to end the year down 2%, a reduction from our earlier guidance of about flat.

It is important to note, we continue to have a diversified portfolio, with the majority of our fleet either in the value segment or in growth markets, and only about a quarter of the fleet in traditional North America Gap and Banana Republic specialty stores.

Regarding tax, due to the fact that the restructuring charges necessitate certain non-cash valuation allowances that impact our effective tax rate, we now believe the rate for the full year on continuing operations will be about 40%.

In closing, our global growth strategy remains intact.

We are simply focusing our talents and capital on areas that have the greatest potential for profitability.

After our actions, we will still have a presence in over 90 countries.

While we are disappointed with the results for the quarter, we are energized about our plans to evolve our business, and to capitalize on the competitive advantages we have.

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

That concludes our prepared remarks.

We will now open up the call to questions.

We would appreciate limiting your questions to one per person.

(Operator Instructions)

Simeon Siegel, Nomura Securities.

Perhaps a dumb question, but can you share any more color on the specifics behind the streamlining the operating model?

Sabrina, maybe any help on the timing of when you'd expect the cost savings to hit?

Yes, most of the savings are going to come from the operating model, actually.

But I would tell you the actions are going to take place throughout 2016.

We don't expect a significant portion of the annualized number to come in 2016.

Although, it is going to be helpful, and as I said, it is going to enable us to deliver the continued expense discipline that you would expect from us.

And then if I can follow up on that.

In light of the comments on the full-year guide, do you think anything has changed in the ability to forecast the business longer term, and is there any changes in predictability in general?

And if so, anything you can do to maintain your ability to plan the business going forward?

I think what was really interesting about Q1 was really based our assumption around traffic, which we have never expected positive traffic.

We didn't expect deeply negative traffic.

And the other interesting thing about the trend was it was quite erratic.

We know that February started quite well, and even March started quite well, and it fell off precipitously in the week before Easter.

I think we just want to pause for a minute and see if the Q1 volatility is a continuing trend, or an aberration for us.

That will allow us to get a better sense of the full year, and the assumptions we want to base that on.

But as I said, I think that the consensus estimate is very reasonable, in terms of the range of outcomes that we could predict at this time.

Great.

Best of luck for the rest of the year.

Matthew Boss, JPMorgan.

Could you talk to your promotional strategy today?

Any changes to potentially drive increased traffic in the second half?

Any consideration to potentially taking a cut to initial ticket prices, just to reset the bar?

And last question, regarding distribution, Art, I know you have made comments about Amazon.

Any opportunity and the thought process between a potential partnership at some point?

Sure.

Let me try to address all those.

Several of those bundled together.

That was very clever.

If we just think about promotion, I think it depends on the brand, because we are very different positions on each brand.

Gap and Banana having come out of situations where they were extremely deep over the course of the last, in some cases, 18 to 24 months, because of big product issues.

And in both of those businesses, we are working to drive top line, but also to tighten up our discounts.

If you are a subscriber to our emails, or in our stores or on our website, you will notice that it is real.

It is not easy, but we are working in terms of the depth of promotional -- the depth of promotions, the promotional frequency, and the breadth that they cover.

I actually was just with the Gap team, where we went through, looking at our commercial plan up to Memorial Day, and how we are trying to drive a very compelling, seasonally appropriate message from a promotional standpoint, so that we can play.

But also working to protect margin as much as we can.

The same is really true on Banana, where we have backed off, and I will be the first to say that when you start tightening up in promotion, you're playing a game of chicken with your customers, and they try to wait you out, and so we have been playing that now for really the last quarter.

We have seen more affecting us quite honestly, it's a little bit easier in Gap, where we are seeing the numbers move more consistently in the right direction, a little more sporadic inside of Banana.

At Old Navy, we have been promotional, we are promotional.

We missed execution in Q1 from a marketing standpoint, and we are really tightening up the commercial messaging for Q2 and Q3.

We are going to continue to be promotional there.

It is the way you have to play in the value space.

I think it's we have said over the last few years, we have actually been quite good and pleased with the fact that we have improved our yields in managing the underlying promotions, while at the same time communicating a strong value message.

And then you have something like an Athleta, which admittedly is a smaller but every day larger piece of the portfolio.

It is still largely a reg price business, and a business that we really feel good about from the standpoint of the promotional cadence there.

On tickets, absolutely.

It is something we have been looking at, and in some cases both in Banana and Gap and Old Navy as well, all three, we have made some adjustments to our tickets, where we felt like the initial tickets, given where our competitive out the door pricing was, just were not real at the end of the day, and that is something that we are always looking at.

On Amazon, I will reiterate exactly what I said, regardless of how it got interpreted, and that is we are committed to making sure that we are where our customers are.

Today, our customers have obviously moved in digital, very significantly to a mobile experience.

We are running as quickly as we can to make sure that we run alongside them every day.

Amazon's presence in e-commerce is undeniable in this country, and therefore to not fully consider all of the options of distribution for us would not be thinking about things that were important to us.

So in no way was I previewing a partnership, I'm just previewing the fact that we want to make sure that we're very situationally aware of what is going on around us with our customers and in the world.

Makes sense, thanks.

Dorothy Lakner, Topeka Capital Markets.

Thanks.

Good afternoon, everyone.

I wondered if we could go back to product for a minute.

Art, if you could talk about the evolution that you are trying to effect at Old Navy, where you had too much fashion and you need to adjust the mix.

How long you expect that to take?

And then at Banana, where you may have assumed that the better product would get a better customer response, and it didn't, what you are doing there?

And then lastly how we should see the evolving mix at Gap, since you are seeing success both top line and margin, how we should see that evolve over the course of this year?

Let's talk Old Navy.

Old Navy really started to soften for us in Q4.

That was right around the time, as you recall, we also had a leadership departure, and an interim leader.

We got in there very quickly, we looked and diagnosed the problem.

By then, Q1 was bought, so we had the assortment architecture that we had.

Again, the issue there is not -- is much less about product acceptance, and much more about the architecture of the assortment.

And frankly duplicative and over assortment, largely in the women's business.

Items that were bought for very short fashion buys, a collections orientation.

We lacked the depth and tightness around key item buys in Old Navy.

And so on diagnosing that, that has obviously come through Q1.

We, as we have said before, focused on making changes as quickly as possible in Q2, which was coming at us pretty quickly.

I feel much better where we are in Q3, in the reset of the assortment architecture.

I don't want to leave unmentioned the fact that we have not had strong marketing in the first quarter of the year.

And that has contributed to what has been an unacceptably soft Old Navy business, when I believe value continues to remain strong.

And so it is deeply disappointing to me.

We have pulled TV out of April, we had ineffective TV, TV is a big brand driver for Old Navy, and we're back on that as we look into Q2 and then certainly into Q3 in line up for to back to school.

And so I'm not going to call everything, right as we cross over that threshold into Q3, but I am confident we have the proper diagnosis, we took the proper actions, and we have realigned the commercial plan.

The overall macro trends for a value competitor, family value competitor for Old Navy should be strong.

If I pivot to Banana for just a second, again, where I see us having put the most intention on key item buys to the filters of the brand.

I am pleased with what I am seeing.

It is just too little, not fast enough.

And so in that the customer is responding to those, it validates the work that the team has been doing, and then I go to the words I have been using, of accelerating the change to get there as quickly as possible.

That is a period over period change, that we have confidence is going to continue to improve the business.

Banana is the toughest product business that we have, just given the segment that they're in, and the work there has been the hardest work to reestablish the aesthetic and invite the consumer back in.

Leading-edge metrics in Banana around customer feedback, around reviews and things like that are very positive, but we are not anywhere close to where we need to be as fast as we need to be there.

If I go to Gap, here is what I would say about Gap.

If the traffic volatility that we and the industry experienced, if that had not happened in Q1, we would be sitting here having a very different, and much more upbeat conversation.

The metrics underneath the covers are moving in the right way.

When we are in a mode like this, we track period over period leading edge metrics, and they're all moving in the right direction for Gap, but we had traffic volatility that made it very difficult to show the top line that we were looking for.

So it is a mixed story across the businesses.

Again, I just want to come back to Athleta.

Strong strength in the portfolio.

I mentioned that of my comments, and I want to underline that as well.

We have a big business enacted for this Company, and it is a place where we are pushing hard to continue to distort towards that space.

As we look in that business, highest growing, and it will be a very significant segment of the overall ready-to-wear apparel space, as we go forward, and we plan on it being here to stay.

Great.

Thanks.

Paul Trussell with Deutsche Bank.

I just wanted to inquire about inventory goals.

I know it's a volatile marketplace, and it is tough to know the pace of trend that you will be dealing with, but how should we think about what would be a comfortable level of inventory for you by the end of maybe 2Q or year-end?

Yes, thanks for the question, Paul.

As I said, we are guiding to a low single-digit negative for Q2, and we just finished Q1 at a minus 3, so similar trend.

We have said all along, especially for our North America specialty brands, we want to keep the inventory pretty tight.

Now, the tightrope we all walk is, you don't want to bring it down so far that you cut off your opportunity to get a positive comp, so that is always the delicate balance that we walk, but we think pitching it where we are pitching at right now, at a low single-digit negative, strikes that balance, so that is what we are looking for.

Anne-Charlotte Windal, Bernstein.

Should we move onto the next?

Paul Lejuez, Citigroup.

It's Jennifer on for Paul, and good afternoon.

A quick question on Athleta.

I was wondering if you could talk a little more about that, give us a sense of the size of the business now, and maybe the margin structure of that business?

We don't disclose a lot about that yet, Jennifer.

You can get as sense of it in our other column.

Included in the other column is Piperlime, INTERMIX and Athleta.

And Piperlime, we wound down in Q1 of last year, so the number looks a little bit funny, because of the lack of Piperlime sales this year, when we had than last year.

If you remove that, we would have double-digit increase in other, and that gives you a sense directionally, since Athleta is much longer than INTERMIX.

That gives you a sense directionally of that business.

Can you give us a sense of size of INTERMIX and how that is performing, maybe?

I think the way the to think about that, Jennifer, is we haven't grown the fleet very much since we purchased it.

And so I think back then, we gave a sense of the size of the purchase, but we haven't -- it's been trying to tighten up and learn about the business model there.

So there hasn't been much growth there.

So I would say the primary driver of the growth in that column is going to be Athleta.

All right.

Great.

Thanks.

And would you say FX impacted earnings this quarter?

We did in the press release, but I will tell you now again, it is a 4 percentage point drag on earnings per share in the quarter.

Thanks for asking, because I didn't say it in my remarks.

Thanks a lot.

Best of luck.

Ike Boruchow, Wells Fargo.

Sabrina, could you maybe give us a sense of the timing, I'm sorry if I missed it, but the timing of those roughly 75 store closures, maybe what quarter those will fall into?

And just to clarify, so those stores represent about $250 million in sales and generate a loss of $275 million, or is there something else like back-office our headcount to gets you to $275 million in savings?

Let me take the last part of that first.

The $275 million, Ike, is made up mostly of operating model changes we are making across the board at Gap Inc.

So the Old Navy Japan wind down contributes to the $275 million, but is not the majority at all.

The majority is the op streamlining of our operations across the board.

With regard to the store closure timing, I would expect that to take place throughout 2016, and really probably weighted toward the end of the year.

Got it.

Thank you so much.

Brian Tunick, Royal Bank of Canada.

I guess Sabrina, I was curious, I think you mentioned 2 points or 200 basis points of an operating margin benefit go-forward.

I wasn't sure if you were referring to 2017, if you were referring to the core business, or does that have to do with some of the streamlining you are doing, that you're announcing today?

Just curious about what you thought.

Does that mean your longer-term operating margins can get back in the low double digits over the next couple of years?

Second question, on Old Navy, sorry to beat it to death again, but just wondering between macro and weather -- and how much could this fashion miss or over fashion really have impacted the quarter here?

It seems like a couple months now, the trend has been decelerating.

So I'm wondering as you parse out different buckets, what you have learned, and what is the timeframe again that you will see those product changes?

Okay.

I will start on operating margin.

The base that we are talking off of is our expected 2016 pace.

If you remove the sales of $250 million, and you remove all the associated line items, that gets you the annualized savings of about $275 million, Brian.

You get about, nearly 2 percentage points of operating margin accretion.

So it is actually quite powerful, from an operating margin perspective.

So we're very pleased with that.

This is going to be a journey back.

This is a big step forward in focusing us on the businesses that have the highest potential for long-term profitability.

And removing those that had quite a dilutive impact.

So that's on the operating margin.

I will turn it over to Art for the second question.

I'm sorry, the second question was around Old Navy, correct?

And product.

Again, like I said earlier, we saw what we saw in Q4, and got on it immediately.

Again, that was coincident with a change in management and leadership transition.

We made modest changes to Q1, as we previously indicated, because most of that product was either here or on the way.

And so we had a limited amount of impact.

And then incremental changes in Q2, as well.

The ability to significantly affect Q3, and obviously wholly affect Q4.

And so from the standpoint of the assortment architecture, which again was really largely around women's product being over-assorted, and lacking in the appropriate variety across some of the key programs, and then lacking the inventory depth behind key buys, that is significantly corrected as we get into Q3.

At the same time, we have had marketing against -- some weaker marketing against strong marketing that we have had in the previous year, and we have worked to correct that.

We have put TV and a number of other things back into the schedule, in order to bring our voice back every day.

And so, do I believe that we're going to continue to see weakness in the business on a going forward consistently?

I don't, because of value proposition is in the sweet spot of where we should be playing right now.

I have much more confidence that the architecture of the assortment is back in line, in Q3.

And then Q4, I think we are in very good shape, and we have a very good marketing program decked against it.

Super.

Very helpful.

Thanks very much.

Dana Telsey, Telsey Advisory Group.

As you think about the opportunities and the focus on supply chain logistics, CRM, with each business, what is the opportunity and what's the timeframe to achieve that?

Do you think it helps sales or helps margins?

Thank you.

Dana, that is a question we could probably spend the day talking about, so I thank you for asking it.

Surely you are aware, obviously, since we have spent a lot of time talking about the back-end work we're doing on supply chain.

And that is work that is, again, a journey not a destination.

I see significant scaling of that, as we go forward in the businesses, period over period.

But again, it is a journey that we're on at the end of the day.

If I look at it from the other areas, let's go to CRM for a second.

It's one I'm really passionate about.

I just announced a position in the Company of a Chief Customer Officer, where we are taking a wide variety of disparate connections that we have with our customer, and stitching them together organizationally, and beginning to really build the capability to have a much more consistent, deep, and holistic view of our customers as individuals.

The core of that, as you might imagine, is our credit card, which are our best customers.

It is a program that we only have in the United States, which is part of why I go to structural strength.

It's a very strong program here for us in the United States, and it represents a significant portion of our business.

And I'm not of a mind that an organizational change brings about meaningful change, but we have had bits and pieces of the customer again, in a number of places in the Company, and I have just broken those walls down and brought it together.

If I think about what our best practices are, broadly, we are well behind that.

I think we are actually in a pretty good space from where our best practices are in the apparel industry, and I am looking to accelerate that significantly there, also.

Again, credit card is the core, web browsing history, obviously all your tender history, loyalty program, multi-tender loyalty program all coming together in one place.

And that is one example.

Again, I'm not going to tell you that's a lights-on moment in Q3 or Q4, or something like that.

We live in a world today where we spent a great deal of money on marketing, which is something else that I have signaled to you before, and a lot of that money is spent in very traditional ways.

We are now increasingly enabling the capability to be much more one-on-one in our communication, targeted and personalized in our communication, and that is a pivot away from some of the traditional vehicles that we have seen to a much deeper form of communication through CRM.

I had my Board this week, and I explained to them that one of the places where this will manifest itself is, I think windows today are much less relevant than they have historically been, and you will see this going forward, that we are actually skinnying down our windows treatment in Gap, as an example, on the belief that if you haven't won at the digital interface on the front end, your windows in the mall store are probably not going to make a difference at the end of the day.

So this is work that is underway, and again, I am happy of course, as always, to talk to you separately, but it is work that we are enthusiastic about, where we believe we really truly have some structural advantages.

Thank you.

Omar Saad, Evercore ISI.

I would love to hear a bit of thoughts on the e-commerce side of the business.

It's such a strong suit for you for so many years.

I know it sounds like you're moving a little bit more towards investing behind the mobile capabilities to round out the suite of your prowess there, but can you give us an update on how you are thinking about the e-commerce business, and maybe how we should expect the mobile side of it to fold in over time?

It's a really good question.

It's a place where we have had strength, and we continue to have strength, and we see it obviously as everybody does, I think.

A long-term progressive shift of the consumer moving in that direction.

Let me go straight to mobile for a second, but let do view what I call the leaky bucket.

If you think about a business moving from stores, to a desktop or laptop, to mobile, stores for the industry, conversion of traffic into stores, whether it's in the mid-20s to the high 30s or something like that.

If you go down to a desktop or laptop experience, where someone is buying, that traffic converts somewhere in the low single digits for most people out there.

And then if you go to a mobile experience, a lot of people out there today are seeing conversion off of mobile traffic as a fractional single-digit.

And so the work that we're doing is very much about addressing that migration of traffic, and making sure that the opportunity for us to monetize that traffic as it moves remains there at the end of the day.

If I go straight to mobile, a big part of mobile is making sure that people have an incredibly easy shopping experience and checkout experience on a mobile device, that the content is relevant, so that means a responsive website, which we are largely towards achieving right now.

And then obviously content and the digital experience that shows up on a screen that is 2.5 by 5 inches at the end of the day.

So that is something where we are very focused.

For us, overall, our traffic has grown, and it has grown with digital.

If I were a retailer out there who was looking at this and was seeing my traffic being directly substituted from my stores, to a desktop to a laptop, to a mobile device, I would really start to worry about that bucket leaking out of the business.

And so we're committed to making sure where our customer is, and our customer today, and increasingly is on a mobile device, which means a great mobile shopping brand and e-commerce experience.

Great.

Thank you.

Good luck.

I would 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 first-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.

That concludes today's conference call.

We thank you for joining.