Gap exceeds expectations with 5% comparable sales growth in Q3, raising full-year guidance as brand reinvigoration strategy gains traction.

OPERATOR - (00:00:00)

Gotta keep trying, gotta keep my head held high because there's always going to be another mountain Always going to want to make it move Always going to be an uphill battle Sometimes I'm going to have to lose It isn't about how fast I get there It isn't about. There's always going to be another mountain Always going to want to make it move Always going to be an uphill battle Sometimes I'm going to have to lose and about how fast I get there and about waiting on the other side. Is the climb. Good afternoon ladies and gentlemen. I would like to welcome everyone to The Gap Inc. Third quarter 2025 earnings conference call. At this time, all participants are in a listen only mode. For those analysts who wish to participate in the question and answer session after the presentation, you may now press star1 to enter the Q and A queue. As a reminder, please limit your questions to one per participant. If anyone should require assistance during the call, please press the star key followed by the zero key on your touchtone phone I would now like to introduce your host, Whitney Notaro, Head of Investor Relations.

Whitney Notaro - Head of Investor Relations - (00:01:50)

Good afternoon everyone. Welcome to Gap Inc.'s third quarter fiscal 2025 earnings conference call. Before we begin, I'd like to remind you that the information made available on this conference call contains forward looking statements that are subject to risks that could cause our actual results to be materially different. For information on factors that could cause our actual results to differ materially from any forward looking statements, please refer to the cautionary statements contained in our latest earnings release. The risk factors described in the Company's Annual Report on Form 10-K financial filed with the securities and Exchange Commission on March 18, 2025 Quarterly Reports on Form 10-Q filed with the securities and Exchange Commission On May 30, 2025 and August 29, 2025 and other filings with the securities and Exchange Commission, all of which are available on Gap Inc.com these forward looking statements are based on information as of today, November 20, 2025, and we assume no obligation to publicly update or revise our forward looking statements. Our latest earnings release and the accompanying materials available on gapinc.com also include descriptions and reconciliations of financial measures not consistent with Generally accepted Accounting principles. All market share data referenced today will be from US Apparel Consumer Service for the 12 months ending October 2025, unless otherwise stated. Joining me on the call today are Chief Executive Officer Richard Dixon and Chief Financial Officer Katrina o'. Connell. With that, I'll turn the call over to Richard.

Richard Dixon - Chief Executive Officer - (00:03:28)

Thanks Whitney and good afternoon everyone. We are very pleased to report third quarter results for Gap Inc. That exceeded our expectations across multiple measures including net sales, gross margin and operating margin. We've done this by executing our strategic priorities with precision and consistency. The reinvigoration of our iconic brands continues to gain strength. Our playbook, rooted in purpose, powered by creativity and executed with excellence, is working and it's bringing consistency to how we operate and clarity to how we win. The momentum in the business is clear from product design to storytelling, from store execution to digital engagement. The result is a company that's becoming more agile and performing with increasing confidence. On today's call, as usual, I'll provide. An update on our third quarter performance. And progress in the context of our four strategic priorities. Then Katrina will walk you through our detailed financial results and our financial outlook, after which we will open the call for questions. Let's start with financial and operational rigor. Gap Inc. Comparable sales were up 5% versus last year, the highest quarterly comp in over four years. We were pleased to see our three largest brands, Old Navy, Gap and Banana Republic, posting strong positive comps in the third quarter, demonstrating the resilience of our portfolio. Despite a challenging quarter for Athleta, we delivered operating margin of 8.5% which benefited from growth in AUR. As customers responded well to our brand offerings, we continued to strengthen our balance sheet, ending the quarter with strong cash balances of approximately 2.5 billion. Turning to our next strategic priority, driving relevance and revenue by executing on our brand reinvigoration playbook. This playbook, when applied with relentless repetition, creates a powerful flywheel which has resulted in seven consecutive quarters of comp growth for our portfolio. Our largest brand, Old Navy, had an incredibly strong quarter, reflecting the brand's strength, consistency and continued momentum. Comparable sales were up 6% with the brand consistently gaining market share over the last two years. Customers responded to the compelling value proposition, resulting in healthy growth in average unit retail and notably across all income cohorts, which is encouraging. Despite widely reported macroeconomic pressure on the low income consumer. Old Navy's consistent performance is being delivered by Trend-right Products, our strategic pursuit of category leadership and compelling storytelling. The quarter began with a robust back to school season, reinforcing its leadership position in kids and baby. In the U.S. denim posted its highest third quarter volume in years with growth across the family. Women's and girls showed particular strength, driven by trend right styles like barrel, wide leg and baggy fits. Active delivered impressive double digit growth in the quarter with strength across the family. This demonstrates the strong customer response to the brand's distinctive value proposition in the active market and innovation, including new franchises like Bounce Fleece. Today, Old Navy is the number five active apparel brand in the US and the number four brand in the women's active space. As we begin to drive more growth through strategic partnerships that amplify our brand relevance, Our latest Disney collaboration kicked off the holiday season with our Jingle Jammies collection, which is exceeding our expectations, driving excitement across the family and fueling strong performance in the broader sleep category. Another great example is our first designer collaboration with American design legend Anna Sui. The collection brought high fashion design to a broader audience, staying true to Old Navy's democratic and accessible brand promise. The campaign featured rising Gen Z artist PinkPantheress and resonated across platforms. In September, we announced plans for a strategic expansion into the beauty category with a phased launch. Starting with Old Navy. As one of the fastest growing, most resilient retail categories in the US and customer insights that reinforce strong interest in the category, we see a clear and meaningful opportunity to grow in beauty. We recently expanded Old Navy's beauty collection in 150 stores, with select stores offering dedicated shop and shops and beauty associates. We intend to use this pilot to inform a thoughtful scaling strategy that will take us from seeding in 2026 to accelerating growth in the years that follows. Old Navy's third quarter performance reflects the strength of the team's work, which is clearly resonating. This brand continues to delight consumers and consistently deliver positive comps while reinforcing Old Navy's position as a brand that defines value, style and accessibility in American fashion. This gives us confidence as we move into Q4 and beyond. Now let's turn to GAAP. Gap delivered another standout quarter, reinforcing the reliability of its execution and the compounded strength of our namesake brand. Comparable sales were up 7% on top of 3% comp last year, marking the eighth consecutive quarter of positive comps with growth in average unit, retail consideration, organic impressions and new customers, a clear signal that Gap's momentum is real, repeatable and resonating. The quarter was fueled by broad based strength in Denim, the centerpiece of our viral campaign Better in Denim featuring global group Cat's Eye. This campaign demonstrated the power of the playbook in action, featuring trendrite product amplified by culturally relevant storytelling. With more than 8 billion impressions and 500 million views, better in Denim culminated in a global cultural takeover and has become one of the brand's most successful campaigns to date, generating significant traffic and double digit growth in denim. The results speak for themselves. Gap continues to accelerate, attracting a younger highly engaged consumer, particularly Gen Z, who is discovering us while reinforcing loyalty with our core consumer. As Gap brand equity and relevance continues to build, the iconic Gap Arch logo hoodie is a great example of the brand reclaiming its place in the cultural conversation. During the quarter, we marked the 30th anniversary of the Gap Hoodie with our first ever Hoodie Day. It was a moment that energized our teams, drove connection with consumers and contributed to the notable strength in fleece during the quarter. Our recent collaboration with Sandy Liang was another highlight, delivering strong results and continuing to position Gap as a platform for creative partnerships that drive relevance and new customer acquisition. For holiday, the brand is leaning into cashsoft where you'll see continued innovation with extensions into new silhouettes on trend sets and vibrant colorways. Earlier this month we launched our highly anticipated Give your Gift Holiday campaign, a continuation of our effort to bridge the gap across generations through music, creativity and culture. Featuring emerging artists. Sienna Spiro Gap's execution of the playbook has been fantastic and it's been exciting to see the brand building on their success quarter after quarter while continuing to drive distinction and relevance. It's a brand that knows who it is, where it's going and how to win and we're looking forward to carrying that momentum into the holiday season. At Banana Republic, we continue to make steady progress. The work to strengthen its positioning leaning into its heritage is paying off. Comparable sales were up 4% in the quarter, reflecting meaningful traction as the brand's reinvigoration takes hold. Growth was driven by continued progress in the harmonization between men's and women's. Men's elevated fashion designs featuring distinctive textures and fabrications continue to perform well and we've seen notable improvement in women's as fit and product refinement are resonating, particularly in dresses and wovens. Building on the success of the brand's prior campaigns. The response to Banana Republic's fall campaign with David Cornswett was strong, breaking brand engagement records and fueling growth while expanding cultural reach and resonance. For the holiday season, Banana Republic is leaning into its distinctive position as the modern explorer brand. Our new campaign shot in the stunning landscape of Ireland captures this essence well with our beautiful product featured in our travel oriented storytelling brought to life through dynamic destination rich content. This approach is driving stronger brand affinity and proving to be highly impactful with our customers. Overall, Banana Republic's third quarter results reflect meaningful progress and continued momentum. I'm optimistic the brand is well positioned as we head into the holiday season, shifting to athleta Maggie Gouger, Brand President, has begun to make an impact. In her first 90 days, she's taking quick and thoughtful action to begin to reorient the brand. This includes reorganizing the talent structure to align with her vision. The team is doing the right work, acting with speed and urgency to drive progress, but this reset will take time. Our focus is on positioning Athleta for long term success and returning it to its rightful place as a premium aspirational brand. The brand is at the beginning of its reinvigoration journey. We aren't chasing quick fixes, we are taking a deliberate approach to position the brand for the long term. We're confident that the consistent application of our brand reinvigoration playbook, anchored in purpose and heritage will guide Athleta forward. This is about returning to what made the brand great to begin with while re establishing our clear and distinctive position in the active market. We're encouraged by the steps Maggie and the team have already taken and we look forward to the continued impact of their leadership as Athleta's reinvigoration takes shape. As we head into the holiday season, our supply chain continues to power strategic advantages. The scale of our global network across sourcing, logistics and fulfillment gives us the flexibility and resilience to operate with confidence. Our long standing vendor partnerships and diversified sourcing footprint are enabling us to move with speed and deliver newness at the pace of demand. We've introduced new automation and AI capabilities across our Omni fulfillment network, from robotic unloaders to advanced storage and retrieval systems which have increased productivity by nearly 30% compared to just a few years ago. This enables us to meet peak demand with greater speed, agility and precision. With a fleet of about 2,500 stores globally and the largest specialty apparel e commerce business in the US we're positioned to serve our customers wherever and however they choose to shop. This holiday season across Gap Income. Our teams are inspired and energized by the work we're doing and you can feel it. The work we're doing together to drive the business continues to ignite real energy inside the company, creating a culture that's united, motivated and focused on execution. This is the culture that is carrying us into the holiday season where our collective focus is clear win with the consumer, deliver with excellence and keep building on the progress we've made together in the fourth quarter. We remain focused on executing with excellence. Our Q3 and quarter to date performance positions us well for the holiday selling season and gives us the confidence to update our full year outlook increasing net sales growth to the high end of our prior range and raising our operating margin. We look forward to finishing the year. Strong and creating a clear Runway to the next phase of our transformation as we move into 2026. Building momentum I'll now turn the call to Katrina for a closer look at our financials.

Katrina O'Connell - Chief Financial Officer - (00:17:43)

Thank you Richard and thanks everyone for joining us this afternoon. We delivered exceptional third quarter results, surpassing our expectations across multiple key metrics. Our strategy is working. Growing brand relevance combined with operational and financial discipline drove our highest quarterly comparable sales performance in over four years, up 5%. We saw strong performance across the back to school and early holiday periods, underscoring the increasing resonance of our brands with consumers. With the Playbook now in its second year, we're beginning to see a flywheel of growth take hold at Old Navy and Gap, with Banana Republic gaining traction. We exceeded our gross margin expectations with strong flow through to our operating margin in the quarter, driven by rigor in the fundamentals. Average Unit Retail or aur, grew again this quarter reflecting our compelling product offering and the disciplined execution across our teams. Our brand momentum combined with our strategic supply chain actions enabled a significant portion of the tariff impact on our margins to be mitigated. With the strength of our third quarter results and our quarter to date performance in mind, we are raising Our full year 2025 gross margin and operating margin outlook with full year 2025 net sales growth now expected to be at the high end of our prior guidance range. I'll take you through the details of our outlook shortly. We are entering the final stages of fixing the fundamentals. Consistent progress on our strategic priorities has strengthened our position as we move into 2026 where we will focus on building momentum and creating new growth opportunities. Now turning to third quarter results, net sales of $3.9 billion were up 3% year over year, exceeding our expectations with comparable sales up 5% by brand. Starting with Old Navy, net sales were $2.3 billion, up 5% versus last year with comparable sales up 6%. It's exciting to see the brand winning in strategic categories like Denim, Active and Kids and Baby, supported by strong execution of culturally relevant marketing and partnerships. Turning to Gap, brand net sales of $951 million were up 6% versus last year and comparable sales were up 7%. Relentless, consistent execution of the reinvigoration playbook is fueling sustained momentum for the brand, clearly reflected in the better in Denim campaign. Banana Republic net sales of $464 million were down 1% year over year with comparable sales up 4%. Our foundational work on the brand from elevated product to culturally relevant storytelling is resonating with consumers and drove the second consecutive quarter of solid performance. Athleta net sales of $257 million decreased 11% versus last year and comparable sales were down 11%. We're focused on applying the playbook with rigor, beginning with the fundamentals as we work to reset the brand for the long term. And while we're eager for results, we are executing a phased plan that will take time. Let's continue to the balance of the P and L Gross margin of 42.4% declined 30 basis points from last year but exceeded our expectations. As anticipated, tariffs pressured overall margin levels. However, lower discounting resulted in increased AUR growth driven by the consumer's response to our relevant product and storytelling. Compared to last year, merchandise margins were down 70 basis points due to the estimated 190 basis point impact of tariffs. This implies roughly 120 basis points of underlying margin expansion. Rod leveraged 40 basis points in the quarter. SGA increased to $1.3 billion primarily due to the quarterly timing of incentive compensation and continued strategic investments. SGA as a percentage of net sales was 33.9%, deleveraging 50 basis points versus last year. Third quarter operating margin of 8.5% was down 80 basis points compared to last year, which includes an estimated 190 basis points of tariff impact. This implies roughly 110 basis points of underlying margin expansion. Earnings per share in the quarter were $0.62, a decrease of 14% versus last year's earnings per share of $0.72 primarily due to the impact of tariffs. Now turning to the balance sheet and cash flow, end of quarter inventory levels were up 5% year over year, primarily attributable to higher costs due to tariffs. Our disciplined inventory management resulted in slightly negative unit inventories and we believe we ended the quarter with the right inventory composition. We continue to be rigorous in our approach to inventory for the balance of the year. As we shared on our second quarter call, we've tightened the way we purchase unit inventory to ensure maximum flexibility for various demand scenarios and to enable us to be more responsive to consumer demand. We expect to operate in line with our inventory principle of unit purchases positioned below sales. The last two years have been about fixing the fundamentals, which includes strengthening the balance sheet. We ended Q3 with cash cash equivalents and short term investments of $2.5 billion, an increase of 13% from last year. Net cash from operating activities was $607 million year to date and our free cash flow of $280 million year to date demonstrates the rigor we have put into managing the business. Capital expenditures were $327 million year to date with regard to returning cash to shareholders in the third quarter, we paid $62 million to shareholders in the form of dividends and the Board recently approved a fourth quarter dividend of 16 and a half cents per share. Year to date, we have repurchased 7 million shares for approximately $152 million, achieving our goal of offsetting dilution and while we've achieved our goal, as always, we remain opportunistic. Now turning to our outlook for fiscal 2025, I am pleased with the strength of our Q3 results and solid quarter to date performance which are giving us the confidence to update our fiscal 2025 outlook. We've been operating against a dynamic backdrop for the last few years and we're expecting the same for the fourth quarter. Our outlook assumes a relatively consistent macroeconomic environment, but acknowledges the potential for increasing uncertainties related to consumer behavior in global economic and geopolitical conditions. As a result, we continue to take a balanced view with our guidance and and remain focused on controlling the controllables. Starting with full year 2025 net sales, we are increasing our outlook to the high end of our prior guidance range and now expect net sales growth of 1.7 to 2% year over year. Our outlook assumes ongoing strength at Old Navy Gap and Banana Republic and a longer recovery at Athleta. Moving to Gross Margin with our strong Q3 performance, we are raising our full year gross margin outlook. We now expect deleverage of about 50 basis points year over year, driven by an unchanged estimated annual net tariff impact of approximately 100 to 110 basis points. Excluding the impact of tariffs. This would imply underlying gross margin expansion of approximately 50 to 60 basis points versus last year. Turning to SG and A, we continue to expect SG and A to leverage slightly for the full year. As discussed on last quarter's call, we are driving continuous improvement in the cost structure of the Company this year as we rigorously drive $150 million in cost savings in our core operations through efficiency and effectiveness. We remain committed to reinvesting a portion of the $150 million into future growth projects including beauty and accessories as we pursue the long term success of the company. A portion of these savings will also offset continued inflation. Now we'll turn to fiscal 2025 operating margin we now expect an operating margin of about 7.2% for the full year, an increase from our prior guidance range of 6.7% to 7%. This continues to include the estimated net tariff impact of approximately 100 to 110 basis points excluding the impact of tariffs. This would imply meaningful underlying operating margin expansion of 80 to 90 basis points versus last year. Our income tax rate outlook for the year has increased to approximately 28% and primarily reflects the impact of changes in the amount and mix of our geographic earnings. This increase of 1 point versus our prior outlook of 27% represents an approximate 3 cent headwind to EPS looking to 2026 as we shared on our second quarter call, we do not expect the annualization of tariffs in 2026 to cause further operating income declines and we now expect the majority of the mitigation to come from adjustments to our sourcing manufacturing and assortments. With the balance driven by targeted pricing, we continue to be mindful of price elasticity and remain focused on maintaining the overall value proposition for our customers. And while pricing is a lever to manage aur, it's one of many we've been using to manage margin over time. Other levers include assortment mix, full price, sell through promotions and inventory management. Our third quarter AUR performance and the momentum of our brands gives me confidence that our AUR growth plans are achievable. There will be a timing dynamic to the tariff impact on gross margin in 2026. We estimate a Q1 net tariff impact similar to Q4 followed by meaningful benefits from our mitigation efforts in Q2. The back half of 2026 should turn to a tailwind as our actions build and we lap most of this year's tariff impact. In closing, our Q3 results reflect strong execution of our reinvigoration playbook, driving consistency and growth across our largest brands. Continued cost discipline is enabling reinvestment in strategic growth opportunities, while our scale and supply chain strength support ongoing tariff mitigation. When we perform with excellence, it builds confidence. Confidence fuels execution. Execution drives growth. This flywheel is the engine of our momentum as we look to deliver this holiday season. We remain focused on operational excellence and advancing our ambition to become a high performing company that delivers sustainable, profitable growth and long term value for our shareholders. I'd like to thank the team for their commitment to excellence and delivering results in support of our transformation journey. With that, we'll open up the line for questions. Operator.

OPERATOR - (00:29:54)

Thank you and we'll now begin the question and answer session. If you have dialed in and would like to ask a question, please press Star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press Star One a second time. If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. To be able to take as many questions as possible, we ask that you please limit yourself to one question. Again, it is Star One. If you would like to join the queue and our first question comes from the line of Alex Stratton with Morgan Stanley. Your line is open.

Alex Stratton - Equity Analyst - (00:30:37)

Great. Congrats on a nice quarter. Maybe for Richard or Katrina, can you just dig in a little bit more on what drove such a strong comp acceleration at the Gap banner and also how you think about sustainable comp level. For that business over time. And then maybe for Katrina, just what surprised the upside versus your initial expectations on gross margin. Curious if tariffs played a role and how you think about steady state on that line item from here.

Richard Dixon - Chief Executive Officer - (00:31:09)

Thanks a lot Alex. Thank you. First off, I think it's clear our strategy is working and it is showing up in the momentum that we're seeing in our results. All three of our largest brands exceeding expectations. You know, Navy up 6%, Banana Republic up 4% and Gap delivered another standout quarter with a strong comp of 7% and that's on top of 3% last year and it represents the eighth consecutive quarter quarter of positive comps for us. You know, this consistency is setting new records for the brand and it's reinforcing our confidence in its long term growth trajectory driven by compelling product assortments. Partnerships and marketing have really resulted in growth across all income cohorts. We have seen more high income consumers choosing Gap and we really do believe that with the strong competitive position that we've taken between premium and value and the fact that we're bridging the generation gap, it's a really exciting time to see Gap continuing to accelerate. We have been attracting a younger, highly engaged consumer, particularly with Gen Z as they discover the brand and it's reinforcing loyalty with our core consumer. So the performance in the quarter, which as you know was fueled by our broad based strength in denim. The centerpiece of our viral campaign Better in Denim, featuring the global group Cat's Eye, did incredibly well. I mean we generated more than 8 billion impressions. I think we had over 500 million views. It was the denim story everybody wanted to be part of. We increased our ranking in the denim category. Gap is now the number six adult denim brand in the US up from eight last year. Collaborations are continuing to drive relevance and revenue with our latest collaboration this quarter with Sandy Liang which was incredibly successful, again attracting new younger customers to the brand. And it's exciting to see the brand just continuing to build on their success quarter after quarter and we're looking forward to carrying that momentum into the holiday season and beyond.

Katrina O'Connell - Chief Financial Officer - (00:33:28)

As it relates to gross margin. Oh sorry, I'm going to finish up Alex for you on gross margin. So for gross margin in the quarter we did exceed our expectations in gross margin by over 100 basis points and that was actually driven by an in line expectation as it relates to tariffs. So tariffs of 190 basis points were as expected but. But the outperformance in the quarter really came from standout performance, particularly at Old Navy and Gap and better than expected AURS as consumers really responded to our product and storytelling which enabled us to have lower discounting in the quarter.

Richard Dixon - Chief Executive Officer - (00:34:09)

Thanks Alex.

Bob Durbil - Equity Analyst - (00:34:14)

And our next question comes from the line of Bob Durbil with btig. Your line is open. Good afternoon. I was just wondering if you could expand a bit more on AUR Trends, how you're managing AUR Trends and I guess just the growth plans that you've spoken about as you look forward, maybe Q4 but even into 26. Thanks.

Katrina O'Connell - Chief Financial Officer - (00:34:39)

Thanks Bob. We approach pricing as we always have. I mean we consider all the various inputs while maintaining our overall value proposition for consumers. And in Q3 as our brands continue to gain more relevance and the rigor that we put around inventory management, as that becomes more foundational, we are increasing our price elasticity and we've been driving higher sell through at full price. We did take select pricing in Q3 and select categories Denim which saw double digit growth and the strength of our execution is really resonating with customers. And we saw growth as I mentioned, across all income cohorts. The sales were driven by both units and aur. We had overall AUR improving versus last year. We saw particular strength in Old Navy and Gap with customers that were really responding well to our style, the quality and the value which we continue to advance. Banana Republic Aurs also were strong. This is resulting in less discounting, better regular price sell through and it's giving us confidence that we can continue to drive AUR growth as we enter the fourth quarter.

Matthew Boss - Equity Analyst - (00:36:00)

And our next question comes from the line of Matthew Boss with JP Morgan. Your line is open. Thanks. And congrats on a really nice quarter. Thanks Matthew.

Richard Dixon - Chief Executive Officer - (00:36:11)

So Richard, could you speak to drivers of the top line inflection that you saw At Old Navy this quarter, any change in momentum, early holiday and relative to the consistency that you've now clearly shown at the Gap concept, I guess how do you see Old Navy differentiated as it relates to the market share opportunity for that brand? And then Katrina, just given actions that you've taken to the cost structure, how best to think about annual operating income, dollar growth if low single digit top line was the baseline multi year moving forward. Matthew, thank you for the question and thrilled to talk about Old Navy. We had an incredibly strong quarter. Comps up were 6%. With the brand consistently gaining market share over the last two years, it is the number one specialty apparel brand in the US and the performance this quarter really speaks to the brand's strength, consistency and continued momentum. Customers are responding to what Old Navy does best. We give great style at great value. We saw healthy growth across all income cohorts in aur. It was driven by trend right product, which again was amplified by compelling creative and better storytelling for our brands. We've been winning in the categories that we've been strategically pursuing with intent and we've shared those along the way. Kids and baby denim and Active have all been driving the momentum. Active in particular was a standout in the quarter. We delivered double digit growth and I believe it's underscoring the power of our value proposition and innovation differentiation as it relates to the market share opportunities that we see. We look at partnerships, Disney's partnership with us. We just presented Jingle Jammies, which was an incredible presentation across the family. It exceeded expectations. We just also introduced Anna Sui's collaboration with us, which was particularly meaningful as the first designer collaboration where we're bringing high fashion to a broader audience. All of this while we're just beginning to expand the brand into beauty, which of course is early days, but we see incredibly high potential opportunity for Old Navy for that category and the broader portfolio over time. So look, I'm thrilled with Old Navy's consistency and the quarter performance and I actually am particularly excited about our holiday offering at giftable price points and we are ready to execute with excellence.

Katrina O'Connell - Chief Financial Officer - (00:38:56)

And then Matt, as it relates to your other question, I would say, as you called out, you know, we've done a lot of restructuring over the last few years and then this year we previewed that we're saving about $150 million in our cost structure. We are reinvesting a portion of that into future growth opportunities because we want to be able to seed this next phase, which we're saying is building momentum that we hope over time leads to accelerated growth. So balancing the savings with what we think are important investments for the long term. What I would say is this year the operating margin that we've guided to have about 7.2% is really only modest deleverage compared to last year. And that's while absorbing 100 to 110 basis points of operating, excuse me, of tariff impact, which does show the way we are managing the business with rigor. Both through cost and margin improvements as we look forward. We've also said that in 2026 we don't expect the annualization of tariffs to cause further operating income declines as we work hard to mitigate those costs once tariffs are fully reflected in the base. We do believe the consistency in our core combined with top line benefit related. To the high potential growth opportunities that we're seeding in 26 should provide sales growth that benefits operating income over time. So more to come on what that algorithm turns out to be, but we feel good about the work we've been doing and we're certainly pleased with our results.

OPERATOR - (00:40:32)

Thanks, Matthew, and pardon me. Our next question comes from the line of Brooke Roach with Goldman Sachs. Your line is open.

Brooke Roach - Equity Analyst - (00:40:42)

Good afternoon and thank you for taking our question. Richard, how do you feel about the store fleet today across brands and banners? Are there any investments that need to. Be made to fuel the momentum from. A shopping experience perspective? And what does that mean regarding storefleet transformation, whether that's remodels or changes in store count as you look ahead into 2026?

Richard Dixon - Chief Executive Officer - (00:41:03)

Brooke, thanks for that question. Stores are a really important way for customers to experience our brand. I mean, they bring our products, product storytelling and service to life in a way that digital just can't. With a company operating a fleet of about 2,500 stores, we are always optimizing our retail footprint. We're closing underperforming stores, we're repositioning some locations that are more relevant to our customers, and we evaluate new store openings. As you know, over the last several years we've closed about 350 stores that were unprofitable. Last year we closed about 56 stores across our portfolio. We expect to close approximately another 35 in fiscal 25, with the majority of those closures being specific to Banana Republic. I believe we're at a pivotal point right now where the fleet is really well positioned and we've been testing new formats and experiences. Gap Flatiron in New York has been functioning for about a year with great learnings that we've started to expand across our Gap fleet with Denim shops, new refresh shop here in San Francisco and a variety of others that are on plan. Banana Republic, specifically in soho and other locations that we've been refreshing with some great results. And of course, Old Navy and Athleta up at bat. We continue to evaluate these tests and their performance and are getting more and more confidence in the revenue and relevance and the strong returns that they've been driving. We've begun to invest rationally and selectively in the areas that we think will drive the return that we're looking for. And we will continue to keep everybody posted as we look to the combination of repositioning our stores, refreshing must win stores, and again, looking to start to open up new stores where it makes sense strategically.

Brooke Roach - Equity Analyst - (00:43:05)

Thanks so much. Thanks, Brooke.

Adrienne Yee - Equity Analyst - (00:43:10)

And our next question comes from the line of Adrienne Yee with Barclays. Your line is open. Good afternoon. Congratulations. Great to see the progress at the right time. Richard, my question for you is sort of a little bit higher level since you've come. There's such a focus on product and marketing, like the combination of the flywheel effect of those. How is the appointment of design and creative, specifically Zac Posen, change the complexion of creative thinking throughout the organization and then the marketing piece of it. How has that kind of complement, kind of the product in creating that flywheel?

Richard Dixon - Chief Executive Officer - (00:43:51)

Thank you, Adrian, for the question. First off, let's just mention Zach. He's been an incredible addition to our leadership team. It's been almost two years ago now that he's joined and has brought significant impact on many creative aspects, I would say both inside the company and beyond our objective collectively with Zach. And by elevating the creative conversation across our brands, highlighting design and product is an incredibly important attribute to all of our brands. Has been working. I mean, we've been culturally creating moments, curated moments where our brands and our products have taken center stage not only to some extent on the Runway, but on Main Street. And we're attracting talent as well to our portfolio that might not have considered a place like Gap Inc. Or our brands prior. When we talk about marketing, which I also am pleased to talk about, you know, we know marketing is a much more complex function today than it was in the past. And as you know, we've been working really hard at driving new narratives that put our brands back into the cultural conversation. And it's our job to be everywhere that our consumer is with the right creative messaging. I think it's obvious we're performing while we transform. We're driving digital dialogue messages with social media as the Number one platform for our consumers. Influencer content is among the most common product discovery methods amongst Gen Z and Millennials, which we've been performing incredibly well with. We actually recently launched a cross brand content creator and social media advocacy program last month, which you might have seen. We now also have a presence on TikTok as a shop and many more. And these methodologies are proving really impactful, but they also require higher quality, accelerated amounts of creative. And lastly, you know, we can't help it but mention again, Cat's Eye is a great example of that. I mean, 8 billion impressions, 500 million views. This was a true cultural takeover. And I think it's another proof point in our playbook. And we believe we've got the means and the experiences and the brands to continue to be more effective and be. More efficient in our spend. As we've proven, this methodology is working and it will continue to propel us into the future.

Dana Telsey - Equity Analyst - (00:46:28)

And our next question comes from the line of Dana Telsey with Telsey Group. Your line is open. Hi, good afternoon everyone and congratulations on the nice progress. Christina, one for you, one for Richard. As you think about the tariff mitigation strategies which seem to be effective, the pricing adjustments have seemed to become less and less. Is that the right impression and how you're thinking about pricing going forward? And then Richard, the acceleration in store sales is impressive in your view of the consumer overall, how are you thinking about the consumer? Does it differ by brand? Lower and higher income customer? Whether it's Gen Z, millennial or Baby Boomer, how do you think the current feeling is and the attitudes toward merchandising? How do you think of consumer demand? Thank you Dana.

Richard Dixon - Chief Executive Officer - (00:47:20)

Thanks for the question. I think I'm going to jump in here and take consumer first and then Katrina can follow up with tariff mitigation answers first. I think it's really important to share we're seeing consistency and strength in our customer behavior. As I mentioned, we're really proud that we're winning with all income cohorts and you could see it with the strong differentiation within our portfolio. Together we see equal growth across low, middle and high and it's evidenced by our two largest brands, Old Navy and Gap. Now there is external data that points to of course, the macro pressure on the low income consumer. But our customers are finding our price value, our product, our styles. It's breaking through the competitive landscape and we're winning. We're also doing this, Dana, with less discounting. We've got better regular price sell through increased aur, which is really indicating that our product is resonating. I think you could see it when you go into our stores. We're just telling better merchant driven stories and it is supported by incredibly relevant marketing. We're also excited to see that the high income consumer is discovering our fashion, quality and value and we think that is also being driven by the relevant narrative that we've been creating in the marketplace. So when I step back and I look at our portfolio competitively, I think our portfolio appeals to a wide range of consumers. It gives us greater flexibility in today's environment. When we look at our portfolio today versus even a few years ago, we are much stronger portfolio of brands today. We're resonating with consumers and it's our job on a day to day basis to create great product with great style and quality, exceptional value. And I think we will prevail in any marketplace if we stay consistent and and true to that narrative. Over to you Katrina, on tariffs.

Katrina O'Connell - Chief Financial Officer - (00:49:24)

Sure. So as it relates to tariffs, we did do a slight amount of pricing in the quarter, but we really honestly Dana, approach pricing as we always do. We look at all the various inputs really with an eye to maintaining the overall value proposition for our consumers. So we did take select pricing in select categories. I think denim is a really good example at Gap where given the strength, we were able to take slight pricing and see double digit growth in sales. In spite of that, the strength of our execution, as Richard said, really is resonating with our consumers. And as Richard said, you know, we saw sales come from both units and aur in the quarter. I would say the bigger driver of the outperformance in the quarter and what we're seeing is less discounting and better regular price sell through. And, and I think as Richard said earlier, that really gives us the confidence that we can keep driving aur growth as we enter the holiday season.

Dana Telsey - Equity Analyst - (00:50:23)

Thanks, Dana.

Lorraine Hutchinson - (00:50:28)

And our next question comes from the line of Lorraine Hutchinson with Bank of America. Your line is open. Thank you. Good afternoon. Just switching gears to Athleta for a minute. How do you feel about the level and and content of the inventory there? And do you have a timeline for. When you think that sales could begin to stabilize?

Richard Dixon - Chief Executive Officer - (00:50:51)

Lorraine, thank you for that question. You know, we're not hiding from Athleta. It's a very important brand on our portfolio. We have been disappointed in the trend. But Maggie, our brand president has hit the ground running in her first 90 days and she's balancing near term priorities with of course the longer term reinvigoration objectives that we have for the brand. As I mentioned, she's been building her leadership team to align with her vision and she is truly setting the foundation for the brand's next chapter. A lot of work happening, editing the assortment, studying the consumer, evaluating our retail footprint and of course the overall customer experience. This is a reset year for Athleta and our focus is going to be on positioning the brand for long term success and returning it to a rightful place as a premium, purpose driven, aspirational brand. We do believe Maggie and the team are taking the right steps and we remain confident that Athleta will emerge as a brand that really does matter even more to women through product trend and storytelling. We understand there's a lot of work to do, but we believe we've got the right leader in place to do it and we look forward to continuing to update you as more news unfolds.

Katrina O'Connell - Chief Financial Officer - (00:52:08)

And maybe what I'd add Lorraine, on inventory is, you know, as we assessed Athleta in second quarter, given sort of the trend in the business, we did make some choices to lower inventory levels overall. And so we have aligned inventory for Athleta to this lower sales trend as we head in for Q3 and as we head into Q4. So you know, we feel good about the levels and quality of inventory at Athleta and and will remain pretty prudent as it relates to Athleta until we start to see the product and the marketing get back to where we would expect it to be for this brand.

Lorraine Hutchinson - (00:52:45)

Thanks Lorraine.

Paul Lejwick - Equity Analyst - (00:52:49)

And our next question comes from the line of Paul Lejwick with Citigroup. Your line is open. Hey thanks. Just to go back to the unit comments, curious which brand you saw the greatest increases in units. And then I'm also curious on the inventory versus unit gap that you mentioned, what will that look like at the end of the year, the finish up fourth quarter and then into the first half of 26. Thanks.

Katrina O'Connell - Chief Financial Officer - (00:53:25)

Paul. I'm going to take the first one but we had a lot of trouble hearing your second question so apologies on that one. We're going to ask you to repeat it as it relates to units. You know, we were really pleased to see that as our brands are gaining relevance combined with the rigor that we're putting into the business that we're seeing our elasticity improve and we're getting higher sell throughs at regular price. When we look at the units in. The quarter, I would say units were aligned with where we see outperformance in the business, particularly at Old Navy and Gap. And we also saw Aurs there as well. But I'm going to ask you to repeat again the second part because we couldn't hear you.

Paul Lejwick - Equity Analyst - (00:54:07)

Sure. Sorry, Katrina. So the inventory dollars versus unit gap that you spoke of this quarter, curious what that looks like at the end of 4Q and then the first half of next year.

Katrina O'Connell - Chief Financial Officer - (00:54:19)

Oh, thanks. Sorry about that. So we continue to keep our units below sales as we try to keep within our principles of keeping inventory tight. We want to keep maximum flexibility so that we can respond in season to various demand scenarios and be responsive to consumer demand. So as we think about end of quarter inventory, I would expect it to be similar to how we just ended Q3.

Paul Lejwick - Equity Analyst - (00:54:50)

Thanks, Paul. Thanks, Paul.

Cory Tarlow - Equity Analyst - (00:54:55)

And our next question comes from the line of Cory Tarlow with Jefferies. Your line is open. Great. Thanks so much for taking my question, Richard. I wanted to ask about the power of partnerships and the reason being is I don't think that there's a retailer in the mall today that has done more partnerships in the time span that you've been at Gap to expand the aperture for the brand and to build, as you say, relevance and revenue. And I was curious about what you think strategically this means for the business ahead. And then the follow up to this is how have the consumers responded to these improvements in the brand in the way that you've been able to say, remove promos on categories like denim at Gap.

Richard Dixon - Chief Executive Officer - (00:55:47)

Okay, Corey, thank you for the question. First off, I think it has been a credit to the brands and teams that have followed the methodology that we shared with our playbook and as part of the playbook. And when we look at cultural relevance, collaborations help a brand drive relevance. It broadens its customer base and continues the drumbeat between its larger pulse, partnerships and releases. So it keeps topical in the context of the amount that we do and the timing that we do do them now, you have to really be authentic. It's not just a collaboration. It's a well thought out strategic partnership. To date, Gap Brand, as you mentioned, We've launched over 13 collaborations. It continues to drive enormous excitement and attract new audiences to us. And they're very precise and they need to be, they need to be win win, and most importantly, they need to be authentic to the consumer. The collaborations that we've been doing, as I mentioned, are attracting new generations to Gap, but it's also at the same time reinforcing the brand to those who love us. For years. This is to some extent a balance of art and science. The latest collaboration this quarter with Gabriel Gap Brand, with Sandy Liang in the third quarter it drove incredible engagement and overall basket. You asked about consumers responding in relation to it and how it affects our business. More than 25% of the customers who shop these collaborations were new to Gap and of those who shopped the collaborations, 20% shop beyond the collaboration. So we see the attraction that these collaborations, when done right, are generating for the brand. And then we by offering and showing other product, we're now establishing broader, bigger house files and more exciting relationships with our consumers. We just launched the Anna Sui collection with Old Navy which is the first designer collaboration in Old Navy. Incredible success, similar engagement, a really well thought out precise partnership and we believe a sign of things to come. So again, laddering up. It's great credit to the teams across the brands for driving the playbook, executing it with excellence and really creating win win collaborations for the consumer. And our.

Carson - (00:58:28)

And our final question comes from the line of Michael Binetti with Evercore isi. Your line is open. Hey guys, it's Carson on from Michael. Katrina, probably a question for you. Appreciate the color on the wraparound effect of tariffs into 2026, but if we set tariffs aside, we had really nice underlying gross margin expansion in third quarter. The guidance implies pretty similar for fourth quarter. How much of that underlying expansion is from AUR versus other drivers? Because I think I've heard several times today confidence in the AUR plan. So if that's a leading driver, is it safe to carry those impacts over into the next few quarters? Thanks.

Katrina O'Connell - Chief Financial Officer - (00:59:10)

Thanks for the question. So the way I would answer that is our margin strength in Q3 came from a combination of favorability in commodities aided by some supply chain leverage that we got, as well as strength in AUR. As we look to Q4, what you'll see is that the tariff impact to Q4 is similar to what we just experienced in Q3. And we're also still seeing the commodity benefits, but in Q4 we're trying to sort of stay balanced in our outlook. And so right now what we have in is roughly similar promotions year over year so that we have room to compete in any environment. And so we'll obviously aspire to do better. But the upside that we saw in AUR from Q3 is not currently assumed in Q4.

OPERATOR - (01:00:16)

And ladies and gentlemen, that concludes our question and answer session. I will now turn the conference back over to Mr. Richard Dickson for closing remarks.

Richard Dixon - Chief Executive Officer - (01:00:25)

Thank you operator. This was an exceptional quarter and I'm really proud of this talented team that continues to deliver quarter after quarter as we look to finish the year strong Our team is fired up and our focus is clear. Continue to execute with excellence and win with the customer this holiday. Thank you for joining us today. For those of you who celebrate, wishing you a happy Thanksgiving, and we look forward to seeing you in our stores this holiday season. Thanks all.

OPERATOR - (01:00:56)

Ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect it.