GAP - NYSE

Good afternoon, ladies and gentlemen. I would like to welcome everyone to The Gap, Inc. Fourth Quarter 2024 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 call, 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 touch-tone phone. I would now like to introduce your host, Whitney Notaro, head of investor relations.

Good afternoon, everyone. Welcome to The Gap, Inc. Fourth Quarter Fiscal 2024 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, filed with the Securities and Exchange Commission, on March 19, 2024, and any subsequent filings with the Securities and Exchange Commission, all of which are available on gapinc.com. These forward-looking statements are based on information as of today, March 6, 2025, and we assume no obligation to publicly update or revise our forward-looking statement. Our latest earnings release and the accompanying materials available on gapinc.com also include descriptions and reconciliations of any financial measures not consistent with generally accepted accounting principles. Joining me today on the call are Chief Executive Officer Richard Dickson and Chief Financial Officer Katrina O'Connell. With that, I'll turn over the call to Richard.

Good afternoon, and thank you for joining us today. I'm excited to share with you our strong fourth quarter results, which rounded out an exceptional year for The Gap, Inc. We continued to perform while we transform, delivering another quarter that exceeded financial expectations and underscored the meaningful progress we're driving across our strategic priorities. Operational and financial rigor is the fabric of how we work and has delivered solid metrics that Katrina and I will discuss during this call. This discipline has enabled us to execute effectively against our brand reinvigoration playbook and at the same time, strengthen our platform by building and sharpening our operational capabilities with highlights on supply chain and technology. We continue to energize our culture, empower our global teams, and attract great talent. I do want to begin by taking a moment to thank our global team for their partnership and collaboration this past year. Their relentless dedication to our transformation has been instrumental in driving the progress that we've made. Let me share some highlights on the progress we achieved in 2024. The Gap, Inc. delivered positive comps in all four quarters, with all four of our brands comping flat to positive for the year, demonstrating consistency and strength across the portfolio. The Gap, Inc. gained market share for the eighth consecutive quarter, reflecting that our brands are resonating with consumers. We achieved one of the highest gross margins in the last twenty years, a clear result of our focus on financial and operational rigor. We increased operating income by more than $500 million and operating margin by 330 basis points versus last year's adjusted while we continue to drive efficiencies in our cost structure. We delivered a full-year EPS of $2.20, the highest since 2018, demonstrating our earnings power as we drive towards becoming a high-performing company that generates sustainable and profitable growth. Looking ahead, we have more work to do, but we are building on a much stronger foundation. 2025 represents an exciting step in our ongoing transformation as we begin to transition our focus from fixing the fundamentals to continuous improvement through innovation and pave the way for momentum in the years ahead. Since this is our year-end call, our remarks today will be a little longer than usual, as we have a lot to cover. I'll begin by providing an update on our fourth-quarter performance and progress in the context of our strategic priorities. Then Katrina will walk you through our detailed financial results and share our outlook before we open the call for questions. Let's start with our first strategic priority, financial and operational rigor. The Gap, Inc. comparable sales were up 3% in the quarter, with comps at Old Navy, our largest brand, also up 3%. This is the brand's eighth consecutive quarter of market share gains, reinforcing its leadership position as the number one specialty power brand and retailer in the US. Gap comps accelerated to 7%, the fifth consecutive quarter of positive comps, and the brand delivered its seventh consecutive quarter of market share gains. Banana Republic comps were up 4% and gained share as a result of our focus on reestablishing this premium brand in our portfolio. Athleta had a more challenging quarter with comps down 2% while maintaining market share with more work to do as we continue to reset the brand. We delivered SG&A in line with our expectations and expanded operating margin 120 basis points versus last year. EPS was 54 cents, up 10% versus the fourth quarter of last year. We ended the year with strong cash balances of approximately $2.6 billion and generated $1 billion in free cash flow in fiscal 2024. Turning to our next strategic priority, we remain focused on driving relevance and revenue by executing on our brand reinvigoration playbook. Each brand is at a different point in the process, and I am encouraged by the improvements we've driven across the portfolio. Let's start with Old Navy. In 2024, Old Navy delivered one of the highest annual net sales in the brand's history and was the number one specialty apparel brand and retailer in the US. We've been connecting our customers with products they want through compelling storytelling and executing with clarity in pricing and in-store navigation. The brand is gaining more relevance as demonstrated by our digital dialogue, notably our strong social and influencer engagement. As a result, we finished the year strong with a 3% comp in the quarter and the eighth consecutive quarter of market share gains. Our strategic pursuit in both denim and active this year led to a consistent drumbeat of innovation and newness across these key categories. We have been putting insights into action with product innovation, leveraging our scale and expertise, and executing with excellence. And the results are showing up on the scoreboard. Old Navy leaned into denim with an expanded offering, a dynamic in-store and online experience, supported by a fall campaign, expressing our evolving brand identity work. In the fourth quarter, we increased share in denim, driven by our on-trend assortment in wide and loose fits, as well as barrel. On our third-quarter earnings call, we spoke about the exciting opportunity that we see for Old Navy to become the destination for the family as the value player in the active category. During the year, the brand grew to be the number five player in the category and the only brand among the top five to gain share. And we are not stopping there. In the fourth quarter, Dynamic Fleece and PowerSoft were great examples of innovation that drove Old Navy's strength in the active category, and we are bringing more innovation, style, and value in 2025 with our recently launched Studio Smooth collection. This new fabrication brings exceptional comfort and value to consumers and marks another step forward in our expansion within the active category. Old Navy's merchandising narratives and style are presenting better, and our in-store and online communication has improved with more clarity around pricing and more compelling marketing promoting great value. This evolution of the customer experience has resulted in higher NPS scores for both stores and online. With the foundational elements we've established, we are a stronger Old Navy than we were a year ago and are positioned well for 2025. In the year ahead, Old Navy will be focused on ongoing innovation in key categories, driving big ideas with storytelling while mobilizing an enhanced customer experience. Recognizing the work achieved and the metrics delivered shows the powerful position Old Navy holds in our portfolio and in our industry. And we continue to believe there is significant growth potential ahead for the brand. Now let's turn to Gap. Gap is back in the cultural conversation. This brand was built on strong product narratives with brilliant marketing expressed through big ideas, and over the past year, each of these were reignited. The team has been executing the brand reinvigoration playbook with excellence, and it's showing up in the results. Gap's comp accelerated to 7% in the quarter, marking the fifth consecutive quarter of positive comps and the highest quarterly comp in three years. In the fourth quarter, the brand also achieved the seventh consecutive quarter of share gains as the brand continued to resonate with consumers. This strong performance was fueled by innovation, product newness, and compelling marketing with a social-first approach. The momentum in women's continued in the fourth quarter, men's also performed well, and we began to see improvement in kids and baby. Our focus on big ideas resonated with strength in key categories like fleece, denim, and sweaters, driven by the performance of CashSoft, our innovative fabric, all of which were amplified by our "Give Your Gift" holiday campaign. The brand campaigns and collaborations are attracting a new generation to Gap while reinforcing the brand to those who loved us for years. In 2024, we expanded our customer base, and we saw increased engagement with the brand as a result of our trend-right product and culturally relevant messaging. And we're building on that momentum in 2025 with our latest fashiontainment moment released last week featuring Parker Posey, dancing to Meeta's "Mama's Eyes," a celebration of the confidence that comes from feeling comfortable in your clothes and in your own skin, which is resonating and bridging the generation gap all over again. Our legacy inspires us to pursue the significant potential this brand has, and with consistent execution of our playbook, we are excited about the brand's growth potential in the years ahead. Now moving on to Banana Republic. There's been a lot of progress at Banana Republic as we continue to focus on reestablishing the brand to thrive in the premium lifestyle space. The brand successfully implemented fundamental fixes throughout the year, leaning into classics, more precise assortments, focusing on fit, and rebuilding trust. And we're beginning to see signs of stabilization with the early results showing up in the fourth quarter. Comps were up 4%, with market share gains. Women's drove the acceleration at the brand, with better fundamentals across pricing, product, and design, which translated incredibly well, most notably holiday occasion dressing. The brand continued to build on the strength in the men's division and lean into classics with a stronger cashmere point of view which resonated with consumers. The work the Banana Republic team has done to improve women's and strategically redeploy marketing to more culturally relevant storytelling is starting to deliver results. I'm confident Banana Republic is positioned well for continued progress in 2025 and beyond. Shifting to Athleta, in 2024, Athleta stabilized revenue, delivering a flat comp and improvements across several key metrics. The brand reentered the cultural wellness and sports conversation through major activations that engaged key brand partners like Simone Biles and Katie Ledecky on the world stage in Paris, and most recently, Lexi Halle and Kate Martin. In addition, we meaningfully increased the number of new and reactivated customers. I'm encouraged by Athleta's ability to maintain its rank as the number three brand in the women's active category this year, and the only brand in the top three to gain share. Despite this progress, the year was not without challenges and volatility. This was reflected in the fourth quarter when the brand delivered a negative 2% comp, missing our expectations. Despite a strong start to the holiday season, Athleta struggled to keep up its core loyal customers' engagement during the peak holiday shopping moments. In 2025, we will be strengthening our product and ensuring newness to excite our core customer base while continuing to inspire new customers. Athleta has made progress in a number of areas this past year. However, we are still in the process of resetting the brand, which in the near term may result in choppy quarterly performance. We have more work to do to implement our reinvigoration playbook and realize the brand's full potential. Our ambitions for Athleta remain high. Moving to our third strategic priority, strengthening the platform. Today, The Gap, Inc. platform creates significant value with the benefit of scale across our global supply chain, supporting a fleet of more than 3,500 stores, a technology platform that enables one of the largest e-commerce businesses in the US, as well as an active customer file of over 55 million. I was impressed with the resilience and the agility of our supply chain as we successfully navigated a number of disruptions during the year. This will serve us well as we continue to navigate a highly dynamic environment, top of mind being tariffs, which Katrina will address in her remarks. In 2024, we began to cultivate a digital-first organization and mindset, building and sharpening our operating capabilities to improve effectiveness and efficiency, and in turn, drive increased cost leverage and demand creation. Sven Gerjets, our Chief Technology Officer, who joined us last summer, began pursuing plans to leverage technology to enable both our business performance and our transformation. This included standing up an office of AI, focused on driving AI innovation across our strategic priorities over time, with early use cases primarily related to employee enablement. In 2025, we will be developing AI monetization opportunities relative to the consumer experience, product to market, as well as organizational productivity. Now having organized the various ways we can use AI to enable value creation, we're prepared to mobilize against this framework with intention. Our financial and operational rigor is allowing us to find efficiencies and cost savings that we plan to reallocate to invest in new platform capabilities to support the ongoing success of our brands. As our focus shifts towards continuous improvement in 2025, we will be optimizing for growth by cutting low-value projects to fuel high-value opportunities. We see significant organic growth potential through smart and targeted investments in areas like design, consumer insights, and store operations that deepen the execution of our playbook and seed new avenues for future growth. Reflecting on our fourth priority, I'm proud of how our teams have stepped out of their comfort zones to embrace new ways of working. Getting comfortable with the uncomfortable creates resilience, and the resilience of this organization is showing up as we continue to perform while we transform. A great strategy can only go so far without a culture that is united and mobilized behind it. And the energy of our people is impressive, and it's fueling creativity and driving executional excellence. Transformations of this scale take time, and we've been deliberate about taking a phased approach. In 2024, we were focused on fixing the fundamentals and made significant progress. As we look ahead, we are beginning to focus on continuous improvement through innovation to pave the way for momentum in the years ahead. We are stronger today and have consistently proven our ability to navigate a highly dynamic macro environment while delivering results. The Gap, Inc. has a powerful portfolio of brands that matter, and we're proving that they can matter more. Our playbook is working and showing up in comp growth and share gains, and we are well-positioned for organic growth over time. We continue to unlock efficiencies in the business and deploy savings into high-potential growth opportunities. Our financial and operational rigor is driving operating margin expansion and generating significant cash flow, allowing us to invest in the business while returning cash to shareholders through dividends and share repurchases. I'm pleased with what we've been able to accomplish so far, but our aspirations are high, and we have more work to do. We remain focused on controlling the controllables and successfully executing our strategic priorities, continuing to be market share winners in any environment. I'll now turn the call to Katrina for a closer look at our financials.

Thank you, Richard, and thanks everyone for joining us this afternoon. Our strong finish to the year reinforces the power of our portfolio of iconic American brands that shape culture and our confidence that our transformation is taking hold. The meaningful progress we've made on our strategic priorities is showing up in the results, with a return to top-line sales growth for the year resulting in share gains and all brands showing signs of reinvigoration. The discipline we've developed has enabled significant margin expansion and earnings growth, and our rigor in expense and inventory management drove substantial operating and free cash flow generation, resulting in a strong balance sheet. The reinvigoration of our brands combined with our financial and operational rigor is enabling us to perform while we transform, consistently delivering on our commitments as we continue to strengthen our performance. Some key highlights from fiscal 2024 include the following. It's exciting to see the brand reinvigoration driving results, with The Gap, Inc. comparable sales up 3%, and all four of our brands comping flat to positive for the year, which is notable as we execute on our reinvigoration playbook. This was The Gap, Inc.'s second consecutive year of market share gains driven by wins across our brand portfolio. Gross margin in fiscal 2024 expanded 250 basis points versus last year. This progress reflects both the increased relevance of our product and brands and our disciplined inventory management. We tightly managed SG&A dollars below the prior year and in line with our beginning-of-year outlook. With our focus on expense management and financial rigor, we realized efficiencies in our cost structure that more than offset variable costs from higher sales as well as wage inflation. This resulted in operating income of $1.1 billion, growing 83% compared to last year's adjusted operating income, and an operating margin of 7.4% for fiscal 2024, a 330 basis point improvement versus last year's adjusted margin. We achieved over 50% growth in full-year earnings per share to $2.20. We ended the year with $2.6 billion of cash, cash equivalents, and short-term investments on the balance sheet, net cash from operating activities of $1.5 billion, and generated $1 billion in free cash flow. We returned approximately $300 million in cash to shareholders through dividends and share repurchases. This strong performance gives us confidence in the 2025 outlook we provided today, which reflects continued sales growth with gross margin expansion and SG&A leverage, resulting in another year of operating income growth. So turning to our detailed results for the fourth quarter. Net sales of $4.15 billion decreased 3% year over year, inclusive of the 7 percentage point negative impact related to the loss of the 53rd week. Net sales for the quarter were negatively impacted by the weekly shift related to the 53rd week dynamic, as well as the loss of the extra week. For that reason, I'll be referencing comparable sales by brand, as we believe it's more indicative of each brand's underlying performance. The Gap, Inc. comparable sales were up 3% in the quarter. By brand, starting with Old Navy, comparable sales were up 3%. The brand continued to win in key categories like active and denim, with innovation and newness driving strength and market share gains. Turning to Gap brand, comparable sales meaningfully accelerated, up 7%. Gap has been reignited and is executing the brand reinvigoration playbook with excellence, driving relevance and revenue. Banana Republic comparable sales were up 4%. The brand saw notable improvement in its women's business during the quarter and continues to build on its strength in men's. Athleta comparable sales were down 2%. While the brand maintained market share in the fourth quarter, it did not meet our expectations, and the team will be taking away important learnings and insights for 2025 as we continue to reset the brand. Gross margin of 38.9% was flat year over year, as merchandise margins expanded 20 basis points and ROD deleveraged 20 basis points in the quarter. SG&A was $1.35 billion in the quarter, $105 million below last year, and in line with our outlook as we demonstrated continued rigor in expense management. SG&A as a percentage of net sales was 32.6%, leveraging 130 basis points versus last year, primarily due to the timing of incentive compensation accruals, as well as lower advertising costs in the quarter. Fourth-quarter operating margin of 6.2% improved 120 basis points compared to last year's operating margin. Earnings per share in the quarter were 54 cents, up 10% versus last year's earnings per share of 49 cents. Now turning to full-year fiscal 2024 results. Net sales of $15.1 billion increased 1% year over year, up about 2% on a 52-week basis, at the high end of our guidance range we provided. Gross margin of 41.3% expanded 250 basis points versus last year, ahead of our expectations. Merchandise margin expanded 210 basis points and ROD leveraged 40 basis points primarily due to higher sales in the year. SG&A was $5.1 billion, $100 million below last year and in line with our outlook. As a percentage of net sales, SG&A was 33.9%, leveraging 110 basis points versus last year's reported rate and 80 basis points versus last year's adjusted rate. Fiscal 2024 operating income was $1.1 billion, growing 83% compared to prior year adjusted operating income of $606 million, and ahead of our guidance of mid to high 60% growth. Operating margin expanded 330 basis points versus last year's adjusted rate to 7.4%, our highest annual operating margin since 2018. Earnings per share for the year were $2.20, up 64% versus last year's reported EPS of $1.34, and up 54% versus last year's adjusted EPS of $1.43. This demonstrates the value creation we've begun to unlock in this early stage of transformation and indicates the earnings power of The Gap, Inc. as we continue to perform while we transform. Now turning to the balance sheet and cash flow. We maintained disciplined inventory management, ending the year with levels up 3.6% year over year. The increase was primarily due to the timing of in-transit inventory. As we navigated macroeconomic conditions, excluding the higher in-transit, we maintained our inventory principle, managing a healthy stock-to-sales ratio, with inventory lagging sales growth, and we were able to finish the year with what we believe is the right inventory composition going into fiscal 2025. With the rigor and discipline that's now core to how we operate, we expect our 2025 inventory to continue to align with this principle. We ended the year with cash, cash equivalents, and short-term investments of $2.6 billion, an increase of 38% from last year. Full-year net cash from operating activities was $1.5 billion. Free cash flow of $1 billion for the year demonstrates the rigor we put into managing the business. Capital expenditures for the year were $447 million. During the year, we returned $225 million to shareholders in the form of dividends, representing annual dividends of 60 cents per share. During the fourth quarter, we repurchased 3 million shares for approximately $75 million. With a strong balance sheet, we and the board consistently evaluate capital allocation as we strive to maximize shareholder value. Our balanced capital allocation framework is as follows. Our number one priority is to invest organically in the business through capital expenditures to the degree we believe we can drive a strong return. Capital expenditures in 2025 are expected to be about $600 million for the year, up 34% as we utilize our strong balance sheet to invest in organic opportunities for value creation that we see in our business. Second, we believe in paying an attractive dividend as a key component of shareholder return. Our goal is to increase the dividend as net income grows, and we evaluate both the payout ratio as well as the yield. In line with that principle, on February 25, our board authorized a 10% increase to our first-quarter fiscal year 2025 dividend per share. Third, our principle regarding repurchasing shares is to offer our fourth-quarter share repurchase of $75 million marked our first repurchase since 2022, reflecting our confidence in the business and our future. As a reminder, we have approximately $400 million remaining under our current share repurchase authorization. Our strong balance sheet gives us the foundation to focus on capital allocation with the goal of enhancing long-term shareholder value. This has been an incredible year in which our four strategic priorities have resulted in a return to profitable sales growth. I want to thank our teams for their commitment and tremendous contributions that fueled these strong results. With our momentum and the clear opportunities to drive continuous improvement across the business, we are confident in our ability to strengthen our performance in the year ahead. Now turning to our outlook for fiscal 2025. We've been operating in a highly dynamic backdrop for the last few years, and we're expecting the same for fiscal 2025. As a result, we've taken a balanced view with our guidance and remain focused on controlling the controllables. Specific to tariffs, in fiscal 2024, we sourced less than 10% of our product from China, and less than 1% of our product from Canada and Mexico combined. Our fiscal 2025 outlook is informed by what we know today regarding tariff policy and includes any expected margin impact, albeit small, from current related to those countries. Starting with full-year 2025 revenue, we expect net sales for the year to grow approximately 1 to 2% year over year, including an estimated 30 basis point unfavorable impact from foreign currency due to a stronger US dollar. Our outlook assumes ongoing strength at Old Navy and Gap, stabilizing performance at Banana Republic, and a longer recovery timeline at Athleta. An important note regarding the quarterly cadence for the year. In the second quarter, we will be lapping the 2 percentage point benefit we saw last year from the incremental revenue related to our credit card agreement, which we do not expect to recur this year. Moving to gross margin. We are proud of the significant gross margin gains we had achieved in 2024 as we returned to historically high levels. Our goal in 2025 is to sustain these gains and build upon them through continued rigor and executional excellence. With that, we expect gross margins to expand slightly for the year, with roughly equal amounts coming from ROD deleverage and merchandise margin. Turning to SG&A. We are driving continuous improvement in the cost structure of the company as we rigorously drive savings in our core operations through efficiency and effectiveness. Our outlook reflects approximately $150 million in cost savings and efficiencies through better operations, a portion of which will be reinvested for future growth with the balance offsetting continued inflation. With this in mind, we expect SG&A to leverage slightly for the full year. Considering our expectations for approximately 1 to 2% net sales growth combined with slight gross margin expansion and SG&A leverage, we see a clear path towards delivering 8 to 10% operating income growth in fiscal 2025. This growth rate includes an estimated 2 percentage point unfavorable impact from foreign currency due to a stronger US dollar. We expect net interest income to be approximately $15 million for the year, with a quarterly cadence that reflects seasonality similar to fiscal 2024. We are planning for a 2025 tax rate of approximately 26%. We are expecting approximately 35 net store closures during the year, with the majority of closures at Banana Republic. Now let me share some color on our outlook for the first quarter of fiscal 2025. We expect net sales in Q1 to be flat to up slightly year over year. This includes an estimated 50 basis point headwind related to foreign currency due to a stronger US dollar and contemplates our quarter-to-date performance. While the cold start to February was somewhat unfavorable, we are pleased with what we've seen as the weather has normalized. As it relates to first-quarter gross margin, we expect gross margins to expand slightly compared to last year's gross margin of 41.2%. And we are planning for SG&A to leverage slightly versus last year in the first quarter. As I reflect on the year, I'm proud of the significant progress we've made across our strategic priorities. The reinvigoration of our brands is driving sales growth and consecutive market share gains, which when combined with our rigor is delivering meaningfully improved financial results. We look forward to building on the success of 2024 in the year ahead as we drive toward becoming a high-performing company that generates sustainable profitable growth and delivers long-term value for our shareholders. With that, we'll open up the line for questions. Operator,

Thank you.

As a reminder, for those analysts who wish to participate in the question and answer session, please limit yourself to one question per participant. Our first question will come from Alex Straton, Morgan Stanley. Great. Thanks for taking my question and congrats on another great quarter here. I have one for Richard and then a quick one for Katrina. For Richard, just the Gap banner just delivered monster fourth-quarter comps, highest in a number of years. Your initial comments were super helpful, but can you dig in further on what exactly is driving that momentum? The new customer you're recruiting, and then perhaps how big that banner could grow to be? And a quick one for Katrina just on the full-year operating margin expansion you're guiding to. Sounds like that's pretty evenly split between gross margin and SG&A. Or let me know if I'm misunderstanding that and one piece is edging out the other. Thanks a lot.

Alex, thank you for the question. Just laddering up. Obviously, Q4 we delivered a really another exceptional quarter exceeding financial expectations, and ultimately continuing to perform while we transform. Comps, as we shared, are up 3% for the quarter. It's the fourth consecutive quarter of positive comps. We gained market share for the eighth consecutive quarter, and it really indicates that collectively, our brands are really resonating with consumers. It rounds out an exceptional year for The Gap, Inc. All four brands gained market share in the year, really demonstrating the strength in the industry. As you call out, Gap brand had what you call a monster performance, which we really appreciate. Gap is back in the cultural conversation, and it's truly a testament to the Gap team who's been executing the brand playbook with excellence. This is a great example, I'd say, of how the playbook can really drive relevance and revenue. Comps accelerated to 7%. In the fourth quarter, we achieved our seventh consecutive quarter of market share gains. Climbed the ranks also in the apparel market this year. Gap ranks now as number eleven as the largest brand in the US, and we intend this brand to get back into the top ten. I would say the strong performance in Q4 was really fueled by innovation, product newness, we had extraordinarily compelling marketing, and we took a social-first approach. This strategic intent that we've been sharing around driving the women's business is truly showing up in the results. We've got continued momentum in men's, and we're also seeing improvement in kids and baby. The brand campaigns and the collaborations that we have been driving are attracting a new generation to Gap but at the same time, really importantly, is in reinforcing the brand to those who loved us for years. The latest release that we have right now with Parker Posey is really resonating. And it's a unique creative format. I would say that's a great example of bridging the generation gap. We know it's working. Organic Google searches have been up 6% on the year. Holiday, we actually saw a 25% increase in new customer visits online. And ultimately, what I can tell you is we are really looking forward to continuing the trend product amplified by compelling storytelling, enhancing the customer experience, as Gap continues to advance. I couldn't be more excited about the future of Gap, and it's more of a question of how high is high.

And then, Alex, as it relates to the operating margin guidance, I think the way you're interpreting it is pretty correct. We do see sales increasing 1 to 2%. And as you said, 8 to 10% operating income growth, which is building on the significant progress we made on margins with slight expansion in 2025. And then the dynamic we described around the SG&A where we're finding $150 million of savings and then purposely reinvesting a portion are really the two dynamics that we're looking at. And when combined, do get you to the 8 to 10% operating income growth.

Thanks so much. Good luck.

Thanks, Alex.

Our next question comes from Lorraine Hutchinson, Bank of America.

Thank you. Good afternoon.

Katrina, you've managed SG&A very closely in recent years. Is there an opportunity for further expense cuts beyond the $150 million that you discussed? And what are the key buckets that you're focused on?

Yeah. Thanks, Lorraine. I mean, we have rigorously managed the cost structure over the last few years as you said, including this past year. We delivered the $5.1 billion in SG&A, which was $100 million below the prior year and leveraged. And that showed that the team was able to find efficiencies throughout the year to offset costs that were associated with delivering higher sales, the inflation as well as higher incentive comp accruals. And so we have the discipline now in the business, and we remain committed to that. As Richard said, in 2025, this continuous improvement as we become a high-performing company is focused on really eliminating low-value work. As we aspire to really redeploy that into higher-value projects. So the $150 million that we're going after in 2025 is across technology, marketing, overhead, and stores expenses. And as we think about reinvestments, Richard spoke about some of those examples in his speech, we're leveraging AI to create more elevated experiences for our customers with things like personalization. We're looking at empowering our design and development processes. We're modernizing our supply chain, and we're looking at productivity and strengthening our employee experience. So those are a few of the things we're investing in. We will continue this discipline around SG&A. And if we see beyond $150 million, we'll certainly go after it. But that's our first view as far as what we have line of sight to right now.

Thank you.

Your next question comes from Matthew Boss, JPMorgan.

Thanks and congrats on a great quarter. So Richard, on the inflection to continuous improvement, that you cited, I guess, what inning do you see your work on the Gap in Old Navy as we think about today, could you speak to new customer acquisition and category market share gains that you're seeing as we head into 2025? And then, Katrina, just relative to the 2025, top and bottom line guidance, I guess, could you speak to continued drivers of operating income dollar growth multiyear if the portfolio is able to post consistent low single-digit top-line growth.

Okay, Matt. We're gonna try and tackle that one. I appreciate the question. You know, the efforts that we've been making executing our playbook, essentially reinvigorating our brands is working. And as you call out, its evidence is really market share. You know, we talked about gaining market share for the eighth consecutive quarter. It really is indicating that our brands are really resonating with consumers. And so we are building stronger brand identities. It's been supported by trend-right products, we're amplifying these products with more compelling storytelling with a media mix model that's social-first, and it is translating into cultural relevance. Now I would say that each brand is at a different stage of progress, but the progress we're making is real. And we're driving to become a high-performing house of iconic brands that shape culture. So the continuous improvement of that is sequential. We could talk about Old Navy. Obviously, you know, the largest brand in our portfolio, it finished the year with strong results, comping the comp. In the fourth quarter up 3% and delivering eight consecutive quarters of market share gains. Categorically, we've been focused on active and denim, where we've been really pursuing a leadership position and it's showing up in the results. I think I mentioned on the last call our pursuit inactive, and the brand grew to be the number five player in the category. And it was the only brand among the top five to gain share. I mentioned denim. Another winning category. In 2024, we gained share in denim. We're now the fourth largest adult denim brand in the US. So the continued strength in the brand's financial and operational rigor is really enabling us to dial up the merchandising narratives, style quotient, quality, that our customers expect and the brand is really presenting better. I talked about Gap specifically. So don't think we need to belabor that point, but we couldn't be more excited about where we're headed for Gap. And similarly, their share gains and cultural relevance that's really resonating. I mentioned the attraction with new consumers, Google search up, 25% increase in new customer visits. We also have Banana Republic that showed great progress in the quarter with 4% comp continue to work on that brand. Focusing on leaning into classics, as we've shared more precise assortments, been working on fit and ultimately there, it's about rebuilding trust. And lastly, resetting Athleta is still top of mind very ambitious with Athleta. Despite having a challenging quarter, we delivered a flat comp for the year. So we have seen improvements across several key metrics, and we also gained share. So all in all, I would say, I'm feeling really optimistic and proud of the team's results. We are moving into a continuous improvement model and we expect and anticipate another exciting 2025.

And then, Matt, as it relates to sort of operating margin long term, we're very proud of the progress we made this year. We reported the operating margin for this year of 7.4%. As we said, it's a 330 basis point improvement. And we expect to make more progress in 2025 with 8 to 10% operating income growth. And we do continue to aspire to return to more historic levels over time. As it's specific to the P&L, we've made a lot of progress in the cost structure has leverages on any positive sales. And SG&A leverages on slightly positive sales. So as we return the model to sales growth, we do expect to continue to see operating income growth over the long term.

It's great color. Congrats again.

Thanks, Matt.

As a reminder, please limit yourself to one question per participant. And our next question is from Brooke Roach, Goldman Sachs.

Good afternoon, and thank you for taking our question. Richard, I was hoping you could elaborate on the plans to strengthen the Athleta brand. What are the most important initiatives you're focused on this year? And how are you thinking about bridging that brand back to sustainable comp growth similar to the other reinvigorated brands in your portfolio? Thank you.

Brooke, I'm happy you asked the question. I think first off, it's important to recognize Athleta is the number three brand in the women's active space. It's an important brand in the industry. And it's an important brand in our portfolio. It's also important, as I mentioned, on an annual basis, Athleta delivered a flat comp for the year. That's up against a double-digit decrease from the year prior. So we've seen improvements across several key metrics, and most notably, we gained market share. The progress we've been making around the brand's identity, we launched new activations, we've been reentering the cultural conversation, it is reinforcing our confidence in the long-term opportunity. And we do acknowledge that we have continued work to do to continue to reset the brand. In the quarter, we didn't meet our expectations. And specifically, need to do more to excite our core customer during the holiday period. Now we did use promotions at that time as a lever to engage the customer during the quarter. The good news is that we successfully managed our inventory and we're starting the year with better inventory composition in comparison to the same time last year. We have seen the drops that we've had in our color drops, our fashion drops. They've attracted new customers. We've done a great job reactivating customers. But ultimately, we lacked the depth of product interest for our core customer. And now we're gonna find that right balance as we move into a focus for 2025. I will reiterate, our ambitions remain high for this brand. We love the category. It's the largest category in the industry. We have more work to do.

Thanks so much. I'll pass it on.

Thanks, Brooke.

Next up is Adrienne Yih from Barclays.

Great. Thank you very much. Let me add my congratulations. What a great way to end the year. Richard, about a year ago, you hired

Alright. Adrienne, thank you for the question.

And then, Adrienne, on margin, you say, I mean, we're very proud of the significant gross margin gains that we've made. We were up 250 basis points year over year. And then, you know, as you noted, these are historically high levels. Our brands are resonating. And we continue to gain relevance and market share, which we think gives us pricing power in the market. And then you combine that with the rigor that we've developed around inventory management, we still have confidence that we can build upon the progress we've made, in margins as we move forward. The color, I would say, by brand, is that our AURs are up meaningfully higher than pre-pandemic levels. And that's true across all of our banners with the exception of Athleta.

Thank you very much. Best of luck. Great job.

Thank you, Adrienne.

Just a reminder, everyone, please limit yourself to one question. We'll go next to Dana Telsey, Telsey Group.

Hi. Good afternoon, everyone, and very nice to see the great progress. As you look at the store's channel and the online channel, I think the online channel did a little bit better than the store's channel. What did you see there this quarter? How are you planning for the year? With some of the new formats and refreshes that you've done, what kind of productivity gains have you seen? And any more thoughts on what you see as the appropriate store base for each concept. Thank you.

Thank you, Dana. I'll start, and if Katrina wants to chime in at any moment, more than happy to have her join me on this one. First off, we approach our channel strategy from an omnichannel point of view. Clearly, that is how the consumer journey starts and stops today. And our size and scale is a strategic asset. That we continue to evaluate and optimize as we continue to optimize our retail footprint. Customers are expecting to have an omnichannel experience, especially with our brands, and we have the number two apparel e-commerce site in the country. We have been working to optimize the customer experience. We are working to integrate that experience with our stores, and we're doing so with a digital-first mindset. We do believe there are areas that we can better leverage technology and technology to ultimately reduce the customer pain points. We're continuing to evaluate and optimize our retail footprint in conjunction with the evolving consumer landscape, and we believe collectively that we have a great advantage based on our scale. You did mention as we will also The Gap, Inc. Online sales were up 4% in 2024. It represents about 38% of our total net sales. Whereas our store sales were flat. And in Q4, our online business outpaced our store sales as well as representing just over 40% of our total sales.

Yeah. Maybe the only add-on on that is that as Richard said, you know, we have a company-operated fleet of about 2,500 stores, and we're sort of always optimizing that footprint. Repositioning, opening stores in more relevant locations, and we still believe stores are really important for the customers to experience our brands and being in the right locations is critical. We are excited about some of the new experiences that we're testing across the portfolio, which is you talk about dollars per square foot, I think, over time. We believe we'll start to add value. So we've talked about Gap in Flatiron in New York City and Banana in SoHo. Both of which are good examples of how we're starting to really make progress around thinking about store experiences in a different way. And more to come as we start to evaluate the performance of those.

Thank you.

Thanks, Dana.

And the next question comes from Ike Boruchow, Wells Fargo.

Hey. Let me add my congrats. Richard, I wanted to ask you broadly about just your view of the consumer. Behaviors you kind of saw maybe not necessarily in Q4, but kind of January, February timeline. Are there things you point to that make you believe this is just a weather moment with some weaknesses or anything that gives you more concern you putting enough guardrails around your plan for the year? And just a quick follow-up for Katrina, the cash balance is high. You guys are generating a lot of cash again. You bought back a little stock for the first time in a while in Q4. Should this become a larger part of the plan? Are you guys planning further buybacks? Because your stock is very cheap, and you guys are talking about the business with a lot of momentum. So I just wanna kind of, you know, square that circle. Thanks.

Okay, Ike. Thank you for the question. You know, first off, from a macro perspective, we've all been operating in a highly dynamic backdrop for the last several years. And we're expecting the same for 2025. We always study the consumer. And we saw growth across all income cohorts in the fourth quarter. Now our share gains were led by the lower income cohort. This was with strength in the Old Navy brand. Whereas Gap brand outsized share gains were led by the strength in both the top and the middle cohorts. What's really unique about this is our portfolio brands appeal to such a wide range of consumers, which is where we see a real distinct advantage. I mean, in a declining apparel market, we've been gaining share for eight quarters in a row. I think it's really reflecting the resonance of our brands with the consumer. And our relative strength in the industry. And as we look at the future, with a stronger portfolio of brands today, that are resonating with consumers as evidenced by share gains, it's our job to just continue to focus on executing with excellence with great style, great quality, and exceptional value. And as long as we focus on that as the center, on a backdrop of what has been a declining market, we are going to be the winners in any challenging market.

And Ike, as it relates to cash, the rigor in the business is driving significant cash flow generation, which is really exciting to see. And as you say, cash at $2.6 billion, is pretty high. We laid out the capital allocation framework on the call. We are taking up capital investments by about 34%. And so that shows our confidence in investing. The board did raise the dividend for the first quarter by about 10% as we align our principle of growing the dividend as net income grows. And then you're right. We got back into the market in the fourth quarter and purchased $75 million worth of stock. As I said on the call, we do have about $400 million remaining under our authorization. And we'll remain opportunistic as we look to balance value creation with our objective of offsetting dilution over time.

Great. Good luck.

Thanks, Ike.