Gap Q1'16 Earnings Conference Call: Full Transcript

Operator:

Good afternoon, ladies and gentlemen. My name is Didi and I will be your conference operator today. At this time, I would like to welcome everyone to the Gap Inc GPS First Quarter 2016 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 star, one to enter the Q&A queue. And as a reminder, please limit your question 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, Jack Calandra, Senior Vice President of Corporate Finance and Investor Relations.

Jack Calandra:SVP-Corporate Finance & Investor Relations:

Good afternoon, everyone. Welcome to Gap, Inc.'s First Quarter 2016 Earnings Conference Call. Before we begin, I'd like to remind you that the information made available on this webcast and conference call contains forward-looking statements. For information on factors that could cause our actual results to differ materially from the forward-looking statements as well as reconciliations and descriptions of non-GAAP financial measures, please refer to today's earnings press release as well as our most recent annual report on Form 10-K and our subsequent filings with the SEC, all of which are available on gapinc.com.

These forward-looking statements are based on information as of May 19, 2016, and we assume no obligation to publicly update or revise our forward-looking statements. Joining me on the call today are CEO, Art Peck; and Executive Vice President and CFO, Sabrina Simmons. Sabrina will be using slides to supplement her remarks which you can view by going to the Investors section at gapinc.com.

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

Arthur L. Peck:Chief Executive Officer and Director:

Thanks, Jack, I appreciate it. I want to spend some time on where we are and where the industry is strategically and what we are doing. If you recall that over a year ago I spoke to you very directly about the fact that we were not where we needed to be in terms of products, across our brands and how we needed to bring product to markets and we have done a great deal of work across the Company over the last 12 months plus to be focused on products, focused on restoring aesthetic of our brands, quality where it's appropriate, consistent fit and a number of elements of product including building responsive product capabilities. 

I am pleased with the work, it is the right work and we will scale this work progressively period-over-period as we go forward. But clearly we need to more faster and so with that we have announced several other things that we are going to be taking on with a high degree of urgency. This is an environment that we're operating in today the demands faster change. We are present today with our global footprint where apparel dollars are being spent. 

That said that is never meant that we will compete in every geography with every brand and every channel and I am a strong believer in this company of trying things learning from them making adjustments and moving forward and doing that with speed and doing that decisively. As part of this we have announced that we will be winding down our Old Navy operations in Japan partly due to the macro factors in that environment and partly due to frankly need to apply the resources to greater and higher potential opportunities I am obviously disappointed that we are going to be discontinuing operations, but I view it as a sign of a good company when you acknowledge that the business isn't going to deliver and you make changes and move forward.

I am so with respect to Old Navy very bullish about its global growth opportunity, very excited about the potential of license front of that. China has been and will continue to be a key area focus for the entire company and so far in Mexico I have been very pleased with what I have seen as the growth potential and profitability potential there as well. 

I would also want to call out the fact that part of the work that we are doing right now is making sure that we are taking every opportunity to exploit our scale and our mass and our size. We believe very strongly that we have a structural advantage in our North American footprint. There are other advantages in North America that I want to make sure that we are fully exploring whether these are supply chain, logistics, our mobile and web presence, our CRM opportunity all coupled with our product engine which I believe form important formula for winning in North America. There is a tremendous CRM opportunity here and what I say CRM I really mean the opportunity to know our customers holistically and increasingly communicate with them as individuals and personalize their experience. 

We also have an opportunity if I go back to mobile for a second to move towards truly leveraging mobile traffic that we are getting on our website and continue to get towards a fully responses, deep integrated super efficient mobile web experience. These are all advantages that are in our core North American market we have, we can see them, we can exploit them, but we haven't push fully down that path. They are not unrepresented in our other markets as well, but with our home market being North America they are powerful in terms of where have structural advantage. 

So I want to highlight two words and I've mentioned these now frequently inside the company and I just want to underline them for this conversation. One is acceleration and the other is distortion. They are both critically important one is about moving faster on a broader front and the other is about lining our energy against fewer things deeper and better. Acceleration is about the change that we've already been embarking on as a company, but pushing harder and pushing faster. 

We have an opportunity to tighten up our operating model to accelerate that change in order to be more nimble to operate faster and to be more efficient at the same time and I intend that we will take advantage of the every opportunity there as well and accelerate the change that we are making. 

I also used the word distorts and what it means to me is to make sure that our energy, our resource, our investment, our talent, our push towards places where we can win, where we can create advantage that is meaningful in our economics and advantages for our customers and win. So what's a good example of that, our presence in active today. It's a big business for us. We are one of the largest players in active in North America today and it's an opportunity to continue to build the business, to participate in the highest growth segment of the apparel space and then bring our scale, our mass and our capabilities to their in tactical innovation, in fabrication, in design and in trend bring those to be are not just an our active business, but on behalf of our entire ready to wear portfolio. 

Let me come back to Q1, top line and bottom line unacceptable. We saw traffic volatility over the course of several weeks during the first quarter and it obviously had a significant impact on demand on promotional levels and on top-line and bottom line. 

What I am very encouraged about, is what we are seeing inside the business and the customers reactions to the product work that we have been doing over the course of last year. Going to a Gap store, look at the product, feel the quality, see the color, the optimize, the consistent fit, really proud of the work that the team has done and our customers are responding to it. But I started this a year ago and said if we don't win a product first we won't win and it's clear that we need to do more then products but I'm very pleased with the product work that we have done and again how it is showing up in front of our stores. 

You heard me speak to Old Navy before too much fashion, too much duplication in the assortment. The most important thing to know about Old Navy is the brand proposition the value proposition is compelling I'm very excited about the team getting the brand back on track I have zero doubts about how compelling the value proposition is. Let me speak briefly about Banana for just a moment. Obviously again very disappointing comp in that business and we have more work to do to make sure that all of the product in the stores is being brought into the stores through the filters that the brand is put in place. 

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

Last I have not spoken to much about Athleta, but I will do, miss not to call out the fact that Athleta, continues to perform superbly for us, that it is position right in the suite spot of the active space which is growing faster than the overall rate of apparel and it's a place where we are fundamentally omni-channel in our structure and very innovated all the way down to the fiber and fabric level in terms of product fabrication. So both as a growth driver in this company but also as a source of innovation to the rest of our portfolio. I couldn't be happy your having Athleta as part of the Gap Inc, family. 

Let me close by saying that again to me the change that is impacting this industry is obvious. It's been obvious to us for a while which is why we are moving with urgency against a multi-year plan to modernize this company across many levels. I am very excited about what this company can do going forward. 

Thank you and let me now hand of to Sabrina. 

Sabrina Simmons:Executive Vice President and Chief Financial Officer:

Thank you Art. Good afternoon everyone. As you heard from Art, we are committed to focusing the business to gain market share in key strategic markets where we believe we are structurally advantage and or weather significant run rate for growth. The decisions we disclose today will allow us to better align our talent and financial resources against our most important priorities. 

First we have made the decision to wind down our Old Navy business in Japan by the end of fiscal 2016. Additionally we are planning to close a number of dilutive Banana Republic stores primarily internationally. 

Further we are taking steps to streamline our operating model. Let me give you some detail. Regarding Old Navy, as a reminder we launch Old Navy Japan in 2012 and have 53 stores, while Japan will continue to be an important market for the company with over 200 Gap and Banana Republic specialty and outlet stores remaining. The investment in terms of both financial and human capital to build a new brand in that market is significant. 

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

In the near term, Old Navy's growth ambitions will be incurred in North America including our newest market Mexico as well China in the franchise business. These opportunities presents significant potential for us. With regard to streamlining our operating model, we have an opportunity to become more nimble and better leverage our scale. This will allow us to deliver continued expense discipline you have come to expect from us and mitigate the natural upward momentum in SG&A. 

Together we expect these decisions to result in annualized savings of about $275 million and operating margin improvement of nearly 2 percentage points. It's important to note that we expect an annualized sales loss of about $250 million from the closure of approximately 75 stores. We estimate restructuring costs of about $300 million of which about $100 million is estimated to be non-cash. 

Now, let me go back and speak to results for the first quarter, while we are disappointed with our first quarter performance it's important note we have maintained our operating discipline in the areas we can control as evidenced by continued expense management, ending inventory in line with our guidance, and delivering positive free cash flow. With regards to sales, sales totaled $3.4 billion, comp sales were down 5%. 

Foreign exchange negatively impacted net sales by about $20 million. Total sales and comps by division are in our press release.

Moving to gross margin, first quarter gross profit totaled $1.2 billion and gross margin contracted 260 basis points to 35.2%. Merchandised margins were down 170 basis points, driven by Old Navy and Banana Republic. Rent and occupancy deleveraged 90 basis points. 

Regarding SG&A, first quarter total operating expenses were $987 million, slightly below last year. Marketing expenses were down about $9 million versus last year to a $127 million. Operating income for the first quarter was $222 million and net earnings were $127 million. Earnings per share was $0.32.

Regarding the balance sheet and cash flow, total inventory was down about 3% at the end of the first quarter in line with our previous guidance. We expect total inventory dollars at the end of the second quarter to be down in a low single digits year-over-year. For the quarter free cash flow was an inflow of about $30 million and we ended the quarter with $1.3 billion of cash.

Regarding capital expenditures and store count, year-to-date capital expenditures were a $139 million. Square footage was down 1.3% compared with last year. Store count and square footage are listed in our press release. 

With regard to our earnings outlook for the remainder of the year. 

We're operating in an evolving apparel retail environment and it's unclear whether the trends in Q1 will place forward for the remainder of the year. Therefore we are not re-affirming our 2016 guidance. 

But now believe the current first call consensus EPS estimate of $1.92 falls within a reasonable range of potential outcomes excluding the restructuring charges I outlined earlier. To be clear, the Q1 trend would need to improve in order to achieve this consensus estimate. If the Q1 trend continue as for that downward pressure on the estimate. 

Regarding other guidance metrics. Our cash flow generation and strong balance sheet has been and continue to be strength of our business model we intent to maintain that focus and therefore we are reducing our 2016 capital spent guidance by about 20% or $125 million to about $525 million. We now expect depreciation and amortization of about $550 million. 

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

It's important to know, we continue to have a diversified portfolio with the majority of our fleet either in the value segment or in growth markets and only about a quarter of the fleet in traditional North America Gap and Banana Republic specialty stores. Providing tax due to the fact that the restructuring charges in the certain non cash valuation allowances that impact our effective tax rate we now believe the rate for the full year on continuing operations will be about 40%. In closing our global growth strategy remains intact. We are simply focusing our talents and capital on areas that have the greatest potential for profitability. 

After our actions we will still have a presence in over 90 countries. What we are disappointed with the results for the quarter we are energized about our plans to evolve our business into capitalize on the competitive advantages we have. 

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

Jack Calandra:

That concludes our prepared remarks. We will now open up the call for questions. We would appreciate limiting your questions to one per person.

Question & Answer

Operator:

As a reminder, that star one to ask a question. 

Our first question will come from Simeon Siegel with Nomura Securities.

Simeon Siegel:Nomura Securities:

Thanks. Good afternoon. So perhaps a done question, but can you share any more color

Operator:

It disappeared. 

Simeon Siegel:

Hello.

Sabrina Simmons:

Go ahead Simeon, go ahead. 

Simeon Siegel:

Thanks guys. Can you share any more color on the specifics behind the streamlining the operating model and maybe any help on the timing, when you would expect the cost saving to have. 

Sabrina Simmons:

Yes I mean most of the savings are going to come from the operating model actually. But I would tell you that the actions are going to take place throughout 2016 we don't expect a significant portion of the annualize number to come in '16 although it is going to be helpful and as I said it's going to enable us to deliver the continued expect expense discipline that you would expect from us. 

Simeon Siegel:

Great, thanks and then just if I can just follow up on that. Do you think in light of the comments on the -- do you think anything has changed in the ability to forecast the business longer term and is there have many changes predictable in general and if so Steven you can do to maintain your ability to plan that is going forward.

Sabrina Simmons:

Yes look I think what was really interesting about Q1 was really based in our assumption around traffic which we have never expected positive traffic, but we didn't expect deeply negative traffic and other interesting thing about the trend was quite erratic. So we know that February started quite well and even March started quite well and it fell off in the week before Easter. So I think we just want to pause for a minute and see if the Q1 volatility is continuing trend or elaboration for us and that will allow us to get a better sense of the full year and the assumptions we want based on. But as I said I think that it's intense is estimated very reasonable in terms of the range of outcomes that we could predict at this time.

Simeon Siegel:

Great. Thanks a lot guys. Best of luck for the rest of the year.

Sabrina Simmons:

Thanks.

Operator:

Next we'll hear from Matthew Boss of JPMorgan. 

Matthew Boss:JPMorgan:

Thanks. So could you just talk to your promotional strategy today. I guess any changes to essentially drive increased traffic in the second half and any consideration to potentially taking a cut to initial ticket prices just may be reset the bar and then last question just regarding distribution I know you made some comments on Amazon just any opportunity and sort of the thought process between the potential partnership at some point?

Arthur L. Peck:

Sure let me try to several of those bundle together that was very clever. If we just think about promotion I think it depends on the brand because we are in very different positions on each brand Gap and Banana having cognitive situations where they were extremely deep over the course of last in some cases 18 to 24 months because of big product issues and in both of those businesses we are working to drive top line, but also to tighten up our discounts and if you are a subscriber to our emails, in our stores or on our website you will notice that it is real, it is not easy, but we are working in terms of the depth of promotional the depth of promotions, the promotional frequency and the breadth that they cover. And I actually was just with the Gap team where we went through looking at our commercial plan up to Memorial Day and how we are trying to drive a very compelling seasonally appropriate message from a promotional standpoint. 

So that we can play, but also working to protect margin as much as we can.

Same is really true on Banana where we have backed off and I will be the first to say that when we start tightening up in promotion you are playing a game with chicken with your customers and they try the wait you out and so we have been playing that now for really the last quarter. And we have been more effecting this quite honestly to little bit easier in Gap where we are seeing the numbers move more consistently in the right direction and little more sporadic inside of Banana. 

Old Navy we have been promotional, we are promotional. We have we missed execution in Q1 from a marketing standpoint and we are really tightening up the commercial messaging for Q2 and Q3. But we are going to continue to be promotional there it's the way you have to play in the value space and I think as we've said over the last few years we have actually been quite good and pleased with the fact that we have improved our yields in managing the underlying promotions while at the same time communicate to the strong value message. In so that they can ask later which is nearly has a smaller, but everyday larger piece of the portfolio. 

It is still largely a red price business and the business that we've really feel good about from the standpoint of the promotional cadence there. 
On tickets absolutely it's something we have been looking at and in fact in some cases both in Banana and Gap and Old Navy as well all three we have made adjustments to our tickets where we felt like the initial tickets given where competitive out the door pricing was just we're not real at the end of the day and that's something that we'll always looking at. 

Matthew Boss:

on Amazon?

Arthur L. Peck:

I will reiterate exactly what I said regardless of how it got interpreted and that is that we are committed to making sure that we are where our customers are and today our customers have obviously moved in digital very significantly to a mobile experience and we will running as quickly as we can to make sure that we run along side than everyday. Amazon's presence in e-commerce is undeniable in this country and therefore to not fully consider all the options of distribution for us will be we'll not be thinking about things that were important to us. So no way when I prevailing a partnership I'm just prevailing the fact that we want to make sure that we will very situationally aware of what is going on around this with customers in the world. 

Matthew Boss:

Thanks. 

Operator:

Our next question is from Dorothy Lakner with Topeka Capital Markets.

Dorothy Lakner:Topeka Capital Markets:

Thanks good afternoon everyone. I wondered if we you go back to product for a minute and Arthur if you could talk about just the evolution that you're trying to effect it Old Navy where you had too much fashion and you need to adjustment the mix how long you expect that to take. And then Banana where you may have assume that the better product would get a better customer response and it didn't what you are doing there. And then lastly, how we should see the evolving mix that Gap since you are seeing success both top-line and margin how hat we see that evolve over the course of this year?

Arthur L. Peck:

Yes. Let's talk Old Navy, Old Navy really start to soften for us in Q4 and that was right around the time as you recall we also have a leadership departure and as interim leader. We gotten there very quickly we looked and diagnose the problem by then Q1 was brought so we had the assortment architecture that we had. 

And again the issue there is not as much less about product acceptance and much more about the architecture of the assortments and frankly duplicative and over assortment largely in this business. Items that we're brought for very short fashion buys a collections orientation and we lack the depth and tightness around key items buys in Old Navy. 

And so on diagnosing that that's obviously come through Q1 as we have said before focused on the in changes as quickly as possible in Q2 which was coming out as pretty quickly and I feel much better where we are in Q3 and the reset of the assortment architecture. I don't want to leave and mentioned the fact that we have not had strong marketing in the first quarter of the year and that has contributed to what has been an unacceptably soft Old Navy business when I believe value continues to remain strong and so it's deeply disappointing to me. We pulled TV out of the April, we had ineffective TV. TV as a big brand for Old Navy and we'll back on that as we look into Q2 and then certainly into Q3 in line up for back to school. 

And so I am not going to call on everything right as we cross over the threshold into Q3, but I am confident that we have the proper diagnosis, we took a proper actions with real align the commercial plan and the overall macro trends for our value competitor family value competitor for Old Navy should be strong. 

If I get back Banana for just a second. Again why CS having put the most intention on key item buys through the filters of the brand. I am pleased with what I am saying it is just too little not faster though and so and if the customers responding to those it validates the work that the team has been doing and then I go to the words that I have been using of accelerating the change to get there as quickly possible and that's a period-over-period change that we are confident is going to continue to improve the business. 

Banana is the toughest product business what we have just given the segment that they are in and the work their has been the hardest work to reestablish the aesthetic and invite the consumer backin. Leading age metrics and Banana, around customer feedback, around reviews and things like that are very positive but we are not anywhere close to where we need to be as fast as we need to be there. 

By go to Gap, here is what I would say about Gap. If the traffic volatility that we and the industry had not experience if that is not happened in Q1 we would be sitting here having a very different and much more up e-conversation. The metrics that need to covers are moving in the right way when we are in a mode like this we track period-over-period leading edge metrics and they are all moving in the right direction for Gap, but we had traffic volatility that made it very difficult to show the top-line that we are looking for. 

So its a mix story across the businesses and again I just want to comeback to Athleta, strong strength in the portfolio I mentioned that in my comments and I want underline that as well. We have a big business and active for this company as a place where we are pushing hard to continue to store towards that's space. As we look at that business highest growing and it will be a very significant segment of the overall ready-to-wear apparel space as we go forward and we plan I think here to stay. 

Dorothy Lakner:

Great, thanks.

Operator:

And our next question is from Paul Trussell with Deutsche Bank.

Paul Trussell:Deutsche Bank:

Good afternoon. Just wanted to enquire about maybe inventory goals I know it's a volatile marketplace is tough to know the pace of trend that you will be dealing with but just how should we think about you know what would be a comfortable levels inventory for you guys by the end of maybe 2Q or year-end. 

Sabrina Simmons:

Yes, thanks for the question Paul. As I said we're guiding to a low single-digit negative for Q2 and we just finished Q1 at minus 3 to similar trend. We have set our longest especially for our North America specialty brand we want to keep the inventory pretty tight. Now the time where we are walk is you don't want to bring it down so far that you cut off your opportunity to get a positive comp. 

So that is only the delicate balance that we walk but we think pitching at where we're pitching it right now a low single-digit negative strike fast forward, so that's what we're looking for.

Operator:

And next we have Anne-Charlotte Windal with Bernstein.

Sabrina Simmons:

So we move on to next one. 

Operator:

Let's go to Paul Lejuez with Citi.

Jennifer Zhou:Citi:

Hey guys its Jennifer on for Paul Good afternoon. Quick question on Athleta I was wondering if you could talk a little more about that give us sense of the size of the business now and may the margin structure of that business? 

Sabrina Simmons:

We don't disclose a lot about that yet Jennifer, but you can get a sense comment in our other column. So included in the other column is Piperlime Intermix and Athleta and Piperlime we round down in Q1 of last year. So the number looks a little bit funny because of the lack of Piperlime sales this year when we have them last year. If you remove that we would have a double-digit increase in other and that gives you a sense directionally since effort as much larger than Intermix. 

That gives you a sense directionally of that business. 

Jennifer Zhou:

Alright. Can you give us the sense of size of Intermix and how that's performing may be?

Sabrina Simmons:

Well I think the way to think about Jennifer is we haven't drown the fleet very much since we purchase it. And so I think background we have probably give a sense of the size of the purchase that we haven't it's kind of been trying to tighten that learn about the business model there. So there hasn't been much growth there I would say the primary driver of the growth in that call on this going to be our product. 

Jennifer Zhou:

Alright, great. Thanks and then would you say how much FX impacted earnings this quarter?

Sabrina Simmons:

Yes. We did in the press release but I will tell you now again that it's 4 percentage point drag on earnings per share in the quarter. Thanks for asking because I didn't say it in my remark.

Jennifer Zhou:

Okay. Thanks a lot. Best of luck. 

Sabrina Simmons:

Okay. Take care. 

Operator:

And next question we will hear from Ike Boruchow with Wells Fargo.

Ike Boruchow:Wells Fargo:

Thanks. Good afternoon thanks for taking my question. Sabrina could you maybe give us a sense of the timing I am sorry if I missed it but the timing of those roughly 75 store closures maybe what quarter those are fall in to and then just to clarify. So those stores represent about $250 million in sales and generate a loss of $275 million or is there something else that back officer or headcount that gets you to that $275 million of savings.

Sabrina Simmons:

Yes. So let me take the last part of that first. So the $275 million is made up mostly of operating model changes we are making across the board at Gap Inc. So the Old Navy Japan lying down contribute to the 275, but it is not the majority at all. 

Okay, so the majority is the streamlining of our operations across the board. With regards to the store closure timing I would accept that to take place throughout 2016 and really probably waited for the end of this year.

Ike Boruchow:

Got it. Thank you so much.

Operator:

And next we have Brian Tunick with Royal Bank of Canada.

Brian Tunick:Royal Bank of Canada:

Thanks. Good afternoon. I guess Sabrina I was curious I think you mentioned either 2 points or 200 basis points of an operating margin benefit go forward I wanted to if your referring to 2017 if you are referring to the core business or that have to do with some of the streamlining you are doing that you are announcing today. So just curious about what you thought does that mean your longer term operating margins can get back into the low double-digits over the next couple of years and then second question Old Navy's are it to depth again but just wondering between macro and weather I mean how much could this fashion miss or over fashion really have impacted the quarter here seems like couple of months now the trend has been decelerating. 

So just wondering if you porsched out different bucket what you have learned and what's the time frame again you will see those product changes. 

Sabrina Simmons:

Okay, so I'll start on operating margin. So the base that we are talking also the sort of our expected 2016 base so if you move -- if you remove the sale of $250 million and you remove all the associated line items that gets you the annualize savings of about $275 million price you get about nearly 2 percentage points of operating margin accretion. So its actually quite powerful and operating margin perspective so we are very pleased with that this is going to be a journey back so this is the big step forward in focusing us on the businesses that have the highest potential for long-term profitability and we are moving those that had quite a dilutive impact so that's operating margin I will turn it over Art for the second question.

Ike Boruchow:

Sorry the question was around all maybe correct and product again like I said earlier we saw what we saw in Q4 and gone immediately and again that was coincident with the change in management and leadership transition we made modest changes in Q1 as we previously indicated because most of that product was either here or on the way so we could have a limited amount of the impact and then incremental changes in Q2 as well and the ability to significantly effect Q3 and obviously wholly effect Q4 and so from the standpoint of the assortment architecture which again was really largely around women's product being over assorted and lacking in the appropriate variety across some of the key programs and then lacking the inventory debt behind key buys that is significantly correct as we get into Q3. At the same time we have had marketing against weaker marketing against some strong marketing that we had in the previous year and we work to correct that, we put TV and a number of other things back into the schedule in order to bring up voice back everyday and so do I believe that we going to continue to see weakness in the business on a going forward consistently I don't because the value proposition again in the suite spot of where we should be playing right now. 

I have much more confidence with the architecture the assortment is back inline in Q3 and then Q4 I think we are in very good shape and we have a very strong marketing program that against it. 

Ike Boruchow:

Super very helpful. Thanks very much.

Operator:

And next from the Telsey Advisory Group, we will hear from Dana Telsey.

Dana Telsey:Telsey Advisory Group:

Good afternoon everyone. As you think about the opportunities and the focus on supply chain, logistics CRM with each business what's the opportunity and what's the timeframe to achieve that do you think it help sales or help to margin? Thank you.

Arthur L. Peck:

You know Dana that's a question we comprise for the day talking about. So I thank you for asking it. Surely you are aware obviously, since we have spent lot of time talking about, about the backend that we are doing Direct work we are doing on Supply Chain. 

And that's why that is again a journey now the destination I see significant scaling of that as we go forward in the businesses period over period. But it's again the journey that we are on today. If I look at some of the areas, let's go to CRM for a second. 

When I am really passionate about I just announced a position in the company of a Chief Customer Officer where we are taking a wide variety of desperate connections that we have with our customer and sticking them together organizationally and beginning to really build the capability to have a much more consistent deep and holistic view of our customers as individuals. 

The core of that as you might imagine is our credit card which we're our best customers. It's a program that we only have in United States which is part of why I go to structural strength. Its a very strong program here for us in Unites States and it represents a significant portion of our business. And I am not remind that an organizational change brings about meaningful change, but we have had get some pieces to customer again in the number of places in the company and I am just broken those walls down and brought it together. 

And if I think about we're best practices are broadly we are well behind that. I think we are actually in a pretty good space from where our best practices are in the apparel industry and I am looking to accelerate that significantly there also and again credit cards to core web browsing history obviously or your tender history, loyalty program, multi-tender loyalty program all coming together in one place and that's one example. 

And again I am not going to tell you that's the lifetime moment in Q3 or Q4 or something like that. We are live in the world today where we spending a great deal of money on marketing something else that I have signal to you before and a lot of that money is spend in very traditional ways and we are now increasingly enabling the capability to be much more one on one in our communication targeted and personalize in our communication and that's pivotal way from some of the traditional vehicles that we've seen to a much deeper form of communication to CRM a had my board this week and I explain to them that one of the places for this amount has itself is I think windows today are much less relevant than they have historically been and you will see this going forward that we are actually skidding down our windows treatment in Gap as an example on the belief that if you haven't one at the digital interface on the front end your windows in the mall store probably not going to make a difference at the end of the day. So this is work its underway I can again and I am happy of course as always to talk to you separately, but it's work that we are enthusiastic about where we believe we really truly have some structural advantages.

Dana Telsey:

Thank you.

Operator:

And we have time for one final question from Omar Saad with Evercore ISI.

Omar Saad:Evercore ISI:

Hey thanks for taking my question. I would love to hear a bit thoughts on the e-commerce side of the business that's been such a strong suite for you guys for so many years I know it sounds like your kind of moving a little more towards investing behind the mobile capabilities to round out the suite of your powers there. But could you give us an update and kind of how you are thinking about the e-commerce business and then maybe how we should expect the mobile side of the overtime.

Arthur L. Peck:

Yes I think it's a really good question to place where we have had strength and we continue to have strength and we see it obviously as everybody does I think a long term progressive shift to the consumer moving in that direction. Let me go straight to mobile for a second but let me do that what I called the weekly bucket. If you think about business moving from stores to the desktop or laptop to mobile stores for industry conversion of traffic into stores whenever it's in the mid-20s to the high 30s or something like that. 

If you go down to a desktop or laptop experience where someone is buying that traffic converts somewhere in the low single-digits from those people out there and then if you go to a mobile experience a lot of people out there today are seeing conversion of a mobile traffic as a fractional single digit and so the work that we are doing is very much about addressing that migration of traffic and making sure that the opportunity for us to monetize that traffic as it moves remains there at the end of the day so if I go straight to mobile a big part of mobile is making sure that people have an incredibly easy shopping experience and check out experience on a mobile device that the content is relevant so that means a response website which were largely towards achieving right now and then obviously content and additional experience which shows up on a screen that's 2.5 five inches at the end of the day and so that's something where we are very focused for us overall, our traffic has grown and it's gone with digital. If I were a retailer out there who was looking at their service seems by traffic being directly substituted from my stores to a desktop to a laptop to a mobile device. I would really start to worry about hat bucket linking out of the and so Half back bead out of the business and so we are committed to making sure who are customer is and oru customer today and increasingly he is on a mobile device which means a great mobile shopping, brand and e-commerce experience.

Omar Saad:

Great thank you good luck. 

Arthur L. Peck:

I'd like to thank everyone for joining us on the call today. As a reminder the press release which is available on gapinc.com continues to full recap of our first quarter results as well as the forward-looking included in oru prepared remarks. As always the industrial relations team will be available after the call for further questions. Thank you. 

Operator:

And that conclude today's conference call. We thank you for joining.