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Summary of Presentations
2015 Investor Meeting Summary Summary of Presentations Following is a high-‐level summary of presentations scheduled for Gap Inc.’s Investor Meeting on June 16, 2015. Art Peck Chief Executive Officer ........................................................................................................................ 2 Jeff Kirwan Global President, Gap ......................................................................................................................... 3 Sabrina Simmons Executive Vice President and Chief Financial Officer .......................................................................... 4 Andi Owen Global President, Banana Republic ..................................................................................................... 6 Stefan Larsson Global President, Old Navy ................................................................................................................. 7 -‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐ This information contains forward-‐looking statements and non-‐GAAP financial information. Please see our June 16, 2015 press release regarding Investor Day, as well as our most recent annual report on Form 10-‐K, both of which are available on gapinc.com, for information regarding factors that could cause our actual results to differ and reconciliations or descriptions of non-‐GAAP financial information. 1 Art Peck Chief Executive Officer With the retail industry at a pivot point, we want to push boundaries to create what people love. We’re focused on our key priorities to serve the changing needs of our customers, and drive profitable growth across each of our brands. The company’s top priorities are Product, Experience, Talent and Growth. Product is at the center of everything we do. We must love every product we put in stores and deliver with consistency every season. We’ve reinvented our product operating model – Old Navy is a proof point of its success – and we will leverage best practices across our portfolio. With regard to Experience, digital remains a top priority. The traditional retail model is being disrupted as more customers engage through digital touch points, especially mobile. We’re pivoting to run our business with a “digital first” perspective. Talent is key, especially in our creative functions, and we’re proud of both the talent we’ve cultivated internally as well as the world-‐class talent we’ve attracted. Growth remains an important priority. We have a solid foundation on which to grow, with Old Navy internationally, especially in Asia, continued expansion of our Athleta business domestically, and our Outlet business globally. My objective is for all of our brands to deliver strong and consistent results. – Old Navy is performing well, and we are leveraging its best practices across the portfolio. – Banana Republic has re-‐established its fashion credibility and is now focused on driving commercial results. – Gap has made significant progress, and yesterday’s announcement will position this iconic brand to get back on track and build for the future. – With Athleta, I believe there is a lot of opportunity for growth in the athleisure space. – Intermix provides us an important point of engagement with the fashion community beyond its commercial results. We have the brands and people that give me confidence we will win. I’m incredibly bullish on the future of the company and truly believe our best days are ahead. -‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐ This information contains forward-‐looking statements and non-‐GAAP financial information. Please see our June 16, 2015 press release regarding Investor Day, as well as our most recent annual report on Form 10-‐K, both of which are available on gapinc.com, for information regarding factors that could cause our actual results to differ and reconciliations or descriptions of non-‐GAAP financial information. 2 Jeff Kirwan Global President, Gap It is very clear that we need to take immediate action to improve our brand health and lay a solid foundation for future growth. Over the past six months, we’ve assembled a collaborative leadership team, developed clear product aesthetic filters and made significant progress in rebuilding our product pipeline with the overriding objective of driving more consistent product acceptance. Following a thorough review of our business and store fleet, we are now taking decisive action to right-‐size the Specialty fleet, particularly in North America. We’ve decided to close 175 stores in North America, the majority of which will close in 2015, ultimately bringing the North America specialty fleet to about 500. The closures comprise lower-‐ performing stores or those which no longer appropriately represent the brand. This decision also reflects the shift in the way customers now shop, moving to the online and value channels, allowing us to build for the future with a healthier fleet from which to invest and grow our omni-‐channel offer. With this action we are effectively re-‐basing Gap’s sales, as there are approximately $300 million of sales associated with these stores. Though history shows recapture of closed store sales is low, we will work to recapture some of this lost revenue both within Gap Brand and also amongst other Gap Inc. brands. Even with this action on the fleet, we will continue to have a strong presence in North America with 800 Gap stores split between 500 in specialty and 300 in outlet, a balance between specialty and outlet that we believe is appropriate at this time. In light of the changes we’re making to our product-‐to-‐market model, we also took a thorough look at our organizational structure and identified opportunities to simplify the way we work, increase the speed of decisions, and drive greater accountability. As a result, we are eliminating about 250 headquarter positions. These have been difficult decisions. True to the values of our company, we will act in the most fair, equitable and compassionate way possible, and do our best to redeploy people across other Gap stores and across our other brands. We believe these changes will improve brand health, increase profitability, and build a stronger, more competitive foundation for the future. -‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐ This information contains forward-‐looking statements and non-‐GAAP financial information. Please see our June 16, 2015 press release regarding Investor Day, as well as our most recent annual report on Form 10-‐K, both of which are available on gapinc.com, for information regarding factors that could cause our actual results to differ and reconciliations or descriptions of non-‐GAAP financial information. 3 Sabrina Simmons Executive Vice President and Chief Financial Officer Our Financial Track Record Despite macro challenges over the past five years, including cotton price inflation and foreign exchange headwinds, we are pleased to have accomplished the following: – – – – – – – Sales growth of over $2 billion Reached nearly $500M of sales in China in just over four years Achieved a 13% compound annual growth rate in earnings per share Generated nearly $6 billion of free cash flow Increased the dividend per share by 120% Distributed over $8.5 billion of cash, through dividends and share repurchases Delivered total shareholder return of about 140% Our Economic Model Our goal is to create value in line with the following financial model: – Drive revenue growth by delivering positive comps on our large comp base of nearly $15 billion, growing newer brands like Athleta, focusing on faster-‐growing channels, especially online, and expanding the international business with a focus on Asia – Deliver healthy, expanding merchandise margins that result from consistently great product and disciplined inventory management – Leverage expenses – Expand operating margin – Achieve double-‐digit earnings per share growth There are three main factors that may impede our ability to deliver against parts of our financial model in 2015, specifically: – The West Coast port slowdown, which impacts our first half results – Foreign exchange, specifically the strength of the U.S. dollar – Poor product acceptance at Gap Brand -‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐ This information contains forward-‐looking statements and non-‐GAAP financial information. Please see our June 16, 2015 press release regarding Investor Day, as well as our most recent annual report on Form 10-‐K, both of which are available on gapinc.com, for information regarding factors that could cause our actual results to differ and reconciliations or descriptions of non-‐GAAP financial information. 4 One-‐Time Charges We estimate one-‐time costs of $140 million to $160 million associated primarily with Gap Brand’s actions to right-‐size the specialty fleet in North America and simplify the organization. We expect to take the majority of this charge in Q2. About $55 million to $75 million of the charge is non-‐cash. The costs include lease buyouts, asset impairments, inventory/fabric write-‐offs and employee-‐ related costs associated with organization changes. Annualized savings from these actions are estimated to be about $25 million beginning in 2016. Excluding these one-‐time costs, we are reaffirming our full year earnings per share guidance of $2.75 to $2.80. Our Capital Structure Our capital structure objective is to minimize the weighted average cost of capital while preserving sufficient access to low-‐cost funding. While our balance sheet reflects debt of only $1.4 billion, our lease-‐adjusted debt is several billion dollars higher. On a lease-‐adjusted basis, our debt to total capital is about 35 percent. We have a strong track record of generating free cash flow and distributing cash to shareholders. – Over the past 10 years, we have repurchased on average over $1 billion annually, buying back over 600 million shares at an average price below $22 – Since 2010, our dividend per share has increased from 40 cents to 92 cents per share this year. From 2010 to 2014, we distributed almost $1.5 billion in dividends -‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐ This information contains forward-‐looking statements and non-‐GAAP financial information. Please see our June 16, 2015 press release regarding Investor Day, as well as our most recent annual report on Form 10-‐K, both of which are available on gapinc.com, for information regarding factors that could cause our actual results to differ and reconciliations or descriptions of non-‐GAAP financial information. 5 Andi Owen Global President, Banana Republic Customers around the world shop Banana Republic. We have specialty, outlet and franchise stores in 27 countries and an online presence in 75 countries. We are making changes to deliver better long-‐term financial results. Specifically, we are focusing on staying true to our unique brand positioning, creating a product process that delivers memorable product consistently, telling inspirational product stories that build an emotional connection with our customers, and bringing our brand voice to life across all customer touch points. Our product needs to reflect the versatile, polished, contemporary, and memorable style for which Banana Republic is known. To create winning product consistently, we are prioritizing focus and investment behind key product categories, being more disciplined in how we incorporate trend, refining our assortment architecture to create a more profitable product flow, building a more collaborative product process, and improving quality. To build emotional connections with our customers, we are telling inspirational brand stories that are anchored in product -‐ not promotional messaging. Our stories emphasize versatility, style and design, and quality. We are shifting our marketing mix to lead with digital rather than print, elevating our mobile and online presence to better reflect where our customers find style inspiration, and creating unique store experiences to transform our mass brand image. We want customers to step into our stores and have an experience that is uniquely Banana Republic and feels special with a bit of discovery. To do so, we are encouraging stores to be more creative and show their local style in an approachable, versatile way. -‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐ This information contains forward-‐looking statements and non-‐GAAP financial information. Please see our June 16, 2015 press release regarding Investor Day, as well as our most recent annual report on Form 10-‐K, both of which are available on gapinc.com, for information regarding factors that could cause our actual results to differ and reconciliations or descriptions of non-‐GAAP financial information. 6 Stefan Larsson Global President, Old Navy Three years ago, Old Navy set out a vision: To become the first aspirational brand in the value space, by delivering aspirational, on-‐trend and high-‐quality product at an incredible price, in the most inspirational and convenient store experience. Our focus on a clear vision for our brand, and a formula to drive success has delivered consistently strong performance, with three consecutive years of growth. In today’s retail reality, our customer’s expectations have changed. They expect more amazing product, that’s more inspirational than ever before, from a more authentic brand, in an environment that’s inspirational, entertaining and convenient and authentic. And they want all this at great value. In 2015, to meet these expectations, we are focused on delivering continued profitable growth by consistently delivering on our formula: amazing product at an incredible value, and a fun, convenient shopping experience for the future. We have growth accelerators that will help drive the business, in online, active, men’s and kids. We are also expanding our international presence with the launch of Mexico in the Fall of 2015, and believe our brand values of family, fun and accessibility will resonate strongly in this market. -‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐ This information contains forward-‐looking statements and non-‐GAAP financial information. Please see our June 16, 2015 press release regarding Investor Day, as well as our most recent annual report on Form 10-‐K, both of which are available on gapinc.com, for information regarding factors that could cause our actual results to differ and reconciliations or descriptions of non-‐GAAP financial information. 7 Product 3.0 Product 3.0 is a cross-‐Gap Inc. initiative to put product back at the heart of our business and drive a competitive advantage. Product 3.0 enables us to consistently deliver brand-‐right, on-‐trend, high-‐quality and high-‐value product to customers. It’s a combination of brand vision, a systematic, repeatable way of working cross-‐functionally and collaboratively to get the right products to market at the right time. This process also leverages existing Gap Inc. capabilities, like fabric platforming, product demand testing and in-‐season rapid response to demand. Key components of Product 3.0 include: – The trend funnel process, through which we: • Identify aspirational trends that have a “masspirational” potential for Old Navy • Evaluate these trends through the brand filter • Focus on big ideas that we think customers will love and that will drive the business • Develop our unique design point of view – Test and respond: • For products we think are truly ‘masspirational’, like the Pixie, we can quickly put a sample out to test • We can test a sample in market, read customer demand and then confidently place bigger buys, based on our insights. • Store testing to get a read on the customer and then react quickly to get product into stores, enables demand driven buying and helps us meet the ‘trend curve’ for product • We partner closely with suppliers to enable innovation at the fit and fabric level to stay current and on-‐trend • And we leverage responsive supply chain capabilities to get product to market quickly This approach is relevant to all Gap Inc brands. The key difference is that each brand will evaluate trend through its unique brand filters. -‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐ This information contains forward-‐looking statements and non-‐GAAP financial information. Please see our June 16, 2015 press release regarding Investor Day, as well as our most recent annual report on Form 10-‐K, both of which are available on gapinc.com, for information regarding factors that could cause our actual results to differ and reconciliations or descriptions of non-‐GAAP financial information. 8
