Good afternoon, ladies and gentlemen. My name is Abby, and I will be your conference operator today. I would like to welcome everyone to The Gap, Inc. First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. I would now like to introduce your host, Cameron McLaughlin, Head of Investor Relations.

Good afternoon, everyone. Welcome to Gap Inc.’s first quarter fiscal 2023 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 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, as well as a description and reconciliation of any financial measures not consistent with Generally Accepted Accounting Principles, 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 14, 2023 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 May 25, 2023, and we assume no obligation to publicly update or revise our forward-looking statements. Joining me on the call today are our Interim Chief Executive Officer, Bobby Martin; Chief Financial Officer, Katrina O’Connell. With that, I’ll turn the call over to Bobby.

Thank you, Cameron and good afternoon, everyone. Thanks for joining us today. Consistent with what you have heard from us over the last few quarters, we continue to take the necessary actions to drive critical change at Gap, Inc. to further improve the trajectory of our business and to get us back on a path toward delivering consistent results. We are improving near-term execution and requiring a much deeper and integrated focus on the customer to unleash each brand’s potential. Also, simplifying our operating structure and model, reducing costs, improving speed of decision making and unlocking our creative muscle. And modernizing our core capabilities that have been on Gap Inc.’s roadmap for far too long. I understand that we have surfaced these issues before and what I would say is simply. This work has been derailed for too long and it is imperative that we get after it in earnest. The need for change is permeating the organization and I'm very pleased that our teams are embracing the work and behaviors needed to get us there. The leadership team is committed to getting the work done and have put structure, process, and leadership accountability in place to ensure that we do. Now, let me give you a little more specific insight to the actions that we’ve been taking: First, we took immediate action to improve our near-term execution and brand performance. We have moved quickly and effectively at clearing excess inventory, improving assortment particularly at Old Navy and Gap, resulting in share gains in both women’s and baby in Q1. The company delivered over 600 basis points of adjusted operating margin expansion compared to last year, driven by significantly improved gross margin, from the reduction of excessive air freight expense and improved promotional activity, as well as adjusted SG&A leverage. And our balance sheet is stronger. We ended the first quarter with nearly 40% more cash than last year, almost 30% less inventory than last year, and we paid off $100 million of our outstanding ABL balance just last week, while also continuing to deliver an attractive quarterly dividend to our shareholders. Now let me speak to each of our brands. Starting with Old Navy, comparable sales were down 1%. Old Navy’s momentum continued into the first quarter with market share gains driven by strength in women’s, as well as a reversal of trend in the baby business that was offset by softness in active and kids. The Old Navy team under Haio Barbeito’s leadership remain focused on stabilizing the core and elevating execution, which contributed to improved margins resulting from its leaner inventory position and balanced assortments. Styles with a clear fashion point of view and diversified end-use, like woven tops and pants, performed well giving customers the option to go from casual to dressed up, thanks to outfitting cues focused on versatility. The team also continues to lean into its responsive capabilities in order to place inventory buys more efficiently and remain flexible to chase into demand or pivot if the customer needs shift. On Gap brand comparable sales were up 1%, driven by continued strength in women’s, a modest improvement in baby and offset by weakness in kids and active. Gap brand’s focus on amplifying its icons is truly resonating, as the team focuses on reintroducing the most modern versions of its iconic styles. This shows up as updating styles like our women’s silver faux leather jean, an on-trend take on our classic cheeky straight denim offering. And I’m encouraged by product improvement in other categories as well, including denim, woven tops and dresses, which showed up with increased versatility. The team used its responsive levers to chase into best-selling Women’s Denim like the Baby Boot and High-Rise Stride, as well as trending Woven Tops, further driving growth in these categories. Moving to Banana Republic. Comparable sales were down 8% on top of an outsized positive 27% comp last year. While still early on its journey, Banana Republic continues to make progress establishing itself as a premium lifestyle brand and is resonating with our customers. This March, it unveiled BR Home, with a curated collection of rugs, bedding, decor and more, all capitalizing on the BR customers’ appreciation for great style, design, and quality, and leveraging the deep home lifestyle talent and expertise of the Banana Republic leadership team, we look forward to a more expanded collection in the future. And finally, Athleta, which posted comparable sales of negative 13%, which were below plan for the quarter. As we discussed last quarter, Athleta’s near-term performance was negatively impacted by continued product acceptance challenges, including color, print and pattern misses and from straying too far from its performance DNA. Delivering the best product for our customers is the highest priority and while the team is focused on making improvements to the assortment, we know it will take time for those changes to fully take hold. While we continue our search for a new leader for Athleta, we are leveraging the great talent currently at the brand, including our new Chief Creative Officer, Julia Leach, as well as some of our best merchandising and product talent from across our portfolio of brands. Collectively, they are leaning in and making improvements where we can, including better presentation of the product that is working and elevating our marketing and creative expression. And across Gap Inc., we are still watching the channel shifts closely. While online sales were down single-digits in Q1, they are up close to 40% from pre-pandemic levels in Q1 of 2019. As the consumer continues to shift back to stores, we remain focused on delivering the optimal omni experience for our customers across all brands and all channels. Second, we’ve made significant change to our organizational structure and are actively improving our operating model to unlock creative muscle, heighten accountability and empower talent by removing bureaucracy, complexity and outdated processes, while also reducing cost. These changes are pivotal in restoring our strengths and priority around design, innovation, style, and trend. We flattened the organization by reducing layers from a maximum of 12 to eight and increasing the average span of control from two people to four, still with an intent of getting to five or better, informed by best-in-class benchmarks. All of this to address execution inefficiency and improve decision-making quality and speed. Each of our brands now have consistent structures built around our product, our customer and our creative excellence with clear roadmaps and mandates. We believe this work will ultimately show up in improvements in our sales and margin performance over the long-term and, again, most importantly in creative and product execution. Fundamental shifts included: Combining Merchandising and inventory management under one leader to oversee the end-to-end process fueled by consumer insights. Bringing channels together under the Commerce & Experience lead to drive omni thinking in the end-to-end customer experience, and Splitting marketing leadership into two roles, one focused on creative and brand identity and one focused on execution and analytics. And we have also centralized G&A functions that were previously embedded in the brands to create efficiencies and better leverage the scale and expertise of our portfolio. These changes result in eliminating approximately 1,800 positions, and when combined with our earlier actions last fall, reflect approximately 25% of our Headquarter roles, a significant contributor to nearly $550 million in estimated annualized savings on a cumulative basis. I know we can all understand, these decisions are always very, very difficult to make, especially when saying goodbye to team members that we care about. Beyond these organizational changes, the bigger payback will come when we show up as a more informed, faster, and more creative company, delivering brand and cultural relevance to our customers. We have organized not just to improve the cost structure of this company, but with an eye toward best-in-class industry standards and setting ourselves up to deliver long-term results. To be clear, this is not a one and done cost cutting exercise, we are after a mindset and cultural shift that will be part of our evolution as we go forward. The teams are now in place, and in consistent pursuit of efficiency. We will continue to look at additional opportunities to rationalize our technology and marketing investments and exploring ways to further optimize our cost structure longer term more to come as the team gets in deeper into this work. Thirdly, we are modernizing our capabilities to build a healthier company at the core and, ultimately, change the trajectory of our business. Through these improved capabilities, we are focused on key product to market functions, including reestablishing core merchandising processes and pricing architectures, amplifying and leveraging customer insights and analytics, and leaning in further to our vendor partners in our product development processes as we further elevate our responsive capabilities. Lastly, to bring leadership, structure, and accountability to ensure we drive this work to completion, we have put a Transformation Office in place under the Gap Inc. Leadership Team. And we have engaged external consulting partners to even further drive rigor, processes, and day-to-day discipline to support the team through this period of significant change. We have also aligned a significant portion of our incentive compensation this year to the achievement and completion of our cost transformation efforts. Our leaders, and our teams are committed to this change and I'm pleased with the progress to-date. And, finally, before I turn the call to Katrina, I want to address our CEO search and the comments made by our lead independent director, Mayo Shattuck, in our earnings press release today. When I took the role of Interim CEO in July, I did not expect to still be speaking to you on our first quarter earnings call. But this only underscores how strongly the Board is committed to appointing the right person as our next CEO, one who has passion, strong vision, and customer obsession that will take this company forward. We are deeply engaged toward the appointment and look forward to the time we will introduce you to the new CEO of Gap Inc. Let me move us on, but I hope this provided a bit more clarity around our commitment to shoring up the foundation of this company for the long-term by lowering our cost structure, building a culture of creativity and empowerment, and reorienting our business towards the customer. These types of foundational changes pave the way for a future CEO to take over a business that is healthier, more productive, and ready to compete and win. And with that Katrina, I’ll pass it over to you.

Thank you, Bobby and thanks everyone for joining us this afternoon. The actions we are taking to significantly reduce excess inventory, improve category and assortment balance, transform and optimize our operating structure and significantly reduce operating expenses, while further fortifying our balance sheet have allowed us to enter fiscal 2023 better positioned. During the first quarter, we delivered net sales in line with our expectations driven by continued women’s category strength at Gap and Old Navy, despite the weaker sales at Athleta; over 600 basis points of adjusted operating margin expansion as we drove down excessive air freight expense and delivered significantly improved promotional activity most notably at Old Navy and leveraged adjusted SG&A; reduced inventory down over 27% year-over-year, which was only up 3% versus the first quarter 2019; and ended the quarter with cash and equivalents, up 38% from last year to nearly $1.2 billion. While we believe we are making progress to better position our model to deliver for the long-term, we continue to take a prudent approach in planning and managing our business in light of what continues to be an uncertain macro and consumer environment. We remain focused on the levers and opportunities in our control to deliver on behalf of our customers, employees, and shareholders. Let me start now with our first quarter results. First quarter net sales of $3.3 billion decreased 6% versus last year and were consistent with our expectations for first quarter sales to be down mid-single-digits. As a reminder, the sale of Gap China at the beginning of the first quarter had a 2 point negative impact to net sales growth and there was also a 1 point foreign exchange headwind. Excluding Gap China sales of approximately $60 million from Q1 last year, and the foreign exchange headwind, total company net sales would have been down 3%. Comparable sales were down 3% in the first quarter. Stores sales decreased 4% from the prior year. Online sales decreased 9% versus last year and were up 39%, compared to pre-pandemic levels in 2019. Online represented 37% of total sales in the first quarter. Turning to sales by brand. Starting with Old Navy, sales in the first quarter of $1.8 billion were down 1% from last year, compared to 2019, Old Navy sales were up 2% in the quarter. Although we believe Old Navy continues to experience demand softness from its lower income consumers, we are pleased to deliver first quarter comparable sales down 1%, which was a continued improvement from fiscal 2022, driven by strength in women’s and a modest improvement in baby offset by continued softness in active and kids. Old Navy continued to gain share in the quarter, driven largely by market share gains in women’s and the kids and baby category. We continue to believe that Old Navy remains well positioned given its value positioning in the marketplace. Gap Brand total sales were $692 million, excluding the 8 point negative impact related to the sale of Gap China, a 3 point negative impact from foreign exchange headwinds, and the 1 point negative impact due to the shutdown of YZY Gap, sales were down 1% versus last year largely driven by store closures in North America. Gap Brand comparable sales were up 1% driven by continued strength in women’s, a modest improvement in baby, offset by continued weakness in active and kids. Gap brand continued to gain market share in women’s as its reinvented icons are resonating with consumers. Banana Republic sales were $432 million in the first quarter with comparable sales, down 8% on top of a positive 27% comp last year. While the transformation of BR into an elevated, lifestyle brand continues to take hold and resonate, the brand is lapping outsized growth last year driven by the post-COVID shift in consumer preferences, which is impacting year-over-year growth. Athleta sales of $321 million were, down 11% from the prior year, or an increase of 45%, compared to 2019 pre-pandemic levels. Comparable sales were down 13%. As we told you last quarter, Athleta has had product acceptance challenges, which we believe are impacting results. While we know it will take at least a few quarters to make meaningful changes to the assortments, the team has been at work to improve product presentation and creative with an emphasis on the performance DNA that Athleta is known for. Now to gross margin in the first quarter. Reported gross margin was 37.1%. Adjusted gross margin increased 570 basis points to 37.2%. Merchandise margin on an adjusted basis increased 610 basis points. This was driven by approximately 560 basis points of leverage as we lapped last year’s elevated air freight and drove our normalized air expense down; approximately 330 basis points of deleverage, due to inflationary cost headwinds as we are now selling product locked in at last year’s peak cotton prices. This was slightly better than the 360 basis point headwind we anticipated as we are beginning to benefit from better ocean freight rates; and the remaining 380 basis points of leverage stemming primarily from improved promotional activity relative to last year, primarily at Old Navy. ROD as a percentage of net sales deleveraged 40 basis points versus last year. Now let me turn to SG&A. Reported SG&A in the first quarter was $1.2 billion, including a $47 million gain related to the sale of our one Harrison office building offset by $71 million in restructuring charges related to actions to optimize our operating structure, including the reduction of approximately 1,800 corporate and upper field roles. As we discussed last quarter, the actions we are taking to optimize our operating model and structure are expected to result in annualized savings of $300 million, of which half we estimate will benefit SG&A in the second-half of fiscal 2023 and the remainder in the first-half of fiscal 2024. Adjusted SG&A of $1.2 billion was down 7% from last year. As a percentage of total sales, adjusted SG&A leveraged 60 basis points, driven by lower advertising expense and lower technology investments resulting from our cost saving actions late last year. Reported operating income was a loss of $10 million. Adjusted operating income, which excludes restructuring charges and the gain on sale, was $18 million in the first quarter. Adjusted operating margin improved 620 basis points from last year to 0.5% in the quarter, driven by the 570 basis point improvement in adjusted gross margin and 60 basis points of adjusted SG&A leverage. Reported EPS was a loss of $0.05. Adjusted EPS, which excludes restructuring charges and the gain on sale, was $0.01. Share count ended at $368 million. Turning to balance sheet and cash flow. Starting with inventory. Ending inventories declined 27% in the first quarter versus last year. This includes a 17 percentage point benefit related to in transit as we lapped the prior year’s supply chain challenges and 4 percentage points of decline related to pack and hold inventory. The remaining decline is primarily driven by a decrease in fashion and seasonal basics inventory. As you know, we made significant progress right sizing inventories as we exited fiscal 2022. We remain focused in fiscal 2023 on moderating buys, leaning further into our responsive levers, and continuing to integrate the inventory that was placed in pack and hold in fiscal 2022 into future assortments. As a result, we are planning for inventory to be down significantly more than sales as compared to fiscal 2022. Quarter end cash and equivalents were nearly $1.2 billion, an increase of 38% from the prior year. Net cash from operating activities was $15 million in the quarter driven primarily by improved inventory levels and leaner buys. Capital expenditures were $117 million. Consistent with typical first quarter seasonality, free cash flow was an outflow in the quarter of approximately $102 million. We remain confident that cash flow trends will continue to normalize throughout fiscal 2023. As we told you last quarter, we expect to be positioned to pay down the $350 million draw on our asset-backed line of credit this year. In fact, last week we paid down $100 million and intend to pay down the remaining $250 million balance throughout the remainder of the year. We remain committed to delivering an attractive quarterly dividend as a core component of total shareholder returns. During the quarter we paid a dividend of $0.15 per share and on May 9th our board approved maintaining that $0.15 dividend for the second quarter fiscal 2023. Now turning to our outlook. We continue to take a prudent approach to planning in light of the continued uncertain consumer and macro environment. Starting with Q2, let me first provide an overview of factors impacting year-over-year sales comparisons in the second quarter. Gap China represented approximately $60 million of sales last year in Q2, is expected to be an approximate 1 percentage point to 2 percentage point headwind to Gap Inc. for the quarter. We are assuming an estimated 1 point foreign exchange headwind in the second quarter. We are estimating total net sales in the second quarter to be down mid to high-single-digits year-over-year reflecting a range of outcomes based on what continues to be an uncertain macro and consumer environment. We expect gross margin improvement in the second quarter versus last year. Compared to the 36% adjusted gross margin in the second quarter last year, we anticipate an estimated 200 basis points of leverage as we lap last year’s elevated air freight and continue to drive lower normalized air expense; an estimated 200 basis points of deleverage due to inflationary cost headwinds, primarily cotton cost headwinds similar to Q1. We expect these inflationary headwinds to moderate and become a tailwind in the back half of the year as we benefit from lower commodity prices as well as improved ocean freight rates. This 200 basis point inflationary headwind is expected to be fully offset by improved promotional activity as a result of improved inventory positions relative to last year; and ROD is expected to delever by approximately 50 basis points compared to last year. We are planning for adjusted SG&A of approximately $1.3 billion in the second quarter largely reflecting the continued benefit of last year’s savings actions offset by higher incentive compensation. As discussed previously, we expect to begin to benefit in the back half of the year from the $300 million in annualized savings related to the actions we are taking to optimize our operating model and structure that we began implementing last month. Now turning to full-year 2023. As a reminder on the factors impacting year-over-year comparisons, Gap China represented approximately $300 million in net sales last year, representing an approximately 2 point headwind to Gap Inc in fiscal 2023. Fiscal 2023 will have a 53rd week, estimated to add approximately $150 million to net sales, or approximately 1 point of growth. As we look to the remainder of fiscal 2023, we continue to believe net sales could be down in the low to mid-single-digit range for the year. Turning to gross margin. Compared to the 35% adjusted gross margin in fiscal 2022, adjusted gross margin in fiscal 2023 is expected to be driven by, an estimated 200 basis points of air freight leverage as we lap last year’s elevated air freight and continue to drive down normalized air expense, approximately 50 basis points of deleverage versus last year stemming from inflationary cost headwinds. This is an improvement from our prior expectations of a 100 basis point headwind as we are experiencing an improvement in ocean freight rates earlier than previously planned. We anticipate approximately 250 basis points of inflationary deleverage in the first-half of the year shifting to a tailwind of approximately 150 basis points of leverage in the back half as we benefit from improved commodity costs and ocean freight rates. We continue to expect more than 100 basis points of margin benefit in fiscal 2023 as a result of our better inventory position and expected improved promotional activity, compared to last year, and ROD as a percentage of sales is planned to be roughly flat to down approximately 50 basis points compared to last year. We continue to target fiscal 2023 adjusted SG&A to be down low to mid-single-digits from the prior year, or approximately $5.2 billion. As we communicated last quarter, the higher incentive compensation and wage inflation planned for fiscal 2023 is expected to be fully offset by the approximately $250 million of cost savings implemented in fiscal 2022. In addition, as discussed earlier, we expect to realize roughly half of the $300 million in annualized savings related to the optimization of our operating structure, including the elimination of approximately 1,800 corporate and upper field roles. We now expect capital expenditures in the range of $500 million to $525 million, down from our prior range of $500 million to $550 million, largely reflecting lower capital project investments, as well as fewer store openings than previously planned. We now plan to open a net 25 to 30 Old Navy and Athleta stores in total, roughly one-third Old Navy stores and two-thirds Athleta stores. We continue to plan to close a net total of 50 to 55 Gap and Banana Republic stores in North America, of which approximately more than half are Gap stores and the remaining Banana Republic stores. We are entering fiscal 2023 better positioned as a result of the actions we are taking to change the trajectory of our business not only in the near-term, but even more importantly setting the company up for the long-term. We are confident in the actions we are taking and believe we are taking the right steps to position Gap, Inc. back on its path towards sustainable, profitable growth and delivering value for our shareholders over the long-term. With that, we’ll open the line for questions. Operator?

Thank you. Our first question comes from the line of Alex Straton from Morgan Stanley. Your line is open.

Great. Thanks so much for taking my question. I have a couple that are probably best answered by Katrina. So both related to revenue. So on the quarter, is there any color you guys can give us on how it trended? Was it consistent? Did it strengthen or weaken as you got to the total results? And then on the 2Q guidance, it looks like you're assuming a worsening at the midpoint from the first quarter levels. Does that mean that you've seen a slowing in the business quarter-to-date? And is there any particular segment driving that? Thanks a lot.

Hi Alex, thanks for the question. So I think on your first question, I would say, we are obviously pleased that we were able to deliver on our expectations in the first quarter for revenue. And what we observed, I think, is largely in line with what we've heard others report, which is that February was quite strong and probably benefited from the fact that it was warm everywhere. And then in March, we definitely saw a similar weakening to what I think you've heard articulated, largely as a result of the regional bank situation that was playing out and the impact that that had to consumers as they tightened in March. And then a little bit of a recovery and moderation in April, but we were navigating the lower tax return. So again, delivered the quarter, but what we're observing is a much choppier environment for the way that the consumer is reacting to the news and how that's impacting the way they spend. As it relates to Q2 then, we have seen a little bit of that softness continue into May. But what I would say is that that's considered in the outlook we just provided. And the reason why we gave a range for Q2 is that we're trying to provide for whatever scenarios could potentially play out with some of the choppiness that we're seeing out there, and if there are situations where the consumer contracts. So hopefully, that's helpful, but that's how we're thinking about it.

Super helpful. Good luck.

Your next question comes from the line of Matthew Boss from JPMorgan. Your line is open.

Great, thanks. So Bob, you cited market share gains at the Old Navy brand, maybe could you just expand on trends that you're seeing in that business and how you feel regarding the balance today in your assortment, maybe relative to what you see driving the softer Athleta performance?

Yes, I mean, we're certainly pleased to see the momentum carry in to drive the market share gains, and as you heard us point to a little bit in our last conversations, women, in particular, were really strong. We cited some examples like pocket dresses and so forth. And that really has spilled over into several other categories. But as I think you were sort of referencing, it's really where our mind is as well. We still see the brand's over assorted from where we wanted to be. And again, that's just part of this transition that we're working through. But we've continued to see good gains in and around categories that we'll know or we believe that we'll continue to see greater strength in. The brand itself is in a period right now, again, making a lot of those adjustments coming out of cleaning up its inventory, getting rid of the pack and hold and so forth. And I think the kind of performance that we'll see going forward will add a little bit more clarity around the categories in particular that we believe the brand will really thrive on long-term. But right now, I'm happy with the progress, and again, to see the kind of gains help us with some momentum. Look, on Athleta, it's just really clear that we walked away a little bit too far from our performance DNA. Definitely had some misses in and around product specifics, silhouettes, color and even just some of the styling, et cetera. And that really, again, gave us a big challenge relative to that customer, which is coming in for. Although our bottoms continue to be really strong, we have to be able to capitalize on a lot more than that. And everything that that brand stands for, for that customer, we're not backing down from at all. The power of she, the emotion in the brand, performance, why we are moving aggressively to get in more aggressively, and like running, yoga, some of those areas that we know have been real big misses for us. It's what that team right now is really focused on. And as we commented in our remarks, I'm really pleased right now how the current team is making the most, if you will, out of everything we have that the customer is really resonating with. And we look forward to seeing that brand find its stride again, no pun intended. But we know how important that brand is to the company, and we're optimistic that we're going to get back where we need to be.

Your next question comes from the line of Brooke Roach from Goldman Sachs. Your line is open.

Good afternoon and thank you for taking our question. Can you talk to the composition of your inventory today and your current ability to chase into products that are resonating with the consumer, how much chaseability do you have? And do you think that could potentially improve your performance into the back half of the year? And then similarly, Katrina, can you provide some updated comments on your outlook for free cash flow?

Go ahead and take the chase part, and I'll add to it, yes.

Sure. I mean I think, Brooke, we're really pleased with the fact that we were able get our inventories down to where they are not only on a one-year basis, but really back to 2019, being much more in line with what we consider to be healthy inventory levels. And I think you saw that show up in the gross margin performance. For the quarter where we were able to still offer a lot of value to the consumer, but we didn't have all the markdown cleanup from last year that we had to deal with, and so we were able to really clean up the overall margins. So we feel good about that piece. As it relates to chase, I think we've talked about this, we are now back to being able to reinstate our responsive capabilities. And a lot of the organizational structural changes that we made in the business will also help us really have better line of sight to end-to-end inventory management and allows us to get back to really chasing into trends that are working. I think what's different is that Old Navy is back to pre-pandemic levels of chase, if not slightly better. But now we have the capabilities across our brands, which is really nice to see. And so all of our brands should be able to be chasing inventory much closer to the consumer. I don't know if you wanted to add anything, Bobby?

No, I think you covered it well. I think, Brooke, the one thing that I would just highlight again from my seat is, look, I mean, supply chain capabilities is something that we've really long had as a core strength, and I would say that a few things got away from us a bit. We're back really capitalizing now on our vendors who work with us very strong collaboratively, helping us with consumer insights, engaging, if you will, with innovation and all of that, that moves through the pipeline. So to your question about our expectations around the back half, I would say the answer is yes, I mean, we believe that we're finding ourselves back where we've got great leverage points. We're seeing good success as we chase back in the product, and again, really getting back to that discipline and rigor in a very effective way. So I'm actually proud of that progress, really, quite proud.

And then, Brooke, as you asked, obviously, our discipline around inventory and expenses combined with better operating performance is giving us more confidence in our free cash flow outlook. I think you heard on the call that free cash flow was down $102 million in the quarter, which is very in line with our seasonality and back to a much more normalized level. In fact, that's a lower level of outflow than we normally see in Q1 based on the fact that we have such tight inventory and expenses. And certainly, our aspiration is to get back to generating free cash flow in the company through better operating performance. So more to come as we see where the year comes out.

Thank you very much. I’ll pass it on.

Your next question comes from the line of Lorraine Hutchinson from Bank of America Global Research. Your line is open.

Thank you. Good afternoon. I'm curious to hear more about the reduction in promotions at Old Navy. Can you talk about where margins are versus pre-COVID levels for that brand? And also what the reaction has been to some of your recent price increases?

Yes, Lorraine, thanks for your question. Interestingly, when we look at the composition of the margin benefit that we got in the quarter across all of our banners, again, the reduction in inventory has really allowed us to clean up the markdown piece of the business, which doesn't add a lot of customer value, right? That's just inventory that last year wasn't responded too well by the consumer, and we had to sell through given excess inventory, the wrong inventory. So the margin benefits coming from cleaning up that markdown, what that's allowing us to do is still promote, which is a better way to be offering value to the consumer, which is still important at this time. And that's true at Old Navy. As it relates to price increases, I would say, overall, we are not seeing a lot of adverse reaction to price increases. The team was very surgical around taking up prices on categories or items that are known to be important in the consumer's wardrobe right now, like wovens or pants, or our outstanding fashion items that just are so well that the customer has to have it. So I would say, as we look back, we feel very good about where the teams have priced up. And the promotions have remained rather competitive. As far as versus pre-pandemic, we're still better off than pre-pandemic.

Thank you.

Your next question comes from the line of Jonna Kim from Cowen & Company. Your line is open.

This is Neil Go filling in for Jonna today. Thanks for taking my question. Just kind of touching on this from your point earlier. Can you just give some more color on how that promotional environment has been, perhaps different income cohorts and demographics since that was one of the brighter spots? And then what are you assuming from a timing perspective for the rest of the year as we eventually enter the back-to-school period?

Yes, Neil, so I think what's interesting on our income cohorts is that it continues to be similar to what we've seen in the back half into Q1, which is when you look at markets where we have a demographic of a low-income consumer, we are certainly seeing those consumers contract their spending and being much more price-sensitive. In areas where we have the higher-income consumer, there's a lot less price sensitivity and they are still spending. So that dynamic has continued. And as of now, we'll see how that plays forward. But that's part of the reason why we have ranges of outcomes around our revenue performance is because we don't know what will happen as we head into the back half of the year and decide whether we will need to compete more or less. I think, so far, what we've seen, and maybe you've heard this more in the industry, is that as we just talked about, we've had to do less promotion to clear inventory because our inventories are so much more in line. And really, our promotions have been more focused on adding value to the consumer, which we hope will be more revenue-driving actions and less about clearing inventory.

Great. Thank you.

Your next question comes from the line of Corey Tarlowe from Jefferies. Your line is open.

Hi, good afternoon. First, I'm wondering, Katrina, if you could just assess for us the health of the Gap store fleet. I think over the last two years, you've closed something like 370 stores. The segment actually comped positively this past quarter. So it would be helpful to just get some color there? And then just on the Old Navy improvement that you're witnessing, recognizing that there's still more work to do, maybe could you talk a little bit about what that work is and how far along or maybe what inning you think we're in, in terms of the Old Navy improvement?

Yes, Corey, as you say, the store fleet, we've worked aggressively on over the last three years during the COVID pandemic. And so as you say, overall, we have closed or will have closed by the end of this year, about 350 Gap and Banana stores, so both of our specialty fleets we've been working on. And do I think we're done? I don't know, but we are largely through the lion's share of the restructuring activity that had to be done. And I think as you say, that is showing up in the fact that the balance of the fleet that's remaining is relatively healthy. Now we need to continue to work on keeping that fleet healthy. But fundamentally right now, I think we feel pretty good with where we've positioned both our Gap and Banana Republic fleet. As it relates to Old Navy, I think you've heard us call out that we feel really good about the fact that we gained share in women's. I think we would say that we would like to keep seeing more momentum in men's and kids. And then within some of the categories, I think, active as an example, where we've gained a lot of share over a multiyear period, but we're seeing a little bit of reversion there, and there's probably some more work to do to get that assortment back to being current. But I don't know, Bobby, if you want to comment more on the Old Navy.

No. I mean, again, I think we're kind of indicating again, we're seeing it travel along the journey here, again, getting the assortment, really rationalize and balance the right way. And look, you guys realize this as well as we do, this is across all brands. But I mean, we design into the coolness to the brand relevance, the creative being right on fashion, and getting inventory under control, all the way. When we do that, we're always going to do a better job in driving brand relevance, maximizing marketing effectiveness. That certainly is true around the right promotional approach and balance for Old Navy, and in turn, I think, continue to allow it to produce the kind of margin that we want to see a structure to run with and compete with and get back again to really the essence of that brand. That brand has always been known for fun, if you will, and the brand itself is or the team is working around what future of fun looks like around that brand and how it differentiates itself in the marketplace. Staying close to the customer, you guys touched on it, and I'll just acknowledge it back. That's a value proposition that we know we compete in very aggressively. I like the work that the team is doing, the rigor they're putting in around the right diagnostics at every level, from whether it's online or in-store. This merchandising structure change, where we're moving ahead of commerce. So we're bringing together both the online and the in-store together around experience, and everything we're doing from a product and service is all a part of these improvements that, again, we're counting on, and Old Navy, in particular, probably one of the bigger beneficiaries as we land all that work.

Great. Thank you very much and best of luck.

Your next question comes from the line of Mark Altschwager from Baird. Your line is open.

Good afternoon. Thank you for taking my question. I wanted to follow-up on the promo topic as well and gross margin. It seems like the promo recapture was really the key driver to the upside to expectations in Q1, at least relative to our model, and I think how many were looking at Q1 gross margin. Is that magnitude of recapture a good run rate to think about as we move through the next few quarters? And just given your comment about promo shifting more to being used to engage the customers versus clearing inventory. If we were to see some moderation in that Q1 result, I mean, would it be fair to think that we could maybe see some incremental top line benefit as we move through the year? Thank you.

Yes, Mark, it's such a good question, and one I'm really glad you asked. So the upside in Q1, as you say, we saw modest upside from freight, which we talked about, but really, the bigger upside, I think, came from less discounting. I would not use the 380 basis points of benefit from discounting as a run rate. We just said that in Q2, about 200 basis points of the inflationary pressure will get offset in discount. So that already nods to a moderation. And then for the full-year, we said at least 100 basis points in that discount. And you could ask why wouldn't we see more. I think right now, what we're saying is that's the way we'd say maybe a floor of what we think that's worth. We'll see how hard we have to play in Q2 and beyond, depending on where the consumer goes and whether that shows up in revenue or whether that shows up just in us having to play harder to be able to compete as we move through the year. So I'm glad you asked the question, those do moderate as we get through the year. And again, depending on where the customer lands, we'll see whether there's upside there or not.

Very helpful. Thank you.

Your next question comes from the line of Paul Kearney from Barclays. Your line is open.

Hey, everybody. Thanks for taking my question. Can you talk more about some of the efforts to reduce costs and simplify? How will the changes you've made improve responsiveness throughout the organization? And are there additional levers to drive sustainable savings as you rebase this year? Thanks.

Paul, it's Bobby. I'll start and see if Katrina wants to add on. I think it goes without saying that reducing layers from 12 to eight has clearly improved span of control. We had been slowing down, which hurt our ability to make quick decisions and exposed productivity shortfalls. That work is significant and shouldn't be understated. Our SG&A was at an untenable level and not sustainable if we want to compete, so removing that cost is both relevant and meaningful. The biggest payoff will be when we start showing up better informed, more in tune with the customer, driven by consumer insights, and far more responsive. We're pursuing a mindset change and cultural shift toward continuous improvement—it's not just about cutting costs but about becoming more responsible, responsive, agile, and competitive. It's been difficult work in the short time I've been here, and I'm pleased with how the team has embraced the change. Anyone who has seen this level of change knows it takes a lot. Our quarter results show encouraging signs, but we have much further to go and more work to do.

And Paul, I think to add on what I would say is regarding further savings, right now, we're really pleased with the cost savings that are coming from these organizational changes as well as some early savings we got last year in marketing through some contract negotiations and a little bit of tech. But marketing and technology, I think, are the two areas that we've identified we have further opportunity in. And now that we have our organizational structures in place and those teams get settled, we'll begin the work to really understand what the next opportunity will look like. So more to come when we get through the organizational change and are able to sort of move our focus to those next items of opportunity.

Very helpful answers. Thank you.

Your next question comes from the line of Janet Kloppenburg from JJK Research. Your line is open.

Hi, everybody. Congratulations on the improvement. Nice to see. Katrina, on the promotion and less recapture that assumption for the second quarter, is that a trend that you're seeing right now? And do you feel, even with your inventories down as much as they are, that you've had to step up promotions? And I also wondered, in your guidance for the second quarter and for the year, what the assumption is on kids and men's? Do you expect those categories to improve? Or do you expect that pressure to be maintained as we move through the year? And lastly, I wondered if there was any news on denim and how that might be affecting your back-to-school outlook? And one last question, sorry, is just on where we should expect inventories to trend going forward? Sorry. Thanks.

No worries. So on the gross margin and promotional trend, I mean, I'm not really going to comment, it's very early in the quarter, so we'll see. We've given you a sense for the quarter and the year where we think those things will land. And so we'll see how it goes. Memorial Day is coming up, that's usually a big kickoff to summer, and so we'll see how that all goes. On the kids and men's thing, kids in general, the marketplace has been down. So while our kids business has been modestly under pressure, we've been gaining share at Old Navy. And so we'll see how that goes. But there's sort of a range of possible outcomes for both kids and men's as we look to the second quarter and the second half, all of which are contemplated in the guidance we gave. And then on the denim front, we've been gaining share in denim all year, and we gained share again in Q1, so we're relatively pleased with what the teams have been doing around denim. And I guess, we'll see how that plays out in back-to-school. But at least we've got some good momentum heading into back-to-school in that category. There was a fourth one I can't remember. What was it?

It’s inventory, Katrina. Inventories.

Inventories. Yes, so we said in my experience or I said in my speech that we do expect for inventories to be down meaningfully more than the sales guide. So we'll see, but we did end up down 27%, and that will be our goal is to keep those inventories well under control.

Thank you and good luck.

Your last question will come from Marni Shapiro from The Retail Tracker. Your line is open.

Hey, guys, congratulations on some really nice improvements in the stores. I just wanted to focus a little bit on Athleta again because I know this is a growth vehicle for you and important as you're searching for leadership there. Could you give us an estimated time line of when you think the changes with color, print and the better balance start to really show up. Will it be there for back-to-school and the fall season and for winter gifting? And then if we could also just think forward, do you need new leadership in place to start innovating because even this is a part of the market that's heavy on innovation, the performance part of the market. And while I like a lot of the styles you have, some of them have become a little stale, while other brands are advancing in this moment. So I'm just curious if you could talk about those two parts of the business?

Let me to start?

Sure.

First of all, thanks for being so kind, Marni. I would say that to answer your question kind of from the bottom back, new leadership to really start seeing the innovation, I would not take anything away from current team. Again, our focus has really, I think, enabled a lot of moves and changes there. We've already seen wonderful contributions from Julia Leach who we added as kind of press perspective on the creative side. You do understand obviously quite well because of the question that fabrications and other things really are a little bit longer pipe for this brand. That said, the brand is taking every opportunity we can, where if it was an opportunity for raw material to be adjusted a bit to land something for fall, perhaps holiday, there are opportunities being engineered into that. But to go much farther than that, I think that would be too aggressive. At the same time, this seems amazing me right now, everything that they're doing to come up to maximize opportunity. What's most important, obviously, here is, again, we know what this brand stands for. We know what looks for every time she comes in, you just highlighted it again. And it will take us a while to get back where we need to be. But hopefully, we will exceed your expectations and mine.

I hope so. Can I just ask one follow-up. You've been promotional, obviously, to clear out the inventory, and it's going to take some time to fix this. Even within the store today, are there things that she's buying that don't need a promotion? And is there a risk that she gets used to 20% off, 30% off, 40% off there? So how careful do you have to be over the next couple of months in dealing with this?

Go ahead, Katrina.

Yes, Marni, I mean, I think that's a great question. We certainly see that there are core performance bottoms and there are fashion styles that don't need a promotion, and the team is being very cognizant on trying not to train her for promotion by utilizing markdowns better to be more targeted. And but there is a reality of sort of where we are today and where we need to go. The ultimate goal will be to get that brand back to not relying on promotions to be able to drive the business, but drive the business through its fashion authority and its innovation and its positioning. And that is what the team is working towards long-term. So it's a great question and one that the team is definitely focused on.

Tell the team, I welcome back the new product. Enjoy best of luck for the next quarter.

Thanks, Marni.

Thank you. That does conclude our conference call. You may now disconnect.