Jennifer Fall - Gap, Inc. Arthur L. Peck - Gap, Inc. Teri L. List-Stoll - Gap, Inc.

Richard Jaffe - Stifel, Nicolaus & Co., Inc. Ike Boruchow - Wells Fargo Securities LLC Lindsay Drucker Mann - Goldman Sachs & Co. Matthew Robert Boss - JPMorgan Securities LLC John Dygert Morris - BMO Capital Markets (United States) Adrienne Yih - Wolfe Research LLC Samantha Lanman - Oppenheimer & Co., Inc. Paul Lejuez - Citigroup Global Markets, Inc. Lorraine Maikis Hutchinson - Bank of America Merrill Lynch Dana Lauren Telsey - Telsey Advisory Group LLC

Good afternoon, ladies and gentlemen. My name is Ashley and I will be your conference operator today. I would like to welcome everyone to the Gap, Incorporated Fourth Quarter 2016 Conference Call. At this time, all participants are in a listen-only mode. As a reminder, please limit your question to one per participant. I would now like to introduce your host Jenn Fall, Senior Vice President of Corporate Finance and Investor Relations. Please go ahead. Jennifer Fall - Gap, Inc.: Good afternoon, everyone. Welcome to Gap, Inc.'s Fourth 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 our forward-looking statements as well as a reconciliation and description of non-GAAP financial measures, as noted on page 2 of the slides supplementing Teri's remarks, 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 February 23, 2017, 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, Teri List-Stoll. As mentioned, Teri will be using the slides to supplement her remarks, which you can view by going onto our Investor section at gapinc.com. With that, I'd like to turn the call over to Art. Arthur L. Peck - Gap, Inc.: Thanks, Jenn, and hi to everyone on the call, and thanks for joining us today. As we close out 2016, which is my second year as CEO, I want to spend a moment to reflect, reflect on where we've been and where we are and where we're going, both in terms of the work that we're doing but the overall industry context as well. When I took over two years ago, that's two years that has flown by, we and I knew our performance wasn't where it needed to be. We knew that we were in an industry that was changing dramatically. And looking back on it now, I think we probably all underestimated the magnitude and speed of the changes taking place. It's been pretty stark what's been happening over the last year as we've looked at – some competitors have exited the market. That said, we finished the year strong and Teri will take you through our results. And I'm pleased with the progress that we've made, but we are in a market that is in significant disruption. Let me share a couple of truths, at least as I think about them, that are on my mind. First, the apparel market is growing, whether you peg the number at 2% or 3% or 5%. We're in a market that has long-term structural growth, has continued to grow, and that is a good thing. Secondly, the market is, and we have clear evidence of this, continuing to move towards rewarding size and scale, whether that's vendor relationships that provide favorable pricing and innovation, whether it's us with a multi-brand portfolio doing business with our landlords to optimize our real estate footprint, or frankly whether it's our balance sheet and income statement where we see scale in investments, whether it's technology, innovation or other forms. But this is a market that is moving towards rewarding size and scale, and we believe that conveys us a significant structural advantage. The third, omni, almost a cliché word at this point because it isn't like omni is in the future. Our customers are omni today and that is a fundamental reality. Many of our customers begin their journey with our brands on their phone and they finish it in our stores. Many of our customers begin their journey with our brands in our stores and they finish it on their phone. And we've been doing work and we will continue to do work to really line up with where our customers are, not where they're going but where they are today. Again, I'm pleased with the progress, but we have more work to do. Finally, we believe fundamentally, there is a significant market share opportunity. To read the headlines today, you'll see the words dead, dying, sick. We are none of those. We are healthy and strong and have a plan and clear direction. But we can all pick our favorite company that's no longer in business and when the lights go off and the windows get boarded over, that is market share that is made available to the rest of the industry. She's not stopping shopping. She's shopping someplace else. A time of disruption means that market share becomes more fluid. And if we put what we believe are our structural advantages together along with much of the work that we've been doing on product and experience, we believe we have a significant opportunity to consolidate and gain market share going forward. I've said it many times and I'll say it again, because it is foundational, we are a product company and we are a retailer. And if we don't get our product right, we will not win regardless of how good we are in digital or many other things. It starts with emotional product that she connects to that has the right quality, the right fit and the right value proposition. Two years ago when I got into this seat, we really approached product in two ways. One was some quick fixes, particularly addressing quality, aesthetic, the value and the fit and some longer term work that we've been doing where we've made significant progress. Where we have done the quick fixes, and they weren't actually quick because they required work, where we've got fit right, particularly in bottoms but other parts of the assortment, where we've re-established the quality that she is looking for. Where the aesthetic is on, on progress and tracking with where our brands need to be, we've gotten credit for it. We've really gotten credit for it and you can see this anecdotally if you look at the reviews. You can see this in the performance of the underlying core categories where we've done this work and the customer has responded. It's taken longer and I expected, to be honest, a bigger balance out of this work. It was akin to the work that I did when I was running Gap brand back in 2011, but we have seen and continue to see the validation that this work is paying off and that she is reengaging our brands in a way that makes us very optimistic. Then there was the longer lead time work. And what it really is is what I call de-risking our product model. Time is the enemy in this business. And a typical industry average development cycle has for many – much of the industry's history been 10 months. We've done the work now to get many of our programs and many of our categories down in some cases to 8 to 10 weeks. And, in fact, a third of our product across the company can be produced within the quarter. This allows us to buy differently and this allows us to chase trend differently. This allows us to manage inventory differently. A big unlock here was to separate our core basics which we can purchase very cost effectively and efficiently from our fashion items, which have more risk. And we now platform nearly 60% of our fabrics committing to the fabric in advance, positioning that fabric at our vendors and having access to capacity to be able to cut and sew garments immediately at the release of a PO. We've also substantially increased our testing of product whether that's crowd source testing, which we now have validation results in better commercial outcomes or testing physically in our stores oftentimes in stores that are seasonally ahead of where we are so that we can use that to inform our buys. Another thing we haven't really talked to you much about is the tools to do this. In Gap brand, which is leading the way, we're moving also to a demand-based buying model. And this requires tools that are different than what we've historically used. And historically the tools that we use to merchandise, to do inventory management, to do sourcing and costing, there were 18 separate tools that we were using to do that. And needless to say, some of them were on green screens and many of them didn't integrate. We have moved now to one platform that can be used across all inventory, pricing, assortment building and in-season management and we're well underway for the implementation of that platform in the company. That conveys, obviously, a productivity advantage which is important for our cost structure. Most importantly, we believe that it really helps us to get the right product in the right place at the right time, to improve the outcome for our customers and to improve the productivity of all of our inventory. Last on that front, and there's a lot more, but the last thing I'm going to talk about is the fact that we've been making significant investment in our logistics infrastructure. We've traditionally run as much of the industry has, with separate direct distribution for our online customer and retail distribution. We have the, I guess I'd call it the gift, maybe the luxury of having large retail distribution centers that are not fully utilized and the work that we're doing right now, number one, is an investment avoidance issue where we need to continue to add direct distribution capacity. We're actually doing the work to convert the retail DCs to be able to ship both direct and retail fulfillment out of one pool of inventory and one DC. It allows us to avoid some form of incremental asset investment in new buildings. It also allows us to leverage and be very flexible with one pool of inventory. And we are part of the way through that. We have a clear plan for making that happen. There was a slight setback associated when we had the Fishkill fire, but not significant and we'll make material progress on that in 2017 and plan to wrap that up in early 2018. So there's a bunch of things underway. There's much more than I can talk about in this call. I'll look forward again to engaging with many of you as we spend time out meeting you personally. Let me shift now to talk a little bit about our brands in Q4 and I'll start with Old Navy. As you can remember, we had a tough Q4 in 2015. And I have to give kudos to the team and, quite honestly, kudos to the brand. We diagnosed the issues. We made changes. We leveraged our responsive capabilities. We modified appropriately places in the assortment and I expected that really to take probably two quarters to fix and we got traction faster than that. Historically, types of misses that we had in Q4 would really have taken a year. And it really took us four months before we started to see traction and the brand really getting back on track. That yielded, this last year, Old Navy's fifth consecutive year of sales growth and a business that is approaching $7 billion in annual sales. And I have to repeat it because I'm proud of it, but I have to repeat it, which is a 12% comp in December and a 5% on the quarter which I believe under any metric represents a market share gaining performance. This was driven by a strong commercial plan, cut-through marketing and great product acceptance. There was tough traffic but we beat the traffic, beat the traffic headwinds to deliver a positive top line by driving a strong sales over traffic. This was really what was happening with everything going on inside the store. A few callouts. We emerged as the leading market share competitor in women's dresses on a rolling 12-month basis. And again, you've heard me say market share many times and I will continue to say it. Market share today is really omni-market share. Market share historically was square footage. As we think about market share going forward, it is omni and it is category-specific, and the entire company is moving in the direction of really being category market share focused. Women's dresses was a big win and we were able to drive very high-double-digit comps, not by guessing and buying into the category in a big way, but by feeding units into the business off of a responsive platform, really led by customer demand. It's just really the inverse of the historical buying model. I continue to believe that Old Navy is very strong and our aim is to continue to invest in and build that business. It's a market share play. The brand is incredibly well positioned across family, fun, value and fashion. We have clarity of brand equity. We have a strong marketing voice, and really most importantly, we have operating discipline, which is big on by mind. You will hear Teri talk about that as well. The consistency and discipline is something that we have not had as consistently as we needed to across the company. And Old Navy really is the shining example of that in my mind. We continue to believe we have a winner in the brand with significant market share opportunity in front of us. Let me turn to Gap. Progress has been slower than I expected, but I'm really pleased to see some bright spots and I look for, under the covers, period-over-period improvement in key places in the business and I have not been disappointed in seeing it inside of Gap. Jeff and the team at Gap are doing heavy lifting right now to continue to transform the product and the operating model. And probably the most important thing going on in Gap, again, is building on our responsive capabilities, moving to a monthly and demand-driven-based buying model. I would be remiss, however, to say that Gap, as we reported to you, is a very complicated composite of channels and geographies. And I point that out because, obviously, we have a big business in Japan – Japan has been a tough market for many to do business in, a large presence in Europe and a growing presence in China as well as the North American business across the three channels and a franchise presence. So as I look at Gap, I look under the covers to see what the leading edge indicators are, product acceptance, women's business, et cetera, and I'm pleased with what I see. If I look at 2016, Gap is a brand in the relevant categories where responsive capabilities matter. They have moved the majority of their business onto a responsive operating model. A couple of standout examples are the women's knit's business, which for Gap is a big business and the woven's bottoms business, also a big business, leading the way. By Q4, those categories had grown to high-single-digit comps with margin expansion up to 500 basis points. And again, that is starts with on-trend quality product, but it also sits on a platform of the responsive capabilities beginning to show what they can do. I'll move on to Banana Republic quickly. As you've seen, I've made a change in leadership there and I've not yet put in a new brand president. I've taken advantage of this moment to really roll up my sleeves, get into the business personally and understand what's going on. Here's what I would observe. There's a lot to like and a lot right in the business, but not enough. In categories where we lost our dominance and lost the trust of our consumer and we put our shoulder against realigning those categories, categories like pants. Our for-fit (16:47) women's pants complex, categories like suit separates. Those categories we're seeing excellent traction with the consumer. Suiting is an example, double-digit comps with a 400 basis point improvement in margin, but we need more faster. And that's really what I'm focused on right now, which is taking the next steps and taking them quickly to continue to turn the business around. I'm not pleased with the performance. I'm disappointed with the performance. I do believe there's a lot of potential in the brand. We don't break out Athleta, but I have to talk about it. I am nothing but pleased with the brand's performance and the team's performance. The customer continues to respond to the assortment, continues to respond to the aesthetic, continues to respond to product fabrications and the very strong marketing of The Power of She campaign. We are seeing continued excellent growth and we believe the brand is positioned in the sweet spot. Right at the intersection of performance and lifestyle which we, as a company, are very interested in, but Athleta is leading the way on. I'm bullish on Athleta and I'm bullish on the brand's growth prospects. Now let me pause and I want to hand it over to Teri. I met Teri several months ago and we've gotten to know each other over that time period. We've been working now here together for five or six weeks and I would tell you that I just couldn't be more pleased with having her partnership. I'll make a few more comments on that, but I want her to talk a little bit about 2016 and then the perspective moving forward. Teri L. List-Stoll - Gap, Inc.: Great. Thanks, Art. So good afternoon, everyone. I'd like to start by first saying how happy I am to be part of Gap, Inc. and its portfolio of iconic brands. As Art said, this marks my sixth week with the company and so far I've been extremely impressed by the passion and the commitment that Art and the team have around continuing to move the company forward in this difficult environment. Over the last few weeks, I've been diving deep into the business to better understand where we've been, the progress we've made and the opportunities ahead. I'm really excited to be in the role and I welcome the opportunity to help continue to sharpen our operational discipline and execute against our transformation strategies that position the company for long-term growth. For those on the call that I don't know yet I look forward to meeting you and working together. Moving onto the fourth quarter and full year performance, starting with sales, our sales for the fourth quarter were up 1% to $4.43 billion. Comp sales were up 2%. Net sales for the year were $15.5 billion, down 2%. Comp sales were also down 2%. Moving to gross margin, fourth quarter gross profit was $1.5 billion, representing gross margin expansion of 110 basis points to 33.9%. Merchandise margin was up 50 basis points with positive AUR at all brands. Rents and occupancy leveraged 60 basis points, driven by the positive fourth quarter comp and the benefit from certain restructuring actions. For the full year, gross profit was $5.6 billion and gross margin was up 10 basis points to 36.3%. Merchandise margin was up 30 basis points, and rents and occupancy deleveraged 20 basis points on the year. Regarding SG&A, as we've noted, we expected Q4 SG&A to deleverage as we invested more in the business. We also had an increase in incentive-based comps as we lapped bonus accrual reversals in the fourth quarter of last year. For the fourth quarter, total operating expenses were $1.2 billion, which includes the following items: $26 million of restructuring costs associated with the company's previously-announced store closure and streamlining initiatives; a $71 million goodwill impairment charge related to INTERMIX; and the $73 million benefit from insurance proceeds related to the fire at our Fishkill DC. In line with our guidance, marketing expenses for the quarter totaled $195 million, up $26 million versus last year. For the full year, marketing expenses increased $23 million to $601 million. And for the full year, total operating expenses were $4.4 billion. Excluding total restructuring charges of about $197 million and the fourth quarter goodwill impairment charge and insurance proceeds, adjusted operating expenses were $4.3 billion, $156 million above last year. Regarding taxes, our fourth quarter reported effective tax rate was 22.8%. During the quarter, we realigned certain aspects of our legal structure to provide additional flexibility going forward, which resulted in a non-recurring tax benefit. Our adjusted effective tax rate was about 10 points higher, excluding this benefit, as well as the tax impact of the restructuring and impairment cost during the quarter. As a reminder, the adjusted Q4 tax rate benefited from changes in our geographical mix of taxable earnings. For the full year, our effective tax rate was 39.9% and about 1 point lower on an adjusted basis. Turning to earnings, on a reported basis, fourth quarter earnings per share were $0.55, and full year EPS totaled $1.69. On an adjusted basis, fourth quarter and full year earnings per share were $0.51, and $2.02, respectively. Full year adjusted earnings per share excludes a $0.41 impact from restructuring costs, including the impact from a higher tax rate, a non-cash goodwill impairment charge of $0.18 related to INTERMIX, an $0.11 benefit from insurance proceeds related to the fire at our Fishkill distribution center and a non-recurring tax benefit of $0.15. Additionally, it's important to remember that foreign exchange negatively impacted full year adjusted EPS by an estimated $0.15 or about 6 percentage points of growth on an adjusted basis. Regarding stores and capital expenditures, during the year, we completed the wind down of our Old Navy Japan business and the closure of a number of dilutive Banana Republic stores, primarily internationally. As we've said, these closures will allow us to better align talent and financial resources against our most important priorities in 2017 and beyond. On a total company net basis, we closed 75 stores in 2016, and our square footage as of the end of the year was down about 3%, in line with our previous guidance. Capital expenditures totaled $524 million, also in line with our previous guidance. Balance sheet and cash flow, we ended the fourth quarter with inventory down 2% year-over-year. Our full year free cash flow was an inflow of about $1.2 billion, including approximately $73 million of insurance proceeds related to the Fishkill fire. As anticipated, we paid down $400 million of term loan in full during the fourth quarter and ended the year with $1.8 billion in cash. Moving on to 2017, before we get to guidance, I wanted to lay out some changes to our reporting practices. As we have looked at our practices relative to the industry, as well as our approach to planning and operating the business, we've decided it is more appropriate to provide additional perspectives on anticipated results for the year, while moving away from monthly sales reporting. While our intent is to maintain our level of transparency, we believe this approach will allow us to focus more on driving excellent execution of our plans to strengthen the business for the future. Going forward, we'll continue to provide guidance on full-year earnings per share. We'll also add perspective on expected full-year comp sales, as well as full-year capital expenditures and store count. Where there may be other significant factors affecting our planned results, we'll also provide that perspective as needed. In addition, we'll provide perspective for the first half of the year, specifically regarding EPS and inventory. As I said, we're committed to continuing to maintaining transparency with you and our investors through our quarterly and annual reporting. We believe this approach to providing guidance better aligns the investment community with the way we approach the planning and operations of the company to build shareholder value. So, moving to guidance, as Art mentioned, we have an incredible opportunity to capitalize on the changing retail landscape to further differentiate ourselves within the competitive set and, importantly, to capture displaced market share. In 2017, we're focused on capitalizing on our improved product quality to improve sales with healthy merch margins; investing strategically in the business to strengthen our brand equities and to support growth for 2017 and beyond; maintaining our operating discipline and driving efficiencies by leveraging scale; and returning excess cash to shareholders. With that mindset, we expect earnings per share for fiscal 2017, which includes the 53rd week, to be in the range of $1.95 to $2.05. We currently expect that foreign exchange will continue to be a headwind in 2017. We estimate an impact of about $0.09 of earnings per share or about 5 percentage points of growth. This expected EPS range assumes 2017 comp sales are flat to up slightly. We expect net sales growth to lag this, given an expected negative impact of foreign exchange. Let me take a moment to provide some color around the relationship between the first and second half of the year. During the first half of the year, we'll be continuing some of the increased investments that began in the back half of 2016. And initially, it's important to remember that the back half of 2017 will include the benefit from the 53rd week. With that in mind, let me take you through some expectations for the first half. First, we expect continued investments in marketing, primarily at Gap brand, as we seek to leverage the incredible brand awareness that exists and translate it into top-of-mind purchase intent. Second, we're lapping minimal incentive-based compensation accruals last year that will pressure SG&A in the first half. Third, as Art discussed, we're making investments in our digital and omni strategies that we believe support the long-term growth of the business. Fourth, as noted previously, rent and occupancy will include the preopening costs associated with our Times Square flagship locations, scheduled to open in the back half of 2017. And lastly, per published reports, traffic has decelerated February month-to-date, which we have factored into our comp assumptions for the first half. As a result of these factors, we currently expect first half earnings per share to decrease relative to adjusted EPS for the same period last year. We expect the percentage decrease to be in the high single digits. Regarding several other relevant metrics, we will, as Art mentioned, remain focused on disciplined management of inventory levels, learning from our experience following the Fishkill fire and leveraging the benefits of our investments in supply chain. Based on current trends, at the end of the second quarter, we would expect total inventory to be down low single digits. Recognizing that this is a point-in-time measure, we'll be looking for sustained improvement and inventory management efficiencies. With our investments in responsive (29:58), we would expect inventory levels to decrease over time. Factoring in jurisdictional mix of earnings, we expect a full year effective tax rate of about 39%. And excluding an estimated $200 million of spend related to rebuilding our Fishkill distribution center, we expect capital expenditures to be about $625 million. As a reminder, we expect insurance proceeds to cover the cost of rebuilding our Fishkill DC. While the 2017 expected capital expenditures are above 2016, it's important to note our expected spend still remains below our five-year average of approximately $660 million. This spend reflects a balanced approach to invest in the business strategically to support long-term growth. About half of this spend will go towards store investments, with the remainder largely related to IT and supply chain investments to support our omni and digital strategies, as Art discussed. Regarding company-operated stores, during the year, we plan to add 40 net new stores. Openings will focus on Old Navy and Athleta. Closures will be weighted towards the Gap brand. Regarding our store investments, we, of course, will be very thoughtful and prudent around these investments and will adjust the level of spend as needed depending on our performance and expected returns. Finally, turning to cash, our priorities for use of our cash remain unchanged. First and foremost, investing adequately, but responsibly, in the business. Second, maintaining our commitment to our dividend, which currently provides a 4% yield. Finally, returning excess cash to shareholders, while maintaining sufficient liquidity to comfortably support our business. Given our bias to repay the $400 million term loan, we didn't complete any share repurchases during 2016. That said, we have $1 billion remaining on our share repurchase authorization, and based on our current investment plans for the business, we would intend to use a portion of that authorization this year. Our current thinking is to repurchase at least sufficient shares to cover the dilution from our option exercises. Our current plan would be to repurchase $100 million in shares in the first part of the year. From there, we'll monitor the business and make other determinations about whether additional share repurchases are appropriate. With that, I'll turn it back over to Art. Arthur L. Peck - Gap, Inc.: Thanks, Teri. Really appreciate it. As I mentioned and she mentioned, we've been working now side by side for really six weeks. And one of the things that I saw in Teri as I was getting to know her, and I've seen in spades since she has joined the company is that she comes from a culture and a background where operating discipline and cost control are sort of second nature. But she also comes from a culture and a background where the power of innovation and brand building are equally second nature. And I said it before; I'll say it again, I'm very much looking forward to her partnership. We are both committed to ongoing cost control and we view many of the initiatives that we are taking as ors, not ands. In this environment with the competitive turmoil we're seeing with the skittish consumer that is out there, having a lean cost structure is not just a competitive advantage, it's an imperative. And I also believe that in the environment that we're operating today, with the volatility that we're seeing, we would be remiss if we were not constantly grinding away at our cost structure and looking for opportunities for efficiency. I do want to highlight the fact that underlying that, we are working very hard and are more done than not to really rewire the operating platform of the company. And what I mean by that is, historically, we had many functions that were duplicated across our brands. And we have been working really over the course of the last 12-plus months to bring those together in what I call a best-in-class and best-in-cost operating platform. Wherever we can work on a shared basis and work more effectively and more efficiently, we will do that on a centralized and shared basis, while, of course, skimming that platform for everything that faces the consumer and everything that needs be expressed through the brand fingerprints and the brand DNA, so the brands continue to show up as the brands that they are. It's another place where, as we're getting that work done, we see advantage, structural advantage from our multi-brand portfolio as we build this best-in-class and best-in-cost operating platform. Now, I've talked about market share a lot and I want to do a slight deeper dive on market share and I want to highlight the active and performance category. You all know that this business continues to grow. We have a very significant business in the space already, well north of $1 billion. It is on its way to being a third of U.S. apparel spend and it remains a key driver in the overall apparel market. It's a market that we're committed to certainly through Athleta, but it's also a market that we're committed to and excited about in our businesses that continue to build inside of Old Navy and Gap. And one of the things that significantly differentiates this space versus much of the rest of the apparel market is technical innovation. You've heard me say this before and I'll say it again and you'll hear it again, we believe that there is a significant opportunity, particularly in the intersection of performance and lifestyle. A couple examples of this, of this proactive innovation are the Sculptek fiber and the Powervita fiber that we have in products inside of Athleta, which is seeing significant success in their bottoms business. To further push innovation, technical innovation, we have created a small, focused and nimble innovation center, focused on proactively driving innovation at the fiber, yarn, fabric and chemical level rather than being a passive taker of innovation like we have been historically and much of the industry is. We've hired a super-interesting individual to run it. His name is Tetsuya O'Hara. He was leading innovation at Patagonia and I think we can all agree that Patagonia has been an incredibly innovative company. He's just on board. We're really excited about what we expect to see out of this innovation center. And again, that's a center that we have not duplicated across many places of the business, but a center in service to all of our brands. So let me talk for a moment quickly about experience because it's critical. And when I say experience, it's both the digital experience and the physical experience and, really importantly, it's where digital and physical come together. I want to give you a couple examples of the progress that we're making and what I'm starting to see in terms of how this can potentially significantly change the way that our customer is engaged with our brands. So number one, we believe that as a multi-brand portfolio, we have a structural opportunity to exploit some places for experience that we have not exploited historically. Today, we have a loyalty program that is single tender and connected to our credit card. We are in the process right now of building out a multi-tender multi-brand loyalty program that will deliver a rich, mobile-delivered experience for our customer. We believe, and we've actually seen results that support this, that a program like this can drive higher share of wallet, higher engagement, increased personalization and also really offer us very efficient, very effective direct communication with our customers. It's a path towards cost efficient marketing and engagement versus broad-based advertising. We think it's a win-win. We're in the middle of it now. We introduced our first Old Navy native app just several weeks ago and have gotten very good engagement from our customers and we're continuing to move this forward. Let me give you another example. We, as much of the industry have, traditionally operated with a point-of-sale system that is hardwired terminal based in our stores. And we're largely complete in moving our POS off of hardware into the cloud and making it browser-based. What this does is it obviously gives us efficiency in the back end in terms of IT, but the most important thing it does is it puts capabilities in the hands of our sales associates and our customers on the floor that were never there before. If you go back to Old Navy's Q4, what you see is a really exceptional sales over traffic spread. Not insignificantly, this was driven by the fact that we have deployed across many Old Navy stores the mobile POS which also has the ability to do stock checks, to do check inventory levels, to open credit cards, et cetera, and what we're seeing is when a sales associate has this, it changes fundamentally the way they interact with our customers in a very positive way. Okay. Let me wrap up, and I just want to summarize here for a moment. As I look across the landscape and I've learned over the last two years, and we've seen the industry continue to change and that change continue to accelerate, I am convinced that winners will dominate in four areas. First, product. If you don't win at product, you won't win at anything, and we're well on the way towards modernizing our product capabilities and de-risking our buying processes. That's innovation, that's quality, that's fit, that's on-trend every day. Secondly, brand. Brands matter. Strong, healthy, relevant brands will win the day. We have some of the best global brands in the world, and we're working to make them stronger. At the same time, we're continuing to build brand awareness around an emerging brand like Athleta. Third, unique and differentiated customer experience. This is where we're working very hard to solve the omni equation, to put capabilities in our hands that customers haven't historically had, to change the way our sales associates interact to make sure that every unit of demand in every place that it sits inside of this company, every piece of demand, every customer is matched with every unit of supply in a seamless, cost effective and frictionless way. Those three things together, we believe, yield a significant market share opportunity. And then all of that sits on a disciplined, best-in-class, best-in-cost operating platform. This is a journey. It's one that we're approaching with urgency, with determination. I'm a realist. I can see where we have made mistakes, and I can see where I can get very excited as the proof points begin to materialize. My money is on Gap, not only to survive this changing environment that we're in, but to emerge a very clear winner. Now, let me turn it back over to Jenn and open up the call to questions. Jennifer Fall - Gap, Inc.: That concludes our prepared remarks. We will now open up the call for questions. We'd appreciate limiting your questions to one per person.

We'll take our first question from Richard Jaffe with Stifel. Richard Jaffe - Stifel, Nicolaus & Co., Inc.: Thanks very much, guys. If you could just think back to what happened at the Fishkill campus and the learnings that you've realized in the fourth quarter of operating with a very different inventory level at the Gap brand and how that will translate into what's going to happen this year, 2017, by brand in terms of inventory level in stores, online and some metrics we could perhaps use in our modeling as well? Thank you. Arthur L. Peck - Gap, Inc.: I'll just give you a few thoughts, and I'll turn it over to Teri. I don't know if she's prepared to give you a lot of specific metrics right now that are down at the brand and channel level, but. I mean, obviously, we had a lot of inventory that was taken out of service. The primary impact was on Gap. We had a big impact on our online and our outlet business as well as the specialty business. And I wouldn't have wished for the fire to happen, but we did see that with that reduced inventory, we were able to see really nice progress on some of the key metrics of the business in terms of AUR, the productivity of our inventory and that kind of thing. And it has very much informed our thinking about inventory going forward and the size of our buys (43:57). That all said, I do believe over the long run that continuing to gain market share is going to come both through better and more productive inventory, but also through units. The other thing that we exercised with the reduction of inventory selectively was our responsive capabilities to be able to feed units back into the business where it was appropriate. And again, I've said this a lot. The vision on my mind is to be able to always buy conservatively and be responsive enough in key categories to be able to feed units into the business, like Old Navy did in its dresses business in Q4, where we see we have real upside in terms of unit growth. Teri, do you want to add to that? Teri L. List-Stoll - Gap, Inc.: Yeah, I would really just echo Art's comment and then translate that into kind of an intuitive view that there should be room for more efficient management of our inventory levels. I would guide it to down low-single digits in the first half. In my gut, I would expect us to be able to do better than that. I'm not in a position to commit to that this early in the game, but for all the reasons that Art cited, as we get better at our responsive capabilities and these systems come online that we've invested in, I would expect us to be able to continue to make good progress in inventory discipline. Richard Jaffe - Stifel, Nicolaus & Co., Inc.: Thank you.

And we'll take our next question from Ike Boruchow with Wells Fargo. Ike Boruchow - Wells Fargo Securities LLC: Hey, Teri. Just two quick questions. I know you gave us the 53rd week being in the guidance. But I'm sorry if I missed this, but did you let us know what the sales and EPS benefit will be to you this year in Q4? And then when you gave us the 50 basis points of merch margin expansion for the quarter, I just want to make sure that was an adjusted – on the adjusted gross margin. Thanks. Teri L. List-Stoll - Gap, Inc.: Yes. So it's on the first – the last question first. Yes, that was on an adjusted basis, the margin guidance. In terms of 53rd week, we didn't give you the specifics. So what I would say is that on an EPS basis, we expect it to be in the range of $0.04 to $0.05. So about a couple of points on the growth rate. Ike Boruchow - Wells Fargo Securities LLC: Great. Thank you.

And our next question comes from Lindsey Drucker Mann with Goldman Sachs. Lindsay Drucker Mann - Goldman Sachs & Co.: Thanks. Good afternoon, everyone. I wanted to ask about traffic and maybe just expand a little bit more in terms of what you're seeing in traffic. And how you're thinking about specific initiatives to drive traffic into the stores across the year. Arthur L. Peck - Gap, Inc.: I'm sure you see the public data and you could tell that traffic continues to be tough. We saw, as I've said that we saw a – we have a pretty consistent downturn of about 3% a year and now it's gone deeper than that. Sometimes we see deeper than that. The public data would say that February started out significantly deeper than that due to a number of things, not the least of which was the holiday shift. So we will have, as our backdrop, a negative traffic assumption that we're using as planning. We think that is appropriate and conservative. Now, that all said, it's really two things, which is how do you beat the overall traffic number? And that is one of the reasons, one of the specific reasons that we are putting marketing back into the business. And it is not – a lot of it is not the traditional advertising. A lot of it is digital marketing that has a line of sight to returns. We can look and see how do we spend down on an ROI basis to the appropriate level of return and know when we're at a diminishing level of return from our spend. The second thing, and it was really exciting to see was – and to me it demonstrates the relevance of Gap brand as an example, we had '90s Re-Issue Collection. And with a very simple amount of marketing behind it, we got 2 billion impressions out of spending not very much money. And it shows you, again, when you get something right in a brand like that that has ubiquitous recognition and a lot of love, how much you can get for not spending if you go out, craft it and do it in the right way. So marketing is really about being in the traffic spread. I wouldn't underestimate also the importance of what's happening inside the box. I was in stores again this morning. And I like to be before we do every one of these calls and I am often in stores and there was a relentless focus across all of our brands to what I call monetize the footsteps that are coming across the lease line. If there are fewer of them, how do you do better with them? And it's why I highlighted the deployment of the mobile POS. Old Navy drove a terrific SOT and part of that was by driving conversion in some of these stores. In some of these stores during the holiday period, they were bringing 50% of their transactions on the floor. And that results in a very different level of engagement with our customers and it's really one of the first times that I've seen, in my time with the company, when conversion, which can be just a relentlessly sticky metric, has moved in a way that is very convincing. So it's outside the store, beat the trend. Inside the store, monetize the footsteps. And the last thing is, let me go back to where I started, apparel is a growing category and the traffic is out there. It is an awful lot of digital traffic at the end of the day. I've been saying inside the company that a headwind's only a headwind if you're facing in the wrong direction. And a lot of the work that we're doing is really about aligning ourself with where the customer is, beating the traffic trend in our stores, which she still values, and then monetizing the traffic inside our stores. Lindsay Drucker Mann - Goldman Sachs & Co.: Art, if I can just ask just on February, do you think that – just as it relates to the broader industry, does the down shift in traffic or the very weak traffic trends, do you think those are explained by holiday shift or something else, or is something bigger sort of afoot? Arthur L. Peck - Gap, Inc.: I'll do the forensics on February when we have February in the bag. I'm really not going to try to assign a coefficient to the delay of tax refunds and the weather and the holiday shift, et cetera. What I do know is that product acceptance when she's in the store, product acceptance is excellent for us and she hasn't stopped buying clothing. So I'm really spectacle that it's some big things typically don't happen in a matter of a couple of weeks. And obviously with Old Navy in particular, we had a super strong holiday and carried that strength through into January. So again, I'll do the forensics when we can look back and put a bow around it rather than speculate right now. Lindsay Drucker Mann - Goldman Sachs & Co.: Got it. Thank you. Arthur L. Peck - Gap, Inc.: Yep.

And we'll take our next question from Matthew Boss with JPMorgan. Matthew Robert Boss - JPMorgan Securities LLC: Thanks. So on the margin front, how would you rank drivers of the 50 basis points merchandise margin expansion? Just the best way to think about the cadence. And then do you actually see gross margin up this year after we think about ROD and FX or are those offsetting factors? Teri L. List-Stoll - Gap, Inc.: Sorry. What was the last part of your question? Matthew Robert Boss - JPMorgan Securities LLC: Overall gross margin, after we think about... Teri L. List-Stoll - Gap, Inc.: Okay. Matthew Robert Boss - JPMorgan Securities LLC: ...rent, occupancy, depreciation and FX. Is it flat, up or down? Teri L. List-Stoll - Gap, Inc.: Yes. So you're asking for a lot of detailed modeling questions, and we'll be happy to spend a little more time with you offline. But just broadly speaking, if we think about the impact on margin, I'd have to go back and look at the exact ordering, but as I said, we're expecting some AUR progress, but we have the marketing investments and we do have the bonus accruals which are fairly sizable. That's a big part of what we're seeing on the overall margin impact. There is an FX impact. On gross margin this year, I think we had about 50 basis points of impact. We'll have the similar effect next year, so there are countervailing effects there between some of the positives on AUR and then the offsets. We'll take you through more detail offline, if that's helpful. Matthew Robert Boss - JPMorgan Securities LLC: No, that's helpful. Just a follow-up on the SG&A side. What comp do you need this year to lever your expense base? Teri L. List-Stoll - Gap, Inc.: So on ROD, I think we said low-single digits. Matthew Robert Boss - JPMorgan Securities LLC: Okay. Teri L. List-Stoll - Gap, Inc.: Maybe low- to mid-single digits, I guess. Matthew Robert Boss - JPMorgan Securities LLC: Okay. Great. Best of luck.

Ladies and gentlemen, as a reminder, please limit your questions to one per participant. Our next question comes from John Morris with BMO Capital markets. John Dygert Morris - BMO Capital Markets (United States): Thanks. Really nice work in holiday, everybody. Nice improvement and really good improvement in gross margin or the margin pickup in particular. Art, I think my question's for you on product. You've said, and we totally agree, it's all about the product at the end of the day. So maybe tell us a little bit about where your team, your merch team sees the opportunity for the spring season for product. What you've picked up on, particularly at the Gap division and maybe expand a little bit more on Old Navy, but the opportunity for spring this year versus last year. Thanks. Arthur L. Peck - Gap, Inc.: I think the opportunity is going to be across a number of things. I'll just share some observations. And I'd encourage you obviously, as you probably do, to get out to the stores. I was in all of our brands this morning across the entire portfolio from Old Navy to INTERMIX. And I guess where I see strength right now, we're getting traction across the entire company in bottoms. And that is a really good thing. We're seeing that at Old Navy both in men's and women's. We're seeing it inside of Gap, and they have a very strong bottoms development plan going forward. And as you know, to a certain extent, as goes bottoms, so goes the business. They are a loyalty category. If I go to BR with their for-fits (54:04) and the resonance that we've gotten across that for-fit (54:10) bottoms complex and then Athleta, which has had a super bottoms business, partly driven by their responsive platform and then fiber innovation as well, those are opportunities for us as a company. We're always strong when we have a strong bottoms business, and I'm encouraged by what I'm seeing. I'm not going to – probably for this call, it's probably not right to go into a trend-by-trend assessment. Some of these trends are continuing out there in women's tops. Obviously, cold shoulder and off-the-shoulder continues and all the brands have embraced that. But it's really the strength in the bottoms business that gives me – it gives me confidence quite honestly, and the consistency that she has registered particularly about our fits across all of our brands. John Dygert Morris - BMO Capital Markets (United States): Great. Thanks. Arthur L. Peck - Gap, Inc.: Yep.

And we'll take our next question from Adrienne Yih with Wolfe Research. Please go ahead. Adrienne Yih - Wolfe Research LLC: Good afternoon. Art, I wanted to ask you – can you hear me? Arthur L. Peck - Gap, Inc.: Yep. Adrienne Yih - Wolfe Research LLC: Okay. Great. I wanted to ask you, what has given you sort of the confidence to reinvest in advertising, particularly television at the Gap brand? And kind of along with that, the changes that you've made at Old Navy, why the operational improvement? Why have they taken longer at the Gap brand? Thank you very much. Arthur L. Peck - Gap, Inc.: I think that was two questions. Let me just... Adrienne Yih - Wolfe Research LLC: Sorry. Arthur L. Peck - Gap, Inc.: No. That's no problem. So I'm sorry. I was thinking. Can you state the first question again just really quickly (55:41)? Adrienne Yih - Wolfe Research LLC: Yeah. The confidence that you've had to reinvest. Arthur L. Peck - Gap, Inc.: Yeah, (55:44). Adrienne Yih - Wolfe Research LLC: Yep, exactly. Arthur L. Peck - Gap, Inc.: Yeah, the confidence really comes from starting out slow, reading whether or not we're getting the payback which we did a little bit in fall and then in holiday, and then we put more money into it. You would have seen our – hopefully seen our ad that we had on the Grammys. And it's confidence we got through relatively low cost marketing vehicles where we're seeing the ROI. It sits on a foundation of the fact that we're connected to our customers and when our customers are responding to the product in the store, when they feel like it's right for the brand, it's the quality, it's the fit, it's the trend, it's the fabrication, et cetera, I've always said that that's the moment when you go out and you start to get a little bit louder inviting guests back into your home. And that's really what we're doing right now. I was not willing to do that back in 2011 until I felt like the product was up to what the brands want and what we're really doing with our customers is saying, come back in and give us a try. We believe we have what you want and we want them to trust us. And we're seeing – again, it's not a go out and blow it up in terms of huge campaign, but it is building on some of the validation points that we've seen that suggest that we can get the incremental payoff by putting additional money into the business. Adrienne Yih - Wolfe Research LLC: Great. Thank you. Can you answer the second part? Arthur L. Peck - Gap, Inc.: Yeah. Adrienne Yih - Wolfe Research LLC: Thanks. Teri L. List-Stoll - Gap, Inc.: Time on Gap. Arthur L. Peck - Gap, Inc.: Oh, the time on Gap. Yeah. Frankly, the issue with the time on Gap, I would say, is a couple things, not the least of which was Gap had wandered much farther away from its core equities than Old Navy had. And I view brands, and Teri and I spend a lot of time talking about this because she obviously grew up in an environment where brands were paramount. Brands at their core are about trust and when we have done this where we have swung the aesthetic, where we've gone away from categories she has expected, where we don't deliver the quality and the value that she has learned that we stand for, that's a trust issue at the end of the day. And the deviation inside of Gap brand as we wandered away from the aesthetic and did some of these other things was much larger than what we had in Old Navy. And secondly, as we said, also Old Navy's responsive capabilities were more developed than Gap's were. And so it's a combination of reestablishing the equities of the brand and also building the responsive capabilities out underneath. Old Navy clearly is also in the value space. The value space is very strong and checking right now. But I think if you look at those two things, it explains a little bit of the latency between the work we've done and seeing the results show up in the numbers. Adrienne Yih - Wolfe Research LLC: Great. Thank you very much.

And we'll take our next question from Anna Andreeva with Oppenheimer. Samantha Lanman - Oppenheimer & Co., Inc.: Hi. This is Sam Lanman on for Anna. Thanks for taking our question. Mine is on the Gap division specifically. I think you cut SKUs at Gap a few quarters ago. Any color on how that's resonating? Are there specific categories where you see additional opportunity? Additionally, I think you've talked about ticket and maybe evaluating ticket at the Gap division. Can you talk about that as well? Thanks. Arthur L. Peck - Gap, Inc.: Yeah, I'm sorry. You may have broken up in the call. What was the first phrase that you used at the Gap brand? We missed it here. Samantha Lanman - Oppenheimer & Co., Inc.: I was saying that I believe you cut SKUs at Gap a few quarters ago and I was wondering how that is resonating and any specific categories where you see additional opportunity. Arthur L. Peck - Gap, Inc.: Yeah, we definitely had gotten over-assorted in the women's business. So if you go back to summer of 2016 as an example in the knits business, we had way too many CCs on some of – I think we have six knits programs which she really responded to, but we found that the color depth that we had across CCs was way more than we needed. So we've tightened – gone to these programs and season-over-season really tightened these things up. And that's another case also where Gap has really gotten traction with a category we call snits, which are knits but seem like knits – seem like sweaters. And so we've tightened up our traditional knit fabrication in order to create some space for snits. It's a wonderful spot to be because it also gives us AUR lift as well. And frankly, she has responded to it. You see it in the stores. The stores are cleaner. They're easier to shop. They've got a stronger point of view, et cetera. I was in the store this morning at Aventura Mall and I haven't seen as clean a presentation of that in a long time, where the store was just clear what we stood for, the categories were well presented and it was a very easy store to shop. And then, sorry, I think you had an add-on to that question as well. Samantha Lanman - Oppenheimer & Co., Inc.: Yeah, I was asking about ticket. Arthur L. Peck - Gap, Inc.: Oh, yeah, ticket. Samantha Lanman - Oppenheimer & Co., Inc.: I think (01:00:37) may be evaluating it. Arthur L. Peck - Gap, Inc.: Yep. And we've done work now. We've been doing pricing work to really start with ticket integrity from a competitive standpoint and then understanding how the competitors and we play into whether it's a high low model, an everyday low price model or whatever. We're just getting some of that work completed at Gap and it's yielded some very interesting things. Overall, we believe that we have really high quality integrity in our ticketed prices. And again, that's work benchmarked against the competition from the standpoint of value and the quality that our customers are getting for the ticket. We are doing work and we have shown progress under the covers of reducing our frequency and depth and breadth of promotion. If you've been inside a Gap store over the last three or four months, you would notice that we have largely eliminated our, what we call, POS events, where we go further in the store. And that's an example of continuing to, under the covers, back off of some of the discounting we've been doing. We have a lot more to do. I'm not going to kid you, but we've made some progress there and we have confidence. What we haven't done is any kind of wholesale re-pricing or anything like that. Frankly, we don't think it's necessary. There may be some categories where we think bringing tickets down makes sense in terms of competition. The work is also shown in some categories where frankly we had more authority that we've been pricing for as well. Samantha Lanman - Oppenheimer & Co., Inc.: Thank you.

And we'll take our next question from Paul Lejuez with Citi. Please go ahead. Paul Lejuez - Citigroup Global Markets, Inc.: Hey. Thanks. Just curious, within your flat to slightly up comp expectation for the year, can you give any color by brand what you expect concept-by-concept even just directionally? And also, just hearing what you said about the first half earnings, curious about first half, first second half comp expectations. Thanks. Teri L. List-Stoll - Gap, Inc.: Yeah. So we're not going get down to brand-level margin guidance. Happy to talk about some (01:02:43) company drivers offline, but we're not going to get down to the brand level. As we said, we expect the comp on the year to be flat to slightly up. And that's based on our current expectations factoring in the start to the year and what we anticipate going forward. Paul Lejuez - Citigroup Global Markets, Inc.: Sorry, Teri. I wasn't asking margin by comp. Just I was asking about comps by concept? Any directional color there. Teri L. List-Stoll - Gap, Inc.: No. No, we won't go down the brand level. Sorry. Paul Lejuez - Citigroup Global Markets, Inc.: Okay. Thanks.

And we'll take our next question from Lorraine Hutchinson with Bank of America. Lorraine Maikis Hutchinson - Bank of America Merrill Lynch: Hey, thank you. Good afternoon. I just wanted to follow up on SG&A. There had been about $275 million of cost reductions coming out of some strategic actions last year. As we think about the SG&A line, I know you went through a lot of offsets to that. But how much of those have been realized at this point and then is there an opportunity to have SG&A dollars down in 2017 because of those reductions? Teri L. List-Stoll - Gap, Inc.: Yeah, so we did begin to realize some of that savings in the current year. So we haven't disclosed the specific amounts, but a meaningful portion of those were realized this year and the remainder will be realized next year. Those are largely offset – more than offset by the investments that we're making than we talked about in terms of the digital capability and then the advertising spend. So you're not going to see a reduction in SG&A. You'll actually see some growth and it's just a bit of a lagging as we make these investments and then we'll start to see the benefits come as we move forward. Arthur L. Peck - Gap, Inc.: I would just jump in there also and say, reiterate the comments I made. I know Teri feels the same way. We're never done on looking for opportunities for efficiency inside the company. One of the reasons I really welcome Teri's eyes, one of the many, is a fresh pair of eyes sees opportunities that we may not have seen sitting here. And so, that is very much on my mind. And I'm not previewing anything in terms of another cost restructuring or something like that, but I remain convinced that we have to continue to get to a lean cost structure as I said. Lorraine Maikis Hutchinson - Bank of America Merrill Lynch: Thank you. Arthur L. Peck - Gap, Inc.: Yep.

And we'll take our next question from Dana Telsey with Telsey Advisory Group. Dana Lauren Telsey - Telsey Advisory Group LLC: Good afternoon, everyone. As you think about the store base and the footprint, you mentioned about the net openings. What do the closings look like by brand? And how do you think about the store footprint over time? What do you want it to look like? Thank you. Teri L. List-Stoll - Gap, Inc.: So we do have some planned closings. I don't think we've disclosed the specifics, but they're largely associated with Gap following on some of the programs that we had this year. We had closings in BR International largely and Gap. So there will be two additional closings next year. Arthur L. Peck - Gap, Inc.: And the other side of it is, Dana, and it's nice to hear from you, I view Old Navy as an opportunity to incrementally open some additional stores. We have some infill opportunity there. We're experimenting with a small store format. So, that number, as you know, is a net and it's a very different story if you look at an Old Navy or an Athleta versus Gap on the other side of the equation. Teri L. List-Stoll - Gap, Inc.: The last thing, not unlike inventory and SG&A where Art said, we'll be looking at everything with a fresh set of eyes. The real estate footprint is the other thing that we need to look at over time and we'll continue to think about whether we have the right locations and in the best footprint overall. Dana Lauren Telsey - Telsey Advisory Group LLC: Thank you.

And that does conclude our conference for today. You may now disconnect. Jennifer Fall - Gap, Inc.: 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 contains the full recap of our fourth quarter results as well as forward-looking guidance included in our prepared remarks. I'd like to apologize that we did not get to everyone's question, but I wanted to let you know that Teri along with the Investor Relations team will be available after the call for further questions. Thank you.