Jennifer Fall - Senior Vice President of Corporate Finance and Investor Relations Arthur Peck - CEO Teri List-Stoll - Executive Vice President and CFO

Matthew Boss - JPMorgan Lorraine Hutchinson - Bank of America Paul Trussell - Deutsche Bank Paul Lejuez - Citi Mark Altschwager - Robert W. Baird Kimberly Greenberger - Morgan Stanley Oliver Chen - Cowen & Company Simeon Siegel - Nomura Adrienne Yih - Wolfe Research Lindsay Drucker Mann - Goldman Sachs

Good afternoon, ladies and gentlemen. My name is Kevin and I will be your conference operator today. At this time, I would like to welcome everyone to the Gap Incorporated, First Quarter 2017 Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, please limit your questions to one per participant. [Operator Instructions] I would now like to introduce your host Jenn Fall, Senior Vice President of Corporate Finance and Investor Relations.

Good afternoon, everyone. Welcome to Gap, Inc.'s first quarter 2017 earnings conference call. Before we begin, I'd like to remind you that the information made available on this webcast and conference call contains forward-looking statements. For information on factors that could cause our actual results to differ materially from the forward-looking statements as well as a reconciliation of the 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 May 18, 2017, and we assume no obligation to publicly update or revise our forward-looking statements. Joining me on the call today are President and CEO, Art Peck; and Executive Vice President and CFO, Teri List-Stoll. As mentioned, Teri will be using slides to supplement her remarks, which you can view by going to the Investor section at gapinc.com. With that, I'd like to turn the call over to Art.

Thanks, Jenn, and hello to everybody on the call, and thanks for joining us today. So I'm sure you're all observing what's going on in the sector right now. We are as all. And obviously, we're continuing to see downsizing, bankruptcies, commentary about store traffic being soft and consumer spending really lagging the overall consumer sentiment in the marketplace. We're going to see as we go through the dialogue today that we of course are not immune to any of these challenges that are facing the industry as a sector, but we also believe quite strongly and we feel that the results of Q1 are continuing to validate that belief that we are uniquely positioned to turn these challenges into opportunities. To pickup market share to grow and to really continue to serve our customers with the iconic brands that we have. To set to face these challenges but underlying that, apparel continues to grow. It is as you know a remarkably constant growth and that's a good thing. Additionally with everything that's happening in the sector, there was an unprecedented amount of market share coming fluidly into play and we're playing not just to survive the changes that's taking place, but to win in that environment. Our brands are iconic and they are legitimately and objectively loved by our consumers and we continue to invest behind the plan that I've been talking to you about now for many quarters to strengthen our relevance to rebuild and enhance our product capabilities and to deliver an exceptional customer experience to both our stores and our digital assets. Return to the quarter in a moment and Teri will share more on our financials and the specifics around guidance. But again, we're very pleased that our results in this quarter demonstrate the progress that we're making, the progress against the plan that we have been consistently executing against now for really since the time and somewhat before I stepped into this role. We know we have important foundational work to continue to do, but the strong results in Old Navy and the strength that we're seeing in athletic confirm our confidence in our strategy and we're taking the right actions to be well-positioned to differentiate starting with product and our brands and our experiences and profitably and continuously capture market share. Our priorities remained the same, product, foundationally sits on product that our customers love and we're well on the way and well into the journey of enhancing and evolving our product capabilities. Customer experience remained tantamount, brand health talent and importantly leveraging scale and operating discipline. They were our priorities when we spoke several quarters ago, they are priorities today. They will remain at the priorities as the entire organization is executing against. Just for a moment on products. We have continued to do work to solidify the fit to enhance the quality to improve the value relationship of our products and to use responsive capabilities to ensure that our products are on trend and that we can deliver units into the market share opportunities that we see. In February, I went into some more details on the work that we're doing and we continue to make progress. In Q1, we tested significantly more products versus a year ago which allows us to then inform larger buys that we're making many times based upon the demand signals that we're seeing in those tests. We also use responsive capabilities in our product process and almost 60% more of our assortment and we have some categories now where they are 100% on responses and demand base buying and we're seeing the results that we expected to see associated with that. We're also leveraging fabric platforming and importantly, we are working with fewer vendors more deeply. Just a couple of weeks ago, we held our global supplier summit where we hosted our top vendors and really continued to push into relationships with those vendors and again far few of them where we work much more deeply push into relationships where we are strategically connected, where we're leveraging their capabilities, where we're working together a season-over-season to enhance our cost and to drive innovation. These partnerships have been key to enabling us to work faster to change faster and to also respond to demand. On the customer side, we see a continuing opportunity to improve engagement and build loyalty, really by continuing to be focused on the customer experiences and it's an experience in our stores where we have a responsibility to deliver a compelling experience that our customers can't get any place else and it's the digital experience and it's how those two things are connect together. We are relentlessly focused on mobile as traffic continues to move to a mobile device. We launched our native mobile apps starting with Old Navy very recently to improve the customer experience and we've already seen customers rate those apps as materially better than the experience that we were delivering on a web-based app just several weeks ago. And I've talked about operating discipline and in particular about what we call our best-in-class, best-in-cost operating model. There was leverage available out of that, some of which we have gotten, some of which remains in front of us, all of which we are committed to going after. I'm pleased with the progress that we're making, but we have plenty of work to do and I cannot discount the macro environment that we're operating in. So let me spend a moment and shift to talking about the brands. I'll start with Old Navy, a record quarter. I'm proud of the business and I'm proud of the brands and I'm proud of the team. The 8% comp was up against the tough quarter last year and it compares for the rest of the year due get harder, but an 8% comp is in an 8% comp. Clearly, out in front, the rest of the sector clearly gaining market share. It's a family brand. We did well in Easter and the team did a great job gaining share in multiple categories. I'm probably most pleased by the fact to strengthen the business is very diversified this wasn't being driven while we had great successful categories like dresses where we remained number one. The success of the business was diversified across gender and across the family and that to me, signifies sustainable strength. We've also talked for a while about the fact that Old Navy has been leading the company in some of the responsive capabilities and we're using these today to target the competition and importantly to put units into the business to support growth. It's a really good lesson as you look at the sector right now and you look at us. When you're buying responsively in a tough traffic environment, you buy units type and if traffic is negative, you will often buy units negative. In any given season on a traditional pipeline, this really constrains you to yield improvement to get growth AUR, I will call that way and as we continue to develop responsive capabilities, category-by-category and brand-by-brand, it allows us to feel growth both with AUR and yield improvement and in selectively putting units in the business to chase market share and that 8% comp sits on a platform of both of those things and we're pretty confident about our ability to continue to exploit that to our benefit. Another thing to characterize is Old Navy success is their story telling, the high fashion campaign is resonating with customers, it's continuing to enhance brand health and we are seeing better traffic trends in the industry, again due to everything, but not insignificantly due to the fact that we have a compelling story to tell about the brand and are telling in a compelling way. On a side note, we also continue to see real-estate opportunity in front of us and we opened our first holistic small store format for the brand in Walnut Creek at Broadway Plaza just a few weeks ago. It's very early days and we are figuring out how to operationalize 8,000 square feet that really has a holistic expression of the brand, but we're pleased by what we're seeing so far and we really do feel like this is going to open up some interesting opportunities. And importantly, it's a store design that is supported by foundational aspects of operating discipline, fixtures, replenishment, service models, but also by leveraging technology selectively to serve the customer. I'll turn to Gap. Transformational work continues and we're continuing to see signs under the covers that show progress and in particular how it showing up in margins. They are driving elements of the operating model work that we're going to deploy in the rest of the company particularly as it relates to continuing to define our demand base buying strengths. I'm confident that we'll continue to strengthen Gap and it will position it well for the future, but obviously we continue to have more work to do there. On marketing which I spoken to you about during this period, we had the 90s archive reissue, which was really a small campaign supported by some product. In terms of showing the relevance of the brand that generated over 2 billion impressions for the brand and it shows you when we use the voice right, without spending a lot of money, how much consumer resonates there is out there for the message and the story that the brand can tell. Inside the brand, active remains a success story, delivering double-digit comps on the quarter and as you know we are very bullish about the active category across much of the company. We're also continuing to see successful product innovation by launching our [scope] [ph] denim across active and in denim for Gap brand and strong consumer resonates for that innovation. Let me turn then for a moment and talk about Banana. I'm pleased with where Gap is, I'm inpatient for its progress, but I'm confident about what we're going to continue to see. Moving to Banana, you would have seen that we have a new leader in Banana with Mark's Breitbard returning to the company. As you know, Mark has been a CEO in a multi-brand company over the last four years. I know Mark well and probably the most important thing right now, Mark knows the brand, Mark knows the company and Mark is hitting the ground running. So, I'm not going to promise when we're going to see the progress that will come from Mark's and the team's leadership, but I'm very confident that he got his arms around the key issues in that business and there are tremendous opportunities to make quick progress. On our marketing and our store environment, I'm particularly passionate. We've been very quiet in our voice and the team knows that I'm not happy with consistency of execution and how we are presenting in our stores much improved product and I expect to see very rapid progress there. Athleta, which we don't breakout is continuing to be an exceptional performer, one of our key growth brands. It's positioned in a growing segment. It has strength across the vectors of brand equity, product, experience and talent. And it's not just store growth, but growing categories, 60% of their bottoms platform are on responses and they could put units into the business against demand signals very, very quickly and that is part of what is fueling in our growth. They're also a [reg] [ph] price business and so the bulk of their growth is not going to come out of yield, it is going to come out of feeding units into the business and it's one of the reasons that we are so confident that it's the right place to have pushed aggressively ahead with the responsive capabilities in a significant part of the business. They continue to rollout Athleta goal and we're seeing good signals from that and we're pleased with the incremental business as we've expressed that concept exclusively in existing real estate. They are also doing something on the side which we're committed to as a company but Athleta models as well, which is a sustainability commitment. It's part of our story telling. It's part of how we do business. And importantly, it's also part of what customers are responding too and a resonant too as we tell the story to them about the brand. We see an opportunity to continue to build Athleta to continue to build brand awareness to continue to acquire customers and to continue what to run, what is inherently an omni-channel business. And speaking of omni-channel, we have continued to make progress in our backend capabilities as well. We converted one DC in Q1 to a fully omni-DC, it is on our roadmap to convert two of those DCs into the second quarter and the second half of the year and to be clear what that allows us to do was to leverage one pool of inventory and take 999 accuracy for individual direct orders or case lot fulfillment into our stores out of the same pool of inventory. Now, traffic remains an issue. We all know that you see the industry traffic numbers. As an industry in total, everybody will report conversion numbers somewhere between the mid to low 20s and the high 30s or low 40s depending upon the business. Clearly, the industry has a traffic issue, but I've inclined to turn this around just I'm inclined to say that headwinds are only headwinds if you're facing in the wrong direction. And the way we're really approaching this issue of conversion is turning on its head and saying that we have a conversion opportunity, not a traffic problem. And we're beginning to work right now. Frankly, we're accelerating work to push forward in a subset of our stores and really configure what I'm calling a high touch and frictionless experience and I have a strong philosophy that we need to run our stores to enable 100% conversion and I'll be the first to say that's not going to happen on the back of shoveling mass quantities of inventories into our stores and it starts with the fundamentals, it starts with staffing, it starts with replenishment models, it starts with respectfully displaying our product, but it also means layering in and continuing to layer in digital capabilities and allow our customer to frictionlessly purchase at our stores even if the style, color, combination isn't there on the shelf. I'm a big believer in stores, but I'm also a big believer in digital. We will continue as we always have to manage square footage to why our customers are to support them on digital, to support them in our stores and to meet them wherever they are. Last, we continue to do what I call foundational work on our digital experience and there was money to be made by improving your page load speeds by modest personalization, by enhancing your search capabilities and as much as we talk about many of those other things we're proud of the experience that we offer our digital, we have an exceptional digital business and everyday we're committed to making it better. So in summary, our focus on product and working upstream with our vendors is unrelenting. We will never take our eye of it. I've been asked when are you done and the answer is never. We will continue to work on improving fit, improving quality and showing that our product is on trend, we deliver a superior differentiated value proposition. We're focused on meeting our customers where they are on evaluating and involving the experience across our stores and online and we will always be focused on operating discipline and cost control. This discipline will help us fund the investments in marketing, fund the investments in technology and in turn will strengthen our brands and our business. We view Q1 as continued progress, but to be clear, not as a victory and I have to underline one more time the current macro environment is unpredictable. So progress, validation, same plan we've talked to you about before we're head down focus on that where confidence going to continue to yield results. And with that, let me turn it over to Teri. Teri List-Stoll: Thanks, Art, and good afternoon, everyone. As we outlined last quarter, in 2017, we are focused on a few things, capitalizing on our initiatives to improve product quality to grow sales with healthy merchandise margins, investing strategically in the business to strengthen our brand equities and to support growth. Maintaining operating discipline to drive efficiencies and leverage scale and returning excess cash to shareholders. We are pleased to report progress against each of these in the first quarter. Starting with sales, comp sales were up 2% compared to a decline of 5% last year. Total company net sales for the quarter were $3.4 billion flat to last year. With respect to global brand comps, Old Navy as we said had a record quarter delivering 8% comps against a negative 6% last year. While showing progress throughout the quarter, Gap did end the quarter down 4% against the negative 3% last year. Banana Republic comp was also down 4% and [base] [ph] down 11%. As you heard from other retailers, the quarter started out slow with traffic in spending down. Following that, we were pleased to see all of our brands execute well over the important Easter selling season particularly at Old Navy, which tends to realize outside's impact over key holiday period. Moving to gross margins; our first quarter gross margin was up 270 basis points to 37.9%. Merchandize margin was up 220 basis points with positive AUR at all of our global brands. Despite the pre-opening cost associated with our Times Square flagship locations schedule to open in the back half of 2017, rent and occupancy leveraged 50 basis points just primarily driven by lower rent and occupancy expenses as a result of our international store closures last year. Regarding SG&A, as anticipated total operating expenses were $1.05 billion up about $60 million from last year, it's driven primarily by an increase in payroll largely due to bonus accruals as well as increased marketing. Marketing represented about a quarter of the overall increase in SG&A. As we said previously, we consider these marketing investments important to the long-term health of the brands as we seek to leverage the incredible brand awareness we have across our portfolio and transit it into top of mind purchase intent. Regarding taxes, our first quarter effective tax rate was 39.9%, which includes a negative impact from the adoption of new stock-based compensation guidance. We continue to expect a full year effective tax rate of about 39%. Turning to earnings, first quarter earnings per share were $0.36. FX negatively impacted first quarter EPS by an estimated $0.03. Cash flow, our year-to-date cash flow was negative $5 million driven primarily by timing of lease payments and the increase in inventory from the end of the fiscal year. As a reminder, we ended the first quarter with inventory about flat to last year. Free cash flow also includes approximately $14 million of insurance proceeds related to the fire at our Fishkill DC. We ended the quarter with $1.6 billion in cash and cash equivalents. During the quarter, we completed about $100 million of share repurchases. Based on the strength of the current quarter, we now are planning to repurchase an additional $100 million of shares in the second quarter, consistent with our commitment to return cash to shareholders. We ended the quarter with 396 million shares outstanding. Additionally, during the quarter, we paid dividends of $92 million and currently have a dividend yield approaching 4%. On inventory, we ended the first quarter with inventory about flat to last year. We now expect inventory to be about flat at the end of the second half recognizing this measure has some volatility given the magnitude of expected in transit particularly at Old Navy. While this is a point in time measure, it is important to note that we look at several metrics internally to ensure we are comfortable with the amount quality and productivity of our inventory. With the strength of Old Navy, start to set an unit driven business, we are working on signing the right balance to support the business opportunity we see, while continuing to focus on inventory productivity and discipline. Turning to capital, our year-to-date capital expenditures were $110 million excluding the cost associated with rebuilding of our Fishkill DC and related supply chain, we continue to expect capital expenditures to be about $625 million on the year. This is a reminder about half of this end will go towards store investments within remainder largely related to IT and supply chain to support out omni and digital strategies. As we said previously, it's our priority to invest adequately while responsibly in the business to support long-term growth. We will continue to be prudent around these investments and adjust as needed depending in our performance and expected returns. On store count year-to-date, we closed 14 company operated stores on a net basis and ended the quarter with 3186 stores. As we continue to refine our store plan, we now expect our store count to be about flat at the end of the year down from previous guidance of about 40 net new stores. We continue to be disciplined around opening new stores with a focus on wide space for Athleta and Old Navy. Looking forward, as I have noted the current environment is unpredictable, while Q1 was volatile. We are cautiously optimistic given the strength we saw later in the quarter. Based on this we now expect, a mid-single digit decrease of first half earnings per share relative to adjusted EPS for the same period last year an improvement from our previous guidance of a high single-digit decrease. For the full year, we continue to expect earnings per share for fiscal 2017, which includes the 53rd week to be in the range of 195 to 205. Included in our original and trend guidance is about $0.89 of insurance recovery for the fire at our Fishkill DC. This largely offset elevated logistics cost resulting from the fire. We expect to get about half of that in the second quarter. While we still expect the insurance recovery to fully offset elevated logistics cost, the timing of the recovery could have some variability both in the quarter and for the fiscal year. For the full year, all of our other guidance metrics remain unchanged. Thank you. And with that, I will turn it back over to Jen.

Thanks Teri. That concludes our prepared remarks. We will now open up the call to questions. We'd appreciate limiting your questions to one per person.

Thank you. [Operator Instructions] We will take our first quarter from Matthew Boss with JPMorgan. Go ahead please.

Thanks. On the gross margin, can you speak to merchandise margin performance between the Gap brand the Old Navy in the first quarter? And then, just how best to think about the second quarter and the back half of the year? Teri List-Stoll: Yes. We are not going to get down to margin by brands but just going back to the overall. We were very pleased with the progress we saw in merch margin is, it's not just the numbers, but really when you look at the underlying health. So, we had positive AUR on all of the brands and the merch margin is actually the highest expense, since I think around 2013 was the last time we were above the levels we are in the first quarter on a first quarter basis. We had a higher percentage of sales at reg price, which is another healthy indicator and our marked down margin was actually improved as well. So, as we look across, we are very comfortable and pleased with the trends we are seeing in merch margins across the company and even within the brands. As we look forward, due to a couple of things, one is obviously, that compares easier this quarter than we are going to see over the remainder of the year. And so while we continue to focus on the same basic elements in terms of driving the AUR, remaining disciplined on the AUC, really thinking through our promotional strategies to make sure we can continue the margin expansion. It's just a matter of combination of tougher comps as we move through the year and then the uncertainty of what's the macro environment may bring us.

Great. And then, just a follow-up at the GAP brand, can you just elaborate on the underlying signs of improvement by category that you are seeing. I guess what you think is the biggest second half opportunity. And just on large picture, how do you see the Gap concept differentiating itself longer term from the competition?

Yes, let me fill the time on that and again I don't want to appeal the whole business apart given the time that we have etcetera. So, let me focus a little bit on the differentiation, but what I'll say on what gives me confidence as you know that I always look at the women's first, business first and the women's first in North America. And I'm really pleased with the progress there. Again not perfect, but that's the hardest business and it often is a dull weather for the business and I'm pleased with what we're seeing there and again it's reflected in financial outcomes as Teri noted. If I think about what differentiates the Gap as a concept, I start with brand. And again we – I love the brands. I'm completely on objective about it where we do have objective data and the objective data that we measure how brand help to indicate the Gap's view as an iconic brand and a relevant brand. We have work to do because obviously the business isn't performing up to that standard, but it's not the brand is that in anyway share performed and I go down more to the category level. We've got a fit business inside that business across the family that I think is a real opportunity to continue to drive growth. We have a latent body business and women's where we feel like particularly today with some of the fabrications and silhouettes that we have in the body business, super on trend with what she is looking for. Denim is always important and especially with innovation in denim across the entire family. I'm very pleased with what I'm seeing there and we have some early orders in the water where we bought small quantities of some technical and other innovation denim that are giving us some interesting indications, introduction of scope has been positively received. And then again across our responsive capabilities, they are continuing to penetrate inside the business and where we have them upon running. We're seeing like graphics as an example where we have a super shot pipeline, it's all on demand buying right now. We're seeing very significant comps coming out of that sector and that's where we're also building approximate manufacturing capacity as well. So that we can put it on about – make it put on about be back in store and we're seeing excellent product performance there. So, again Gap's brand is relevant. It's always going to be a composite of the underlying categories and we feel like we continue to have differentiated opportunities in those categories.

Great. Congrats on a good nice quarter.

Thanks.

[Operator Instructions] Your next question will come from Lorraine Hutchinson with Bank of America. Please go ahead.

Thank you. I just wanted to follow-up on the SG&A growth rate this quarter. Is this similar to what we should expect throughout the year as the marketing expense continues to grow? Teri List-Stoll: Yes, that could be a little variability for the quarter but as I said it's really driven by couple of things, bonus, accruals and marketing and those will fall pretty radically throughout the year.

Thank you.

And we'll go next to Paul Trussell with Deutsche Bank. Please go ahead.

Good afternoon. Could you just talk a little bit more about the, a profitability on what you're seeing from a trend standpoint on margins for the various banners. And also if you can just give a little bit more detail on what you're seeing in Athleta – Athleta, it seems you're having a lot of success there. Teri List-Stoll: Yes. So in terms of the profitability, I go back to the gross margin commentary that we saw we are seeing positive AUR across the brands and we're seeing positive sales over traffic trends as well. These are indicators of increasing product acceptance across the brands and that obviously, then gives us the right starting point to be able to drive the growth of the business and the profitability of the business. So, now not going to as I said break it down brand-by-brand, but other than to say that I think we are learning a lot from the experience we had at the end of last year with the Fishkill Fire operating with leaner inventories maintain that discipline and driving the AUR throughout the year. Art, do you have anything to add?

No, I'll just jumping on the Athleta question and again I'm not going to go into specifics here but if you just look at the things at the fine Athleta, first of all, the active space and particularly the intersection of performance in lifestyle which is where Athleta is kind of uniquely positioned. It continues to be at above average growth segment for the market. In that space, many of our competitors are largely dependent upon wholesale. The wholesale buying calendar is much longer than we now have in many parts of the business. So especially in performance lifestyle, it allows us to be active – reactive to fashion trend which matters in that segment. It is an omni business. It has been from the get go and so we are seeing strong store performance and strong online performance and many customers who have in both of those and are most loyal customers. So, it's just the space that we're pleased with and we feel like the team is executing and the last thing is to be the voice that they have – the storytelling that they are doing, all based on the power of she and a very integrated message that we have there. We're just getting fantastic engagement and seeing fantastic loyalty. So, we're continuing to be bullish about the business and about the sector.

Thank you. We'll go next to Paul Lejuez with Citi. Please go ahead. Once again, Paul Lejuez of Citi, your line is open. Please check your mute button. We are unable to hear you.

Sorry, thanks. Can you talk about AUC during the quarter, if you could quantify that for us and also curious what sort of benefit you're already seeing from working with few vendors more deeply? How far along are you in that work and how do you expect that to impact where you see over the next couple of quarters and then to '18. Thanks. Teri List-Stoll: Yes. So, we don't actually get down to the sea level while I did reference and I was talking about kind of what we look at in terms of profitability that we do focus on that and excluding effects of that – that we try to find that right balance between maintaining AUC, but also taking the right investments and the quality of the product and so it's part of a number of metrics we are constantly looking at to get the right balance of product and customer experience in the store.

On the vendor piece, I wouldn't say – not going to call out a quantified impact next quarter and the next quarter because really is a journey starts with fewer vendors that we do business more deeply with. It will manifest itself overtime in terms of our economics we believe that's the case. It also means that we can leverage vendor capabilities. We had as an example a continuing thing that we're doing is a denim summit when we invite our most important vendors in and we're very focused on making sure that we have sort of proactive engagement with innovation whereas in the past often times we were slow. We're now starting to see innovation that's coming at the fiber yard and fabric level right at the beginning or in fact earlier than others are and that will show up in terms of product innovation. We've pretty radically consolidated our debt vendor footprint over the last couple of years. But again this is a journey I've worked a lot in my past life where people were building a strategic vendor footprint and it's a multiyear journey where you get really tightly integrated with strategic relationships and where I would say really just scratching the surface of the potential impact broadly on business.

Thanks. Good luck guys. Teri List-Stoll: Thanks.

Thank you. We'll go next to Mark Altschwager with Robert W. Baird. Please go ahead.

Good afternoon. Thanks for taking the question. You talked a lot about obtaining market share, obviously we can all see the disruption that's out there, but are there particular segments of the market where you see the most ripe opportunity near-term and anything you're doing here from a marketing perspective or strategic inventory investments in any areas to really go aggressive after the opportunity. Thank you.

Yes, here's what I would say is given the sort of market case if you want to describe at that way and the announcement that seem to be coming out as pretty relentlessly. We feel like we got a pretty broad based opportunity. What I – so it's less about is it in denim or kids and baby or dresses or something like that. We feel we need to be prepared and it's a department store that's closing a store and a center that we do business in, that's obviously market share that's released across a whole bunch of different categories and so what reflects inside of what we're doing now is just really being very intentional about how we're competing for those customers. Some of that is really blocking and tackling which is being present in a center, making sure the customers are aware whether it's true center marketing, whether it's true putting leaflets under windshield wiper blades, really basic stuff that their customers are invited to come into our stores of course we're looking at things like honoring loyalty programs, outstanding coupon sort of the traditional mechanisms that were used, but that's really a competitor often times of center-by-center sort of situation. At the higher level from a customer acquisition from a marketing standpoint etcetera, we're also really in the midway right now of what I would describe is being sort of competitively intentional on a way that we haven't done before. As we get an announcement of a block of closures or a whole chain folds itself up, we're doing the analysis kind of real-time to say where do we think we have an opportunity by brand and how we're going to go after that. So, this is – this isn't the future, but we do feel like there is an unprecedented amount of opportunity being made fluid right now and we want more than our fair share.

Thanks for the color and best of luck.

Thanks.

Thank you. We'll go next to Kimberly Greenberger with Morgan Stanley. Please go ahead. Once again, Kimberly Greenberger with Morgan Stanley, your line is open. We are unable to hear you. Please check the mute button.

Sorry about that. I was on mute. Art, you talked about the confidence the foundational work you're doing is right foundational work and correct me if I heard this incorrectly, but it sounds like you're saying that the – the progress at Old Navy and Athleta are some of the evidence that the foundational work which is the right work. I'm wondering is it possible that the great results coming out of Old Navy and Athleta relate more to being positioned well in a value segment with an off-mall presence in the case of Old Navy and in the case of Athleta being positioned to well in the athletic apparel space which is sort of better space. And I'm just wondering how do you – how do you come to the conclusion that it's the foundational work that driving the results fair and not rather better positioning with consumers and more in line with consumer want and desire and how do you then draw the conclusion from that – that the foundational work is going to turnaround the results at Gap and Banana? Thanks so much.

Yes, right, I think it's a really good question. Just to be clear, we're fully cognizant in the fact that we may have some incremental tailwind for the reasons that you mentioned and others. That said, the traffic is the same – pretty much the same across strips and malls that we're seeing right now and so we can see – and I'm very much about – not about the averages frankly, but about the averaging those businesses and getting down into the business at the category level looking for consistent patterns across similar real-estate and those kinds of things. And so I will always be pretty relentlessly objective and try to disaggregate the fact that certainly value has some tailwind right now and the active sector has some tailwind. To be clear, bit part of Athleta's business is lifestyle rather than hard proactive and that's the business that we're competing in, in Banana and Gap as well. So to say that there is probably a little bit of incremental tailwinds from some of that positioning is probably fair inside the business to see where we're winning and how we're winning is based upon capabilities that we haven't had in these businesses historically and – that in marketing again which to me is distinguishing that, and that's why we're putting our shoulder in those other businesses against storytelling component as well.

Thanks, Art.

Thank you. We'll go next to Oliver Chen with Cowen & Company. Please go ahead.

Hi, Art. I had a question as we think about millennials and generation Z, there is this movement also towards often to city and acceleration and thinking about on the increasing fragmentation it's happening in the marketplace. What your thoughts about how you'll prepare your company just to be well thought of by the younger generations and as you evolve the brand portfolio and the other thing we were just curious about is could you articulate the – your framework for thinking about the store base and just a strategic guardrails, as we do observe what's happening and there is lot of things that are going to happen in all of your control, which may affect you, whether that be specialty or department store closings and the rise of Amazon. Thank you.

That was a lot, bundled into that one sentence of all of our sales. I'll try to get some of it. Let's – let me go to your first statement, which is there are a lot of smaller companies to crap up various entry in terms of entering this business a pretty low. You've actually objectively looks fast and look at the doors that are being shattered etcetera. The reality is quantitatively the consolidation is taking place. So, it's perhaps fragmenting from the standpoint of the noise is out there, but consolidating as some of the share comes up and available and we've seen that happen in other geographies as well where the lead apparel companies in those geographies have been consolidating market share over the last several years. It is a big part of our thesis that because of our size and our scale or operating platform, a multiple brands targeted at different parts of the – different parts of the market that we have an opportunity to accelerate that share consolidation and that's not new news is what we've been executing against. As to millennials, I might turn again that on its head which is there are lot of brands out there today against the backdrop of millennials wanting to engage with brands that have a story and have authenticity that, in fact, are entirely synthetic. When we do the research and we talk to customers and non-customers what we find is that when we tell the story, people are super engaged in the depth, the history, the legacy, the sustainability story that we have, many aspects of the story that we haven't told which is why I'm very big on really getting the holistic storytelling out there in front of customers and non-customers. I've been spending a lot of time on this one because as I look at it now, I see the product work that we've done and the quality of the product that we have in our stores and I feel like our business is lagging, the product that we have in our stores and part of it is due to storytelling and as I've been meeting people, I am met consistently with the question of why aren't you guys telling the story, so, it's really high on my list right now and it doesn't mean, boom, boom, boom, a national TV campaign. We might use TV in some cases. It means really getting what is a rich, deep, authentic story in front of our customers and allowing them to engage on that. So I'm probably less concerned about that and actually will turn that less on liability than more of an asset that I think we have because of our brands and because of the relevance. Sorry, I was so enthralled with my own voice that I got into the second part. And that's just a two-part question, right, now two questions. The store base, the answer is really the same. However, that we've been telling you for a while which is we're going to be always on looking our store base, you say Teri indicated that we're bringing our net store increase down as a function of continuing to be prudent and trimming. Again, the average is hide the true story which is we feel like we have a real-estate opportunity in front with us with Old Navy. I highlighted my comments opening in 8,000 square foot format for Old Navy with the very early returns being positive and 8,000 square feet opens up a bunch of infill opportunities that we feel can be highly productive, but again early days on that. On the more mature businesses with Banana and Gap, we've trimmed some stores, we've trimmed a lot of stores under my tenure out of the Gap brand and we will continue to do that. While at the same time like we are in Times Square and others, we'll selectively open stores if we feel like there is a place where we're not serving the market appropriately. And then you get to break the outlet freed out of that as well where as a new outlet center opens that continues to be a strong business for us. We'll embrace that and we've had some pretty good success like we have is an example on Fulton Street in Brooklyn or 125th Street in Harlem where we have opened factory stores out of the outlet locations and have seen those stores performed very, very well for us.

Okay. Thank you. Thanks a lot, Art. That's it guys.

Thanks.

We'll go next to Simeon Siegel with Nomura. Please go ahead.

Thanks, good afternoon. Teri, can you put any color on the 2Q sales or margins implied within your first half EPS guide and then, sorry, if I missed it but have you saw the Athleta top-line opportunity at all, how large think the concept can grow? Thanks. Teri List-Stoll: I feel like every question I get asked I start by saying I'm not going to tell you that. I'm not going to tell you that.

Just don't get frustrated, Teri. We'll work something out, okay? Teri List-Stoll: But the only guidance with our new conviction with the guidance we provided on EPS for the first half and inventory for the first half. And then for the full year, we said we expect the comps to be flat to up slightly and we're holding to that at this stage given have feel good about the first quarter but that's early days and we need to see what plays out throughout the year?

And on sizing Athleta, we haven't sized it, so you didn't miss it. What I would say as I see a very long runway of growth in front of us, part of it is store count, part of it is just continuing overall to be an attractive segment of the market that is growing faster than the whole. And frankly part of it is the fact that Athleta business is not insignificantly really in the core of lifestyle and ready-to-wear despite the fact that every piece of clothing in an Athleta store has some aspect of performance associated with it. So it is a differentiated innovative offer that has a very large market that it can tap into really into the whole of her closet. So, we're very bullish on the growth opportunity in front of us.

Okay. Thanks. Best of luck for the rest of the year.

Thank you. We'll go next to Adrienne Yih with Wolfe Research. Please go ahead.

Good afternoon. Congratulations on the improvement particularly in the margin. Art, my question is on e-com, I know it's near and dear to your heart having led GID. And I'm wondering you have one of the lower penetrations in that piece of the business relative to some of your competition. I'm wondering if you can talk about kind of where you think that could go and incorporating sort of big data and an analysis to drive e-com and personalization. Thank you very much.

Yes. I'm actually pretty pleased with our penetration to be honest and feel like we continue to have a market share opportunity there. It varies pretty widely across the brands as you might expect. Old Navy has a very significant penetration of millennial customers that are engaged in that brand. We had Old Navy has the highest penetration of cash customers, which obviously, precludes online sales. So I'm -- I'm pleased with what we are and I think we continue to see a significant opportunity in front of us. And I sort of think about our digital business, our digital store in the same way I think about our physical stores in terms of everyday there is an opportunity to improve the quality of execution whether it's page load times, whether it's navigation, whether it's personalization, which as you know we have continued to put energy and effort again and where we even modestly personalized the experience we see positive engagement from the customers and the financial metrics all moving the right direction. Data and analytics is very much on my mind right now hitting number of areas of the business, not the least of which is certainly in e-com and you may have noted that just about a year ago we brought in somebody whose significant part of the responsibilities is to really pull all the data that we have about our customers across the physical experience and the digital experience, the card program etcetera together in a way to really provide that foundation for continuing to advance personalization going forward. So, it's certainly an opportunity that we have, I believe data analytics and AI are going to continue to play an increasing role, but it's out in the future right now and right now we have a lot – we have a lot of opportunity just by executing against the basics, but certainly in our future that will continue to see incremental opportunity there.

Great. Thank you very much. Best of luck.

Thank you. Our last question will come from the line of Lindsay Drucker Mann with Goldman Sachs. Please go ahead.

Great, thanks. Good evening everyone. I wanted to ask on stores, are you talked about how you've closed the number of stores in the past, what can you tell us about sales transfer first of all. Second, can you talk about how your performance was in the quarter in a stores that were in close proximity to some department stores that closed and also I noticed that you changed your -- or you mentioned that store target for the year, what was the driver of that change? Thanks.

Yes. So, on -- I'm sorry, what was the first?

Sales transfer.

Sales transfer, yes, we've talked about this before Lindsay, I'd love to tell you that we've closed the store and magically that moves into a nearby location at online and etcetera in our other brands. It isn't that easy. We worked really, really hard when we closed the store to transfer those customers whether it's into the Gap store into a Gap factory store to an Old Navy in the online business, but it isn't nearly as high as I'd like to be, and it represents – continues to represent an opportunity. And we do the basic things that you would recommend, push extra hard as we're closing a store to get our customers in that store up on our card program, e-mail capture, all those kinds of things. But I generally believe that when you close the store in the short-term, you probably giving up some market share and we've been I think pretty clear about that historically. On the store guidance, we pushed – we push some openings out and then we had some additional closures in Gap and BR. There is no drama inside of that at all as opposed to the fact that I think we've demonstrated and we'll continue to demonstrate that we're pretty relentless about grinding away and tuning and tweaking the number of store locations that we have and we're going to continue to do that. It was something that that Sabrina was very passionate about and I know Teri and I continue to share exactly that same passion. And again, it's on both sides of the equation right now. We're going to get out of stores that we don't feel the brands belong in or we feel like there is an economic issue, and then, we're going to open locations where we believe we have a selective opportunity to increase market share at the same time. And so what I don't want to do is imply that somehow, there was a strategic implication to the adjustment. It's really just a matter of course of business that we made that adjustment and communicated it right now. Teri List-Stoll: I guess, the only thing I would add to that is when you think about those changes. We have largely held our capital budget -- our capital spending guidance and that's because we are allocating some funding to remodels. One of the things Art talked about is the customer experience is very important and stores remained important to those customers and frankly we had gotten a little behind in some places. And so we're doing a very thoughtful job of going through our inventory of stores and making sure that they live up to the brand statement that we want to make to our customers and so, it's certainly nothing crazy, but a very intentional decision to continue to invest in our stores.

And just on -- thank you, and just on how the stores that you have in close proximity to a competitor that closes or to a big department store that closes how those performed relative to the balance of fleet.

Yes. I would say that pick any answer you want quite honestly. There is some stores -- well, some stores will close and you're looking to say okay, there is no overlap to our business because of the segment that they serve. Some stores will close and you suck the life out of a center if it's a major department store. But lot of the stores that are closing just to be clear, the closing for a reason. And it's not like they were necessarily the strong horse pulling the cart in these places. So, our view is very simple about this. That when a store closes, there is a certain number of jeans, pairs of jeans and denim and onesies et cetera, et cetera that aren't going to out the door of that store. And to the extent that we plan those categories and then our brands are positioned relevantly from the standpoint of quality and price that is market share that is now in play. And we intend to compete very intentionally across all of our brands and all of our channels to get more than our fair share. But there isn't a simple easy answer because it's such a mixed bag right now of who's shuttering a store, who is going out of business that some of it is highly relevant and some of it is pretty orthogonal to our brands and how they're positioned.

Great. Thank you.

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 first quarter results as well as the forward-looking guidance included in our prepared remarks. As always, the Investor Relations team will be available after the call for further questions. Thank you.

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