Ladies and gentlemen, please welcome Tina Romani of Investor Relations.
Good morning, everyone, and welcome to Gap Inc's Meet the Management event. Thank you for joining us today. Before we begin, I just want to remind everybody that today's presentation and the accompanying materials include forward looking statements. For information on factors that could cause our actual results to differ from the forward looking statements, please refer to our today's materials, which were filed on Form 8 ks and our most recent annual report on Form 10 ks, both of which are available on gapinc.com. In addition, a description or reconciliation of non GAAP financial measures included in this presentation can also be found in today's materials filed on Form 8 ks.
The agendas for this morning will begin with remarks from Gap Inc. President and Chief Executive Officer, Art Pax. Next, you will have the opportunity to hear from Sonia Singhal, Old Navy President and Chief Executive Officer, followed by a presentation from Art on the new Gap Inc. After that, we'll have a short break. When we return, Terry Listoll, Executive Vice President and Chief Financial Officer of Gap Inc, will provide a financial overview of both companies on a stand alone basis.
Following Terry's presentation, we will have a Q and A panel where you have the opportunity to ask questions of our presenters. Today's event is being webcasted live and a replay of the webcast will be available on the Investors section of gapinc.com. In addition, presentation materials related to today's meeting will be available for download on our dedicated transaction site, gapinctransactionannouncement.com. With that, I'm pleased to introduce Art.
You you do that for me? Right, exactly. So good morning, everybody, and thank you for coming. Really appreciate it. We've got 3 hours with you today.
We're going to try to stuff a ton into those 3 hours. We do want to make sure that we leave enough time for Q and A. So we're going to move through. We'll have opportunity for Q and A. We'll take a quick break, come back with Terry, etcetera.
So I just want to really set up very quickly these 2 new companies. And I can go through and point out, you know obviously the portfolio of Gap Inc, the new Gap Inc, and you know Old Navy. I would really sum this up into 2 things. I would characterize Old Navy as pure play Old Navy as a great example of mono brand scale and the new Gap Inc. Multi brand richness.
And that really is what underlies the thesis for separation. Monobrand scale flat out go make it happen. Sonya will take you through the forward looking perspective of Old Navy. It is a great business with a great model. Multi brand richness is really about pivoting the new Gap Inc.
To a different channel strategy where we're continuing to remix our channels to own what I call hand to bag, something we need to own inside that business model across all of our brands to exploit the customer richness that we have in a multi brand model. We're going to go reasonably deep on both. We're going to leave you probably a little bit unsatisfied because as we get closer to separation, of course, we'll go much deeper on the financials and on other aspects of the business. But we wanted to get the conversation started today. So I want to introduce Sonia to you and I could talk for a long time.
Sonia and I have really worked in the company in parallel for our entire careers inside of Gap Inc. But I really will just say one thing, which is that she is a leader that I endorse with 0 hesitation and great enthusiasm. Sonia?
Thanks, Art. Good morning, everybody. Good to see you all. Thrilled to be here to talk to you about Old Navy. Let me start with a little background on myself and some of my experience.
As Art shared, I've been with the company for 15 years now and sitting in this role of President and CEO of Old Navy for about 3.5 years. I also spent a year leading our international business within the brand. Prior to that, I was our Chief Supply Chain Officer for the enterprise. And I also had some time in London where I ran our European business as Managing Director for Banana Republic and Gap. I began my career in the auto industry, interestingly enough, and moved from there to high-tech in Silicon Valley for a decade.
And so cars to computers to clothing, interesting. I think the red thread for me has been that I am drawn to consumer companies and brands and products that live with people in their day to day lives. As I step into this role at Old Navy, it also is personal. It's a personal decision. It is a personal commitment.
And it is a brand that is very close to my heart. I was that teenager. Anyone here remembers teenage years or has a teenager who is tall, gawky and could not find a pair of jeans that fit me that I could afford. And there's nothing more important at that age than feeling good in your jeans. And so this is what Old Navy strives to do.
It is about making fashion inclusive and accessible and available to everybody. So it is personal for me, and I could not be more excited about the next phase of our growth as we spin and unleash the full potential of this incredible business and this incredible brand. So 25 years ago, Old Navy opened its doors and disrupted fashion. It's thought to make fashion inclusive versus exclusive. This original manifesto that you're looking at here was written 25 years ago and it stands in the hallways in our headquarters.
It's the first thing employees see today. It's as true today as it was then. And it begins with this line, Imagine that the world runs right. And this really embodies the optimism that runs through the brand. In the middle part of the manifesto, it talks about what we do.
We're about incredible clothing for the entire family, great style, fit, quality at prices that you can't believe. This is Old Navy. And we've stayed true to this manifesto from day 1. We've gone from that day 25 years ago to being an $8,000,000,000 powerhouse. And our North Star is stated here in that we believe in the democracy of style.
Style should be something that everyone can participate in, every ethnicity, every income level, every age and everybody. This is Old Navy. And as we look to the next chapter, this will continue to guide us in our path forward. It's a brand with a unique voice and it's been different from the get go, from day 1. And I can talk to you about all of those amazing culture moments that we've had.
I thought the best way to bring it to life was to show you a short video that captures the highlights of the last 25 years.
When I first started reporting on fashion,
which was more years ago than we're going to discuss, we wore hats to the office. Can you imagine?
A lot
of people say growing up means certain of jeans, imagined having enough money to rob those jeans and take the family vacation to the beach or just crack open a cold Turn performance fleets into a household name. Make puffers do all sorts of things. And don't just wear a dress, wear the pants. Can you spin seats? Before your 4th birthday, surprise yourself with $1,000,000,000 in sales, and then, double that number.
I'm seeing double. Make it $8,000,000,000 $8,000,000,000
That's insane. Turn it up
a notch. Ask yourself what's the funniest of everything.
Be all the Griswold's white patches.
Then do that and do big.
You're fierce. You're fierce. You're fierce. You're fierce. And you're vulnerable.
What about What about $1,000,000 donated to the Boys and Girls Club today? Get active. Open a store
in China. We're going outside, incredible energy.
Mexico. Times Square, because fun is infectious.
Shut the door.
Now let's take those doors now. The more the merrier. We're open to all, every single employee and all our customers. And to bring everybody in to make shopping fun again for everybody and every booty, you've got to say yes. You've got to create value.
Don't be cheap. Cheap is easy. Value is an art and also, the science. Oh, and here's the best part. Win the 1,000,000 of dollars.
All that means we stand for equal pay, inspiring future generations. Love is love and showing some love to our mother. So let's imagine, grow, squeeze, innovate,
Our scale, our momentum and our profitability. As we approach $8,000,000,000 in sales, we stand as the number 2 apparel brand in the U. S. And with 42,000,000 known active customers, we've been working hard to know more of our customers. This file size is growing and we have large potential ahead to fully activate that file.
We have strong momentum. We have delivered 7% net sales growth from 2016 through 2018 through a combination of comp sales and new store sales. And over the last couple of years, we've learned a lot around store openings. We've opened about 140 stores and tested into some new areas, in particular, small markets. We have largely stayed away from store markets before and I look forward to sharing more with you what we've learned.
It's an exciting component of our strategy go forward. Our online channel is of equal vital importance. And at $1,600,000,000 of sales, we are the 4th largest e com site in the apparel space. And we've grown at a CAGR north of 20% over the last couple of years. All of this is done through an enviable economic model.
This business throws off a ton of cash and has great profitability at 18% adjusted EBITDA margins. As we think about the path we've been on, I joined the business in 2016 and we drove from that point focus on the core, excellence at the core. What did that mean? That meant focus on our core categories that we had top share position in and growing those and focus on our North America business. Over that time period, we've added nearly $1,000,000,000 in sales.
And I want to use this moment to address our current business trends. Our first half has been disappointing, and we've shared with you some of the weakness we've seen in our women's assortment. We had allowed ourselves to get a little bit too narrow in the assortment offer as our customer wants more choice. As we look to the back half, as we diagnose the business, we've been able in Q3 to shift our units to better support the winning categories that we've had all year, categories where we've been growing, that's denim, that's active, that's fleece, that's outerwear and that becomes a bigger share of Q3 and Q4. And by Q4, we have addressed the breadth of the assortment with more color, more print, more pattern, more choice and coupled with exciting marketing, new partnerships and cut through promotions, we're confident that we can turn the business.
All that being said, the resiliency of the Old Navy business model and the largely consistent performance over the past 7 years and earlier gives me that much more confidence as we look to the future and we look to our ambition of achieving our $10,000,000,000 sales goal and beyond. The opportunity to focus as a standalone mono brand and mono company is going to give us that much more ability to move fast and to accelerate against our winning known strategies. Our competitive strengths are listed here and I'll start with the fact that we are this iconic American brand. You saw it in the video, we are woven into the culture of the American consumer. We participate in families and family moments, whether it's Easter dressing, whether it's 4th July parades, whether it's Thanksgiving and a fun family activity of shopping together or whether it's dressing as a family in holiday jingle jammies, we call them our pajamas.
We have been able to weave our way and participate with American families and families around the world and it is the cornerstone because of our unique voice and because of the consistency of that voice over the last 25 years. We're also a brand that has values and our values matter to us and to our customers. And of the top 10 retailers, Old Navy is the only one where you see our customers wearing the brand proudly in our logo on their chest. It's because we mean something. We represent something that connects to our customers.
We've got a highly profitable store base and 75% of our real estate is off mall location and so it has great economics. We've got a leading ecom channel at 1,600,000,000 of sales and growing. We've got an operating model and product operations that fully leverages the scale of this business. And this is a scale business. We want the cost advantages with that.
We want the flexibility that's associated with that and the innovation that that scale can drive. And all of this culminates in enviable financial model with great cash and great returns. So as we think about ourselves as this fantastic brand with all the potential, how do we measure that? As we look at our brand health, we sit as the number 2 apparel brand with respect to brand health. And compared to the others on the list, which are who are much larger than us, it is a remarkable accomplishment and for me gives us permission to grow.
And then this chart here is a summary of our customers. And what you can see here is that our North Star of including everybody to participate in fashion stands true. We have every ethnicity represented, every age represented, every income level represented, all genders represented and the size range that is the broadest among the broadest in the industry. And some really fun facts on this. We have as many customers that have household incomes below $75,000 a year as above $75,000 a year.
And it really solidifies this notion that regardless of who you are, everybody wants value. And at Old Navy, you can have great fashion at great value. You can have both. Why do our customers keep coming back again and again? It starts 1st and foremost with product.
A great example is how we focus on iconic must have items in our winning categories. And the Rockstar Jean is one of our highlights here. I'm wearing a pair today. We sell 40 1,000 rock stars a day. And it just shows you how this particular gene we have continued to innovate against it.
We have the latest technology in terms of stretch recovery. We've got HiRise, the latest trend. We offer destruction. We offer the latest shades and the latest washes, all at $25 And with iconic products such as this, we're confident that we can steal share for both the premium players and the value players. This has been a cornerstone of our product strategy and is just one example across all the categories that we play in.
In addition to that, we focus on these jaw dropping traffic driving items. A great example is the Dollar Cozy Sock, relatively new product we've launched. And last holiday alone, we sold almost $10,000,000 10,000,000 units of this Dollar Cozy Sock. It is a really fun item. Families enjoy them and it acts as the excitement builder during the critical Black Friday Thanksgiving weekend.
Another great example is the $5 flag tee. So who's ever bought a flag tee for their kids or for themselves? Hands are raised. Yes, oh, good. Look, and seen them at 4th July parades, right?
This last 4th July, saw them everywhere. And we've had this iconic item for 25 years at $5 Our customers look forward to this. The storytelling that we hear about families over generations embedding this product into their family experiences is really heartwarming and just a fantastic example of our product and our culture coming to life together. Our $7 Jingle Jammies is a holiday milestone and a holiday item for us that our customers flock to for the whole family, every age, matching pajamas, how fun is that around the Christmas tree. And then our $15 Cammie dress, really this is about Easter dressing and having that go to dress at that critical time in a really accessible price.
And so a few examples of what are the cornerstones of our product strategy. In addition to this, we're always looking to expand the end use of the assortment in Old Navy. Some examples of this is the active lifestyle space. We have about $1,000,000,000 business in active lifestyle. It's been growing really well and it is the number one category in apparel now and the fastest growing.
So we're paying a lot of attention here. As we look to future, we see potential to grow with respect to adding fleece to the assortment. And also dresses are another great example of extending the end use. This blazer that I'm wearing today, another great example of extending end use. We are all about having our customers wear Old Navy in whatever aspect of her life that she shows up in.
Let's talk about our stores. So we currently have about 11 40 stores across 49 states, the U. S. And Canada and Mexico as well. The returns, the 4 wall cash contribution of these stores is stellar, sitting at mid-20s and 75% in off mall locations.
We have opened quite a few stores in the last couple of years and learned a tremendous amount. In particular, as we've opened into small markets, we've opened about 35 stores in smaller markets. Historically, Old Navy has stayed at about 200,000 trade areas selling. We have seen great response. And we've heard this from our customer comments.
They want stores closer to where they live. And as we've deployed them, the returns have been great and have matched what we currently see in our fleet, albeit a little bit smaller unit. And while we're primarily concentrated in North America, we do see a nascent China business that we're working on as well as franchise partnerships. We've got we're in over 10 countries with franchise partnerships and we see that as a vehicle for growth in a highly leveraged model. Our e comm channel is also equally a vital importance with our stores.
And as you all know, those two channels work hand in hand for us. We have seen great growth in the recent years and sit at about 20% sales contribution to our total business. Our ecom business is of equal profit as our stores business. We've been in this digital space for about 20 years. We launched in 1999.
And so over the course of that time, we have really driven profitability. We've got scale and we've got cost advantage in our fulfillment. Our technology is well deployed and we sit in the top quartile of performance. The growth that we've seen has been driven by investments in site speed and site experience and reducing friction. And we intend to continue with those investments.
We currently sit as the 4th largest e com site. And I think that as we make the site even more effective and as we unleash the full potential of the omni selling opportunity, we see a lot of runway here. Currently, about 17% of our customers shop across those channels and the lifetime value of a cross channel shopper is 3 times as great as a single channel shopper. So you can do the math on how much upside there can be as we convert and as we introduce our customers across both ways to shop with us. Now time to talk about our product operations.
So here we are. We make, design, ship and sell 700,000,000 units of clothing a year. And that is a lot of units. And scale matters when you're talking about our size. We use our supply chain to give us cost advantage and flexibility advantage.
And over the years, we have developed deeper and deeper relationships with our top suppliers. Currently, about 20 suppliers make up about 60% of our sourcing spend. And one of the stories that I think is the least told in the value space is as these relationships have deepened and strengthened, what we can now deliver in the value sector, we could not deliver a few years ago. And it's because of the full unleash of the potential of the innovation, the component innovation from our vendors and the brand knowledge from our teams. You put that together, we've seen some real breakthroughs on product, whether it's the incredible denim that we now offer that can compete head to head with premium, whether it's the superwash tees, slub tees that are soft and cotton based for $5 whether it's Chambray shirting that wasn't available in the value space a few years ago.
All of this has been unleashed by untapping the full potential of these relationships. Our vendor base is also geographically diverse and we have the opportunity to move as needed to deal with trade challenges or accessing additional capacity. Ultimately, we're a brand that is a brand of values. And this matters to our employees. This matters to our customers.
We hear this from them. Our employees let's start with our employees. Old Navy has been recognized as a great place to work by Fortune's great place to work assessments 3 years in a row now. And we're really proud of that. And what our employees say is that they believe in the integrity with which this brand leads.
They believe in what we stand for. And what we stand for are opportunity for underserved youth, which matches right in the heart of what Old Navy stands for. And this is demonstrated by our increase in commitment with the Boys and Girls Club as an example. We stand for sustainability. This year, we put out some ambitious goals as it relates to water conservation and sustainable cotton.
We started the journey to reduce plastic waste in our business. And we stand for open to all and inclusivity. We signed up as a founding member to the Open For All Coalition, which is an organization across multiple retailers to fight discrimination. And we were the 1st retailer to enter Canada and Mexico with this pledge and with this organization. We're really proud of this.
Our customers know this. We're doing a more and more effective job being transparent with our values with our customers as increasingly that is a critical and vital importance. So I don't think anyone 25 years ago when the 1st store opened could have envisioned that we'd be standing at this remarkable place in history where we stand as in this position of strength as the number 2 apparel brand in the U. S. And the 9th largest retailer.
Yet what is I think the most interesting data in this slide is that we sit at only 3% market share. And the opportunity to grow share with weakening competitive set in the middle is really where we see and where we have the confidence to grow as we pivot to the future. So that's a little bit about who we are and where we compete. And now I want to pivot to what will drive our forward growth. Our growth strategy is very simple and very focused.
And it starts first with winning with product. We will win with product by defending our core categories, by expanding categories and by adding new product and new capabilities to the mix. We'll drive our online growth and with that extend our experience across both channels, improve that. We'll almost double our fleet to 2,000 stores in North America, predominantly in underserved small markets. And we'll acquire new customers and drive lifetime value, taking that 42,000,000 customer base, growing it through new stores and through online and getting more deeply connected to our customers to unleash the full potential.
What separation does for us is allows us to have the focus that we need to deliver with confidence this strategy, which we know is the right one. It's against known value creators from our past. And as we lean into the focus that standing alone will allow us, I'm confident that this will give us that path to $10,000,000,000 and beyond. So a little bit on each one of these strategies, winning with product. Right now, we have the number 2 or number 1 market brand market share position across knit tops, pants, shorts, sweaters, dresses, woven tops.
And we will be focused on continuing to defend here. How will we do that? We'll do that through focus on style, focus on fit, on quality and on price. Right now, our overall star rating for our assortment sits at about 4.7 out of 5 stars holistically. And every year, we are obsessed about improving.
Adding to that base, which represents about $90,000,000,000 in addressable market share, we will accelerate share in kids and baby, genes and active. Kids and baby is often an entry point into the brand. It's where mom comes, shops for her kids and shops for the family. It drives frequency due to the growth of the kids and the family. And we'll be doubling down here.
We already have a strong position. This space is consolidating, as you know, and we'll be extending a reach in our product space with emphasis on baby and emphasis on sleep. Our jeans business is strong. It's a $1,000,000,000 business now, our denim business for the family and we've added $300,000,000 of sales over the recent years. And we think we can continue with this momentum by offering more product choice, more fit choice, more size choice and more range across both channels.
And our active business, as we spoke about, is also a $1,000,000,000 business. And with the introduction and the expansion of fleece for the family, we see the opportunity to continue to accelerate share growth here. In addition to the categories that I've named, capabilities to give us more consistency and more margin expansion are of paramount importance. Consistency has often been the Achilles' heel of this industry. And so for us, it is a vital priority, a top priority.
And I want to talk a little bit about inventory optimization, which is really important and something that we think will give us years of opportunity ahead. A simple example, so this summer, our customers in the middle of the country preferred Capri pants. Our customers in the West Coast preferred skinny jeans and our customers in Manhattan wanted to participate in our high rise wide leg, the latest trend. And so an example of the opportunity to get to localized assortment and to better serve our customers through those aesthetic preferences, through size localization down to the store level, the size curve in a Manhattan store versus the size curve in a Bronx store is pretty radically different. And the more we can fine tune that, the better.
Weather differences, there's weather differences across the country and being able to optimize against weather is another important component. So these are all aspects of store level allocation and localization that we want to go after in a big way. And when you think about the scale of our units, those 700,000,000 units and optimizing them a little bit, A few pennies across that sheer number of units drops a lot of value to the bottom line. So that's all about the margin expansion opportunity as well as driving frequency. Testing is also another important aspect of our focus.
Minimizing risk against fashion volatility is critical. We're living through that right now. And while we've made good progress in terms of responsive units, we think there's a lot of potential in more holistically testing our assortment before we buy it. And so that will be a priority for us as well. And then the end to end digitization of our product creative process.
So modern PLM system, 3 d design and full integration with our vendors, our top vendors will really unleash, we think, innovation in our product, speed as well as driving efficiency. We also intend to grow adjacent categories through expanded size and through new product offerings. And Plus is a great example of this. So we already have authority in size offering. We offer 1 of the largest breadth of size from 00 to 30 in Old Navy with 8 different lengths for the family.
And we have a strong and small and growing Plus business, primarily online with some tests in stores. And we think about the average woman in America being a size 16 and the opportunity to better serve the Plus customer, we're quite excited about garnering the full potential of this business across both channels. And then in the future, intimates and beauty are a little bit further out there, but we think under the North Star of democracy of style. Our customers are asking for this product from us and we think we can bring this to life in a way that only Old Navy can. Let's talk about the fleet now.
So this is a really exciting component of our strategy. As you know, we have a strong healthy fleet today. The economics are fantastic. And with our recent learnings around opening in smaller markets, we now have the confidence to say that we plan to almost double our fleet in North America. And we'll primarily focus on these smaller markets.
And to bring this to life, in fact, there was an article yesterday in a local paper in the East Coast, in the Cape Cod actually, about this customer that wrote that said, we're a year round resident for Cape Cod. We love it, except it's been really difficult. One of the downsides is shopping for clothing for the family. And when Old Navy opened, it was like the cavalier had come across the hill. That was his quote.
And it just talks about the fact that he no longer had to drive that hour to get to the closest Old Navy store to shop for his family. And it's just one of the many opportunities we see across North America to better serve the below 200,000 trade area opportunity. These stores, we plan to have the same economic model as our existing stores, the same flow through. They'll be a little bit smaller in terms of unit volume because of the smaller population size, but we're committed to the same economic model. And as you know, every time we expand a store, the opportunity that has on our econ business is of vital importance.
So this is a quick graphic of our existing stores and you can see that there's quite a bit of white space. And as we look to our future deployment, while we have been very thoughtful about where we want to open, this still leaves us with untapped opportunity beyond. So today, we're committing to what we shared, which is an almost doubling of the fleet and we'll learn more, we'll test more in the coming years and keep this angle open for us. The opportunity here, as I mentioned, with digital is something that we will fully capitalize on as well. So with every store opening, we'll deliver omni channel capabilities.
We'll garner the trade area sales for online around that store and we'll look for that full potential. Okay. So, stores and then let's talk about e commerce. For us, we want to stay in that top quartile performance for our e com business. We have a fast site.
We have a frictionless site. We've added capabilities. That's all given us the growth thus far and we intend to continue there. We want to be we will stay mobile first. The bulk of our selling now is on our mobile site.
And we see this as table stakes and non negotiable for us. In addition to that, we want to add a personalized customer experience increasingly. We know our 42,000,000 customers. We know what they buy from us. And to extract the full value of the big data that that intersection gives us is the work ahead.
And we started down that journey. An example is our men's business. We have acquired a lot of men's customers and they're men's male only customers. They're not shopping for their family, they're shopping for themselves. We've been able to tailor our site and our direct marketing to be able to speak to these mail customers with unique content, with products that they're interested in, and that's been quite successful.
And that's just one small example of the journey of personalization that we will go on, both with respect to our site as well as respect to our marketing. In addition to the e com site, the power of our site, we're focused on the experience of our stores. And we have had about 300 or so store remodels, low cost store remodels in the last few years. We've been really pleased with the performance there. Our customers have responded really well to the elevated experience to the new technology that we've included with capabilities like buy online, pick up in store as we focus on convenience and our omnichannel capabilities.
We deployed buy online pickup in store across our U. S. Fleet this year and we've been pleased with the start. We want to lean into this and add new capabilities, new functionality and reduce friction in our store environment as well as in our site environment. And then customers, look, ultimately, it's all about the customer.
And we are early days in the journey for capital from capitalizing on the full potential of our customers. And we've worked aggressively to grow our file. You can see we've grown from 28,000,000 known customers to 42,000,000 known customers this year. And that bar graph is growing with every year. We can match now the bulk of those customers to what they're buying.
And as we lean into investing in data analytics and the ability to extract the value from the selling data and the customer file, we see lots of potential ahead. We've got components of loyalty right now. They're disparate. And as we go out on our own, one of the big things we want to offer is our own unique multi tender loyalty program. This will encompass all of our programs such as our credit card, our super cash program and will serve up something that the value customer has been asking us for a long time.
And we all know the drivers of value of a loyalty program, but it can drive in terms of frequency and engagement. And we're excited to have this as a strategy for us in the coming years. So listen, this is a brand that is unique. It has a unique voice and it is a powerful economic model as a business. So when you think about the strength on which we are entering this new chapter, it is a remarkable place to sit.
We've got great revenue, great scale, great profitability, a healthy brand, a brand that's loved and known by customers across North America and increasingly around the world. Our product resonates with the broadest swath of the apparel sector. And we intend to continue to lean in with focus against our growth priorities. And our growth priorities, we have multiple drivers. We have the opportunity to grow with new stores, with new products, with our online channel and with a cross channel opportunity.
When you step back and you think about this, the clarity of what Old Navy is all about and the clarity of our strategy and now the opportunity to take this incredible platform and unleash the potential as a mono brand company, it gives me a lot of confidence in fully capitalizing on the potential. And when you step back and you think about the next 25 years, what could that bring for us? Really the size is the limit. And I'd like to think about us as an $8,000,000,000 company with the framework or the culture of a startup. We're an $8,000,000,000 startup.
We have the scale associated with what that $8,000,000,000 gives us and we have the attitude and the energy and the excitement of the full potential of a start up attitude. And so as we embark on this next chapter, I could not be more excited. And I look forward to talking with you further in the coming quarters about the specifics around the plan and the journey ahead. So with that, thank you very much. And I will pass it back over to Art.
So, monobrand scale, multi brand richness, and let me just dimensionalize that for a second. If you think about what the operating model is of these two businesses. So, Old Navy, size of monobrand, 5 times the number of styles per of unit volume per brand versus the multi brand Gap Bank. 10 times the number of units per style versus the flow through and of the new Gap Bank. And then you think about that, those physical units going through roughly a third the number of stores.
You begin to see both the disparity of the two business models and the imperative in the opportunity to run these businesses fundamentally differently to invest behind the operating capabilities, the technology capabilities of these businesses fundamentally differently. So let me go to the other side of this then and talk about this new company that is in fact 50 years old. You're 25, I'm 50, I'm in pretty good shape for being 50, but we've got a lot of work to do. I'm not really 50, I'm a little bit than that. So first thing I want to say is that we connect, every apparel company does unless you're selling down and dirty just commodity products.
We connect with our customers emotionally, confidence through sustainable style. And this is something that is very inspirational for our customers and very inspirational for our employees. What I want to take you through today is what I call a game plan. And I can stand up here and talk to you about a 10 year view of this company. As I sit at where I sit right now in the world that we're operating in with the work that we have to do, I really have a 3 year timeframe.
And that's what we're going to inhabit with you inhabit for you today, both from an operating standpoint, a strategy standpoint and a financial standpoint. We'll come back to you closer to separation and really start building this out. But I want to take you through the shapes and colors of how I think about this today. It's a game plan, number 1, it sits on brands and platforms and I'll talk about that. It is a game plan where it's connected to purpose and profitability.
And when I look at profitability, profitability in my mind is very simple. Out of the dock on debut, we are going to accelerate cash flow, operating profit. We think we have a compelling shareholder value story to tell. Why purpose? Profit without purpose is hollow.
We know that today. We don't need a business roundtable declaration to say that companies need to do more for their employees, for their customers and their communities and simply generate profit. For me, and I'll illustrate a few examples of this, these two things are mutually reinforcing and tied together.
Got a
clicker problem here, so let's go on. Let me talk quickly about values: sustainable, inclusive and connected. These are values that we just popped out because they're popular and they're part of the common conversation today. These have been core to what this company stands for on an ongoing basis. Why?
Sustainability, 73% of customers say that they vote with their dollars. They vote with their dollars today because they can largely vote without compromising their consumption. That is really important, especially against the imperative of bringing a younger customer into this portfolio of brands. Sustainability is a critical thing. Yes, great for the planet, great for the business.
We signed the G7 Fashion Pact. We went to Liise Palace a couple of weeks ago, something we're very proud of. But it's just one little piece of the work that we're doing. You know about Athleta being a B Corp, etcetera. Secondly, inclusive.
Why inclusive? Good to do? It's an asset for us. It's about attracting the best talent starting with our stores all the way through every other function of the company to create an environment that is safe and inclusive where people can achieve to their fullest potential. And last connected, connected with our employees, with our customers, with our communities and globally connected.
Under customer, Sonia gave her statistics, we have 90,000,000 known customers, 32,000,000 known active customers and 7,000,000 and growing very rapidly in our loyalty programs. I want to then highlight just one thing and I was checking my Instagram feed for just a moment while Sonia was talking because it happens to listen through WhatsApp to what it's hearing and then pushes sponsored content into my Instagram feed. So we highlight here 2 things that are happening in this industry right now where we believe we are absolutely fundamentally uniquely positioned. Consolidation is taking place. I won't go into it, but you know what's going on at Amazon.
Walmart is trying to build a multi brand platform. They're starting, not going so well so far. But on the other side, we as consumers are assaulted today with constant newness, constant novelty coming at us in a way that's never really taken place over the history of this industry. I'm sure you know some of those brands. I just discovered 2 new white sneaker brands in my Instagram feed while we're talking.
Why? Because a few weeks ago, I bought a pair of Common Projects white sneakers and now my Instagram feed seems to think that I need 17 other pairs from 17 other brands. What's the point here? The point is in we're in the middle of this where we have the benefits of what takes place in consolidation. But on this platform, we can nurture small brands to be big brands.
And as you know from where you sit, most of these brands are not going to be big brands. Many of them are single product brands. Many of them top out at $75,000,000 or $100,000,000 because they fundamentally lack the capabilities to become multibillion dollar brands. I challenge you to go back and say how many have grown over the last several years, multibillion dollar vertical apparel brands. It is a very small set.
We have Athleta under $100,000,000 when we bought it, put it on the platform, nurtured its growth with capability and investment. And we see $2,000,000,000 in our sites over the next few years. Then let's talk market opportunity for a second. And by being 50 years old, we've made choices. Some of them are explicit, some of them are implicit.
But the choices that have limited our accessible market, which we're in the process of unchosing right now. So if you simply look and Sonia referenced this at inclusive sizing. Today, our brands in our stores really sell up to a size 16. 70% of women in the United States today buy a size 14 pant or above. We grossly under index in this space.
This is a choice that we have made. Athleta is leading the way right now bringing out 3x inclusive sizing which pushes them up to a 24 to a 26. And we believe there is a significant opportunity there today to serve a market that we as a company really don't serve in our stores at all and largely don't serve even online. If you look at our channel strategy, we are confined to specialty. And so as we build Hill City as an example, we're looking at wholesale, We're looking obviously starting out digitally native.
We're expressing the brand inside of several athletic stores, which you will see over the course of the next couple of months. And how do you build a brand in a modern way, which isn't put only stores in a traditional regional enclosed mall. So there's a very big market out measured here in the 100 of 1,000,000,000 of dollars that today as a company by virtue of how we have historically done business, we've largely shut ourselves off from and we are opening the aperture for additional opportunity. Customer, quick view through customer. First, I want to point out on the right hand side the fact that this brand portfolio is highly complementary complementary across use occasions, casual, professional, active, special occasion and complementary across the broad range of pricing.
In the business you're in, diversification is a good thing. We believe in this multi brand portfolio of richness that diversification gives us the ability for consistency and to take some of the volatility that has been the bane of this entire industry's existence. On the other side, the multi brand asset, those 35,000,000 known and active customers, we know the value of a customer who is multi brand and multi channel is 10x a casually engaged customer. We also know that they do shop some across brands and some across channels. The opportunity for us is the intersection of a deeper share of wallet and a deeper share of life means that we have an opportunity to really significantly increase the value of those customers.
Why does that matter? It's a structural asset for us when it comes to marketing investment. If we can invest against the customer that is worth way more to us than it is to a competitor, the economics of acquisition, activation, retention and frequency fundamentally are advantage to us. One last thing I want to point out and we'll go deeper then is that pesky profit piece. This is a visual representation of what is really a channel story today as you look at our brands.
Specialty is challenged, you know that. We're already taking action on Gap and Specialty stores and we're going to continue down this path. I'll give you a little bit more information on that. No surprises Banana Republic more attractive, but some Specialty opportunity there as well. A very profitable, mostly stable factory store business where we really need traffic.
That's the issue and we're putting our shoulder against that. And then an e commerce channel that is a multi $1,000,000,000 business and Athleta that we see on a path towards $2,000,000,000 they're both attractive and growing. I'll come back to this. So let me talk our game plan for a minute and I want to go into just a little bit of detail, detail that I'm constrained by my time. But I want to talk briefly about Gap and Banana and then want to move to our growth brands and really focus on Athleta, which is a rocket for us.
And then talk about the platform and why the platform? The platform is the fabric that stitches these brands together in a way where the whole is more than the sum of the parts. GAAP. So everybody in this audience will handicap GAAP. I'm not going to go down that path right now.
What I will tell you is I am absolutely not unbiased about the opportunity that we have with this brand. I'll give you some of the facts, 89% brand awareness, 62% net promoter score. It's an exceptional net promoter score if you just look at how you calibrate those scores, a strong and growing e commerce business. Our strategy here is really pretty straightforward, which is lead in products. I'm going to touch on that.
Put quality marketing against it to reach a younger customer and to generate footsteps on our digital business and inside of our stores and then continue to enhance the experience. And my word for the experience really is hand to bag. We have all the components today to offer a seamless frictionless experience for the way, especially a younger customer shops. Hand to bag, we have a 4.9 app rating on our apps for this portfolio, but we have not done to stitch these together in a seamless way. So hand to bag is a critical focus for us as we go forward and it also connects to a younger customer.
So I'm delusional if I press it harder, it will actually work. But anyway, let me take you through just a little bit of the anatomy of the turnaround here that we're working in the business. And the issue with Gap brand as you know is it truly is a dog's breakfast of bits and pieces. It is our oldest brand. It is global.
It is multichannel. It is men's. It is women's. It is kids and baby. It is body.
It is active. When we report our external numbers, you're seeing the amalgamation of all of that together. The simple reality of GAAP and a turnaround is that the North American business is the bellwether. The women's business is the most important. Women buy the bulk of apparel sales.
The bottoms business is the loyalty category. And for us that means denim. For the August, September October timeframe, we drew a line in the sand. What we said was we are going to gain share in denim, plain and simple. It is how we have gotten the flywheel turning before in our other brands.
It is what I did when I was running the brand in 2012. We said we're going to gain share in denim and that is going to be the fuel that powers the turnaround. So let me share a few facts with you. We flowed products in late July. So we really have 6 weeks of read underneath us.
I could go to a lot of numbers. We typically don't do that. But as I look at the women's business powered by denim, we're seeing a very solid double digit comp in that business, both in margin and in revenue. And so early returns, I'm super pleased. We set out to do something.
We're seeing the results of that. And I think there's a lot more where that came from. I'm not calling a turn. I will not do that until we have a turn solidly in hand. But I've lived this before and I've done this before and the early indications are very positive.
So I want to take you then into one little piece of marketing. So what we're doing these seasons these days is it's not really a campaign. What it is, is we produce assets for social and video and then we split our buys basically roughly fifty-fifty across digital, paid social and then whatever organic social comes in is a bonus. So a 60 seconds denim anthem cut down to 30s, 15s and 6s, which is what shows up in your Instagram feed. This is 115 features Alessandra Garcia.
You may have seen it. It's product focused and an index 600 times above where typical content has and it's the best video product oriented content we've had in many years. So what's she responding to? She's responding, number 1, to trend, product that is on trend with RISE, secondly with body diversity. That's what I see, but it's also what our analysis tells us.
Intent to purchase is very high. That is one of many assets that is helping bring the customer back into our stores. Let me talk stores. So you saw the chart where I showed you the directional relationships between our channels. You know because we've talked about it and we're taking action that we have an issue in our Specialty fleet.
We are well into the restructuring of the fleet, well into the restructuring of the fleet. It will yield significant benefit. And what I said when I stood up in front of you and talked about this was, I will not continue to do business in stores that we shouldn't be in and locations that we shouldn't be doing business in and I will not continue to do business in stores that don't present the brand at brand standards and we're well into that. Any surprises? The one surprise I would say is the degree of the intensity that landlords have of wanting to keep a gap store in their centers.
And it doesn't actually surprise me. What it has done is it's open up a conversation about how do we do that. Now there are some centers we're leaving. There are some centers we want to be in, but the economics don't make sense. That can lead us to a conversation about how do we change the terms, downside the store, reposition, etcetera.
But we are well into this. We'll continue to report on it and we're going to make progress. But on the other side, what we don't talk about and what oftentimes I think is undervalued is the fact that there is a heartbeat inside the Gap specialty store fleet that is strong, that is relevant, that is profitable and is connected to our customers. And those are the stores that our customers shop in every day that they love that we make money in. And so I want to show you 2 clips of video.
The first is probably a store that if we didn't know anything else about it, we'd dismiss it. Garden State Plaza, Paramus, New Jersey, I would encourage you to go see it. Nothing super special about the store other than our customers love the store and we have staff in there that drives the business. No special product, we didn't remodel it. But the store is now driving a 35, 2 year stack inside that store, comp stack in that store.
And we believe that there is nothing but upside there. I'll show you that secondly. And then I want to also show you a concept store that we have. We have 3 of them. This is Encinitas, California, North of La Jolla.
It's in a strip center next to a trade $50,000,000 to $2,000,000 Trader Joe's. And it's really about flipping the economics of specialty retail upside down. Lower traffic, lower rent, higher conversion, great 4 wall model. Early days, we have 3 of them, 1 in Annapolis, 1 in Cherry Hill across the river from Philadelphia and one in Encinitas. It's a work in process.
I'm not signaling that we're going to take a fire hose and start spraying capital back into this business. I will not do that until we have a prudent business case for reinvestment. But we do have work underway. If we don't innovate and we don't test, we die. So let me show you Encinitas first.
I'll show you Garden State's second and then continue on.
Encinitas is a really unique experience. It is a seamless customer first experience from the minute you walk in the door till you get in the fitting room and cash out at the register. We have implemented a very different real estate strategy and we're truly in the customer's path. We are right next to her grocery store, her dry cleaners and her just picking up coffee.
We're creating a different shop flow fixture layout to really kind of open up the vibe and experience, starting with this open window concept. We really want to open the sight lines, give you visibility into the store and hero the product because that's what it's about.
What we do differently is we really reflect our customer and her style in a really well told story throughout each shop.
We also have done something different with mannequin. We actually have fewer mannequins on the floor, but we have these big mannequin expressions showing her how to wear our latest denim, our latest knit and just bringing the cool back to Gap.
Never seen a customer this excited about a brand just being dropped in their community. Sky is the limit from here.
We're proud of our heritage
and our legacy, but we are so ready for our next 50 years.
Garden State Gap stands out for me because this is an example of where small changes can have a really big impact on your business. When I came here in March with Maria, she was trending down 6% on the year. I asked her what she felt needed to happen in the business. She said, Jess, I need more room for the kids and baby customer. My moms and dads, they can't fit strollers through here.
We decide to open up the kids and baby area, given more room for her to shop and to navigate through the pictures.
So some of the work that we did around that based on her recommendation was actually downsizing some of our women's assortment in order to expand on kids and baby, which is the growing customer base she has in the store.
There was
a lot of work done around fixturing, clarifying assortment, navigation and sight lines. How do you open this up so that when I walk in, I can see all of our businesses. I want a customer to know that we're there for the entire family. She went from a down 6 to 1st month out at a positive 9, then a positive 15. For the record in 2018, she was up 15 then 2.
So not only is comping and building sales, she's building it on her best year ever.
I mean, we're comping a camp. It's a campathon that we're going. Our campathon starting May,
June
July. That's how we took
just 3 days
that we missed this month and
we're going down for only 2 days next month.
I'm excited for the fleet. We're starting to navigate through the wake of change, whether it's a remodel or it's an investment in New York City or here at Garden State Plaza. The one thing that is the same between all of them is the customer mindset and filter.
We're closing stores because we have stores that are not relevant. We have stores that are very relevant and I would encourage you to go out and see them. 17th and 5th, we created a Dedham experience in that store. If you haven't been in, go look at it. You may not get to Encinitas.
If you happen to be in Philadelphia, check out the store at Cherry Hill. It's in the center that's anchored by a Wegmans Supercenter. There's a Costco and a Trader Joe's coming into that center. It's right across the aisle from an Athleta store. And then go out to Garden State Plaza.
I know it may be tough to go through the tunnel or across the bridge to get to New Jersey, but that's the 3 d expression of the brand. That's not a tourist center. That's an everyday customer coming in and shopping and loving that store. So you'll make your own determination as to whether there's juice left in this brand. We believe there is absolutely juice left in this brand.
Let me shift to Banana for just a minute. So I took the E Train up this morning from World Trade to the 7th Avenue Station and I looked at Banana customers. What is the Banana customer and what is the place for the brand? It's super straightforward and this is why it's frustrating to me that people don't understand what this brand is all about. The department stores continue to struggle.
There was a customer on that E Train who works in a professional environment. It might be their first job or they're out of grad school, they're working in an office. They need clothes that are a little more professional, a little dressier and where do you shop for them? What's Banana's proposition? Easier access.
Nordstrom's has how many stores? Banana has 400 some stores, easier access, same or better quality and better price points for professional polished clothing, plain and simple. I see those customers every day. I have 4 of them in my family as well. We think there is a simple opportunity here that is other struggle Banana has an incredible market share opportunity.
We'll talk about this more. We're winning right now in Men's. We're bringing a younger customer into the business as we continue to generate rebrand awareness. We still have work to do in Women's. But this is a solid vital market where there's a share opportunity being put in play as department stores struggle.
Now our little rocket, Athleta. We bought Athleta less than $100,000,000 We put it on the platform. We set it with customers, with capital, with marketing money, with talent. And we have business that over the last 7 years has grown at 23%. This Athleta would not be where it was if we hadn't put it on the platform.
And it's a great illustration of the power of the platform. Do the math on it, you do take a 23 CAGR and just run it forward, you see that we have very significant upside opportunity here. I can honestly tell you in this business, I don't know what the limitation on this business is. Let's look at a few of the facts. 41% brand awareness at $1,000,000,000 right now, 80% 80 net promoter score, which is exceptional, exceptional.
This is a brand that customers love when they become aware of it. Dollars 24,000,000,000 market opportunity in active alone and Athleta uniquely straddles the space of the performance active lifestyle. And it's truly an omni business, 43%, roughly fifty-fifty between stores, one pool of inventory and e commerce. What is the brand? What is the positioning?
Very, very simple and we think very unique. Performance, beauty and sustainability. Those are the 3 legs of the stool of this brand. Nobody is playing in that space like we are. We believe that there is a significant forward looking opportunity that is informed by stores.
We have not opened a single store that has given us any indication of diminishing returns to additional physical locations. And so we see a significant store ramp in front of us here. We see opportunity in the online space to continue to grow that business. Those two channels work symbiotically together to create a larger business. It is only in the United States today.
We don't have an outlet presence. We'll be opening our 1st outlet store over the course of the next couple of months. We haven't done international expansion, but I have given Athleta and Janie and Jack to our franchise team on demand from our franchise partners to take these brands around the world through our franchise organization. Then our small growth seeds, some simple facts. Hill City, the younger male sibling of Athleta, essentially the same brand positioning for a man, performance lifestyle.
We're building it in a very different way, starts out digitally native. We have plans for a pop up shop. We have an athletic truck that we're going to be taking to sorry, a Hill City truck taking to locations. We'll be expressing the brand in 8 to 10 Athleta stores over the course of the next couple of months. And we have some very interesting wholesale opportunities to put the brand in other people's real estate to build brand awareness.
Intermix, all the action in designer and premium contemporary right now is online. Intermix has a small fleet, 36 stores. We've cleaned the fleet up, but a super exciting online business growth opportunity where we've seen the business grow at roughly 22% over the last couple of years and we believe that we can significantly accelerate growth there. And you're fully aware of the department store struggles that is making market share available. And then Janie and Jack, which many of you have asked about why.
It's a jewel box of a business neglected inside the Gymboree portfolio. We bought it for nothing, but we didn't really buy it because it was cheap. We bought it because we saw an opportunity. Clean fleet, underexpressed in stores, online opportunity, clear positioning as the occasional occasion based kids and baby retailer, under expressed in the outlet space, no international presence at all. We see a very significant and profitable opportunity in front of us with Janie and Jack.
Once again, all these sit on the platform, which allows us to take smaller businesses and grow them and make them into big businesses. So I've talked about the platform. Let me go a little bit deeper into it for just a moment. What I want to do right now is just give you just a tiny little mea culpa on my part. And the mea culpa really is about since many of these things in the platform are not new topics Don't switch the slide until I'm ready to do it, okay, are not new topics.
The issue with respect to these is really the learning that I have had is the difficulty of driving fast and enduring change in an organization like this company. And one of the things that I really want to point out to you is that we are unlocking change and unlocking opportunity through the act of separating these two companies to complete the build out of some of these capabilities. Let me just talk about them really quickly. But it really reflects a go to the next slide. Really reflects an important from 2 in terms of a pivot from a cultural standpoint.
Number 1, brands responsible for all operations with very limited leverage. We've been a house of brands and we're moving as we speak to brands that are really focused on the things that are customer unique. The second thing is brands that had a full stack of independent functions, finance, HR, marketing, marketing operations, store operations, you can go on a long list. And again, as we speak, we've already taken those and worked to go to a place where we're platforming those capabilities to get both efficiency and effectiveness. And it gives us clear ownership, clear accountability and most importantly consistent processes across all the brands.
And then the 3rd piece is decision making and this probably is the biggest one. As we speak, I'm consolidating decision making to bring it into the hands of far fewer people. We've been too consensus based as an organization and we're going to move away from that and we're designing a management structure and an organization structure that reflects far fewer people participating in decisions so that we can move faster and farther and generate enduring change. So let's talk about the platform just briefly. And there are really 5 pieces here that I want to focus on.
So the first is an efficient cost structure. We'll come back to you and we'll talk and Terry will go through some of the dis synergies. But in my mind, what we have is an opportunity for further SG and A reduction that is metered in several 100 basis points of SG and A. We've done the benchmarking. We've done the calibration.
You see what the opportunity is, we're deep into the process right now with a line of sight towards significant SG and A reduction. So I have actually 100% confidence here that we can chase a whole bunch of cost out of the system between headcount and spend in the course of the separation. 2nd piece is strategically applied data. This is not a new topic. What omni was 3 years ago is a cliche buzzword.
Big data, machine learning, analytics has become the buzzword today. For us, this is real. And it's real because of 2 areas of focus. Number 1, inventory optimization. It is a margin opportunity and it's a working capital release.
We already have 27 models operating that we're feeding today. We believe there is a significant opportunity for margin expansion and working capital productivity. And the second is marketing effectiveness. The imperative for this company is to bring the younger customer into the fold. We spend close to $200,000,000 a year on marketing today through this new Gap Inc.
I don't believe we're getting our full value out of that. I actually would like to spend more, but I want to make sure that we're spending it in the right places. Today, marketing lends itself to analytics like it never has in the history of business and this is our 2nd priority. The third is to fully implement the product model that we've been putting in place. You've heard me talking responsive.
Sonia mentioned it as well. We've built the back end capabilities. We have not fully expressed them in the front end of the business. Where we do, we get results. Let me give you an example.
PowerVita is the primary knit bottoms complex in Athleta. We buy PowerVita pre season to traffic trend, which is flat to low positive single digits. We've grown the business in the mid-30s over the last 3 years. How? By feeding units into the business because Athleta is largely a units business by using our responsive capabilities where we have an 8 week pipeline.
So it's a great example that yields top line, it yields margin, Mark's doing a bunch of things in Banana Republic. We have these examples scattered around, but we haven't built it out. So Mark Breitbar who is President of Banana Republic now has full unfettered responsibility along with our Head of Supply Chain to push this into our businesses quickly and generate enduring change. Customer access I talked about, it's simply remixing out of the specialty space as is appropriate. I showed you the new store work that we're doing, growing the online channel, continuing to equip the franchise model to hunt around the world, and then selectively embracing and looking at licensing and wholesale opportunities.
And then last, sustainability. You'll notice that I have line of sight to P and L levers attached to each of these. Why is that? Because these aren't a fantasy. These do impact the P and L.
And most people will have sustainability and they'll have a picture of planet Earth there. It is important for planet Earth, but it's also important for the P and L. So let me tell you a quick story. So I'm holding an ugly polywovenditzyprintblouse. Just imagine that.
Let's name her. Her name is Gladys. I can use Gladys because Gladys was my great aunt. And like this blouse, Gladys was a little homely also. I can say that, rest in peace, Gladys.
Don't do anything. So let's tell the story of Gladys because right now Gladys started life in
an oil
well, got extruded into poly thread, woven into fabric, shipped to India where the fabric went through a mill, shipped to Vietnam where the fabric was cut and sewn and dyed and printed, packaged to a dock in a container on a ship, to a port, to a trucker train, to our DC, to another truck, to the back room, to the front room, to the clearance section. And that is the long tail of waste that we as an industry generate. So next time you go in a store, don't start in the front and look at the first 20 feet. Well, it would be great. Buy something.
But then go to the back and look at the non dom wall, which is where we and everybody else hides our mistakes. Sometimes the mistakes are it's just didn't execute well. Sometimes the mistakes are we thought it was a good idea and it turned out super ugly. And a lot of those mistakes are we guessed wrong. So the opportunity for both margin and working capital release by eliminating that tail of waste for us a not insignificant percentage of units that we sell below cost every season, Limiting that long tail of waste and the impact on margin and working capital release is significant.
And that's really why sustainability 1st and foremost starts as part of the P and L lever as well as being the appropriate thing to do for the planet. So let me finish up here and I want to go back to this, which is our starting point today, a 3 year game plan. And a game plan again that is focused on accelerating cash flow, accelerating operating profit and standing up a company that we think has a compelling value creation thesis. We have line of sight to let's hit the next slide. Line of sight to pretty significant movement with initiatives already underway to improve the economics of the channels that are not attractive and to continue to grow and accelerate the profitable parts of the portfolio.
As we get closer to separation, we'll obviously provide more financial detail that underlies this chart. So let me end really by focusing back on the compare and the contrast. So monobrand scale, multi brand richness. We're moving this company with urgency to operate in the new model. It starts with consumer relevant brands, what I call own hand to bag, a strong omnichannel platform, the advantage capabilities, taking advantage of scale across the total brand platform, leading the way in sustainability, all adding up to a 3 year game plan, accelerate cash flow, accelerate operating profit and create value.
Thank you. We're going to take a quick break now. I really would like it to be 10 minutes. We're just a tad behind. So grab a coffee, come back in and we'll start back up with Terry in 10 minutes.
Great. We'll go ahead and start again with the financial section now. We may or may not have a clicker that works. Here we go. So let's start by the numbers.
I think you heard pretty loud and clear from Sonya and Art some of the disparities between the fundamental business models of the company, right, in terms of the size and scale of the units in Old Navy versus those in Gap Inc. And then contrasted to the size and complexity of the style assortment at Old Navy versus that of Gap Inc. They're just fundamentally different business models. And here you can see some of the numbers, right, in terms of customers and the magnitude of the online business, the scale. Each of these companies will be better positioned for success following separation.
These are iconic brands that will be focused in 2 they'll be in 2 much more focused companies going forward, significant scale, broad customer reach, unbeatable foundation for customer access and sufficient earnings capacity going forward. So let me ground you a little bit first in the GAAP in historical results. There are these are the results as reported, and they can contain certain adjustments that you're familiar with. Again, these are the historical 'sixteen, 'seventeen, 'eighteen. The 'sixteen and 'seventeen amounts here are presented both as reported and then excluding adjustments from restructuring, impairment and the insurance proceeds from Fishkill.
From there, I'll take you through the highlights for Old Navy, which is prepared on the carve out basis of accounting, and then the results and highlights for Gap Inc. With Old Navy pulled out. And I would caution that when we actually get to the separation financials, the new Gap Inc. Will may look a little different than these historical numbers because at that point, it will be reported with Old Navy as a discontinued operation. So the accounting will be a little different.
As we get closer to separation, we'll be super transparent on all of that, so you understand both historical and then go forward expectations. So let's start with Old Navy. You can see a strong history of profitability of this iconic American brand. Sonya said Old Navy is uniquely positioned at that intersection between traditional specialty and traditional value, taking the unique attributes of both, has a strong growth plan rooted in the predictable profitability of store growth and supplemented with category and geographic expansion possibilities. Despite its current positioning as the number 2 apparel brand, Old Navy has only low single digit share, implying significant growth runway.
As we've talked, there currently is some pressure on the business with the confluence of some macro events macro impacts and some product acceptance issues, primarily women's. Sonya talked about this, and we do not believe this reflects any change in the fundamental strength and growth prospects of the brand going forward. The path to $10,000,000,000 and beyond is clear and the ability to do that with more consistency and driving profitability is enabled and accelerated by the separation, provides more focus, more flexibility on capital allocation that are tailored to the specific Old Navy growth strategies that Sonia covered. Oh, now I'm getting ahead of myself. Really, we're not good at this.
We have so many strengths. This is not one of them. So gapping, I think here the opportunity is also clear. And as Art said, the work is underway to drive profitability and establish a healthy core from which to grow going forward. This starts with the Gap brand.
As Art talked, the fleet rationalization is an important element of that and that is on track. And as we've disclosed previously, that will provide $90,000,000 of earnings benefit on an annualized basis as we move through the fleet optimization. This also enhances the channel mix with the profitable online and value businesses representing approximately 2 thirds of the total and the specialty the other third down from about half today. So that enhancement that Art talked about in his presentation. As you know, the customer journey is increasingly omni.
Art mentioned hand to bag. So the traditional view of profitability by channel is inherently limiting with mobile shopping being resulting in a purchase in the store, shopping in the store resulting in a purchase online, a purchase online resulting in a return in the store. It's really important that we look at the omni results. We'll still measure store profitability, of course, but we will increasingly be talking about the omnichannel results because that's exactly how the customer is shopping. As you know, we have been focused on productivity in Gap Inc.
For some time. We've delivered meaningful savings under that program. We're in the midst now with new gapping of reimagining what that operating structure and operating model should look like, how it can operate more effectively and deliver cost savings using this common operating
platform that Art referred to. It would also
have much more focused and platform that Art referred to. It would also have much more focused investment choices similar to what we talked about with Old Navy. Separation provides a clear opportunity for us and a real urgency and catalyst to continue to drive the efforts to a much larger scale as we move forward. Importantly, as we improve the profitability of our iconic brands, we'll be driving growth in Athleta and some of the other smaller brands that aren't mentioned. Athleta clearly is well established to continue its growth trajectory in a very profitable way going forward.
So let's get to the financial implications. Since announcement, that's surprising, there have been 2 areas of focus, capital structure for both companies and separation related charges along with the dis synergies and stranded costs that will come out from the separation. On capital structure, we won't be going into a lot of detail today. We are still performing a pretty thoughtful deep analysis to determine the optimal capital structure for each company, including return of capital plans as we move forward. We want to make sure we position both Old Navy and New Gap Inc.
For success, while evolving the business model to the refined strategies that have been presented here today. We'll come back with specifics closer to the separation on what those will look like. But I would reiterate that the fundamental principles of capital allocation have not changed. The first use of operating cash will be to reinvest in the business to drive growth, largely on an organic basis. Both companies will have a commitment to return of capital shareholders.
Historically, Gap Inc. Has made use of both dividends and share repurchase for this purpose to provide a good return of capital. As we move forward, both companies will review these and come up with return capital approach that fits their business strategies and plans for growth. So M and A, you heard a little bit about that is the possibility in the future for either company, but it's certainly not the priority in the near term. So moving to separation related costs and the dis synergies.
We are providing our current view of the expected one time costs related to the transaction and also on the expected dis synergies at this point in time. It's important to note just a couple of things. Our current view of these costs are largely consistent with what we originally modeled when we were looking at the separation decision. And therefore, we continue to believe that the separation does represent a significant opportunity for value creation as we move forward. So let's start with the dissynergy discussion.
The combination of dissynergies and stranded costs relating to the separation continues to be largely in line with the expectations, as I said. Some areas came in higher, some areas came in lower, but overall, we're at the low end of our initial modeling assumptions when considering mitigation plans. On a going basis, we currently expect gross dis synergies before the planned mitigations in the $150,000,000 to $175,000,000 range for Old Navy the $225,000,000 to $250,000,000 range for Gap Inc. This is on a gross basis before mitigations. This represents approximately 2% to 2.5% of revenue.
The higher amount for Gap Inc. Represents the fact that it contains more of the stranded costs as we spin off Old Navy as standalone and then GAAP Inc then retain some of those costs which become stranded. We are actively working the mitigation plans for these dis synergies and the numbers presented here are net of those identified and planned actions at this point. Art mentioned the magnitude of mitigation is obviously a more of a strategic priority for Gap Inc. Than it is for Old Navy, but it is top of mind for both companies to be able to set up a lean and efficient structure, not just for the cost savings it provides, but for the efficiency, speed of decision making and ability to enable stronger business results going forward.
We're deep into the planning and execution of the mitigation actions, and we are confident in our ability to deliver on the expected net dis synergies, which net to about 1% of revenue of the respective companies. Now, given the nature of how the separation will occur and the fact that we will have transitional service arrangements in place, initially at separation and to varying degrees over a near term period, These will be a little lumpy in how they come through in terms of how the gross synergies come through, how the mitigating actions come through. As we move through separation, we will provide more transparency on how we expect that to play out. And in the course of all of it, we'll be reporting both companies on an adjusted basis, so that you can see the core operating results apart from any separation impacts that will be more temporary. And then obviously, the last point is that that 1% of revenue, obviously, both companies will be working aggressively to mitigate even that amount over time to continue to drive productivity as a platform for growth in both companies.
The last financial piece then I would turn to is the cost. Well, may or may not turn to
it. Perfect.
Onetime separation impact. The separation related investments will be a combination of both expense and capital as is presented here. We expect the majority of costs to be incurred in fiscal 'nineteen 'twenty with some tailing into fiscal 'twenty one. The majority of one time outlays are for separation of the tech platform and the logistics platform. Those are the places where we have been most integrated in the historical Gap Inc.
Where we've created some scale benefit and then bringing those apart is where more of the cost is. And then of course, the consulting advisory fee severance, the things that are necessary to be able to drive the mitigation actions that we have identified. It is important to acknowledge that not all of these are true incremental costs. Some of them do represent an acceleration of plans for example, modernization of our IT platform. So there's about $100,000,000 included in there that represents effectively an acceleration of spend.
And then of course, in the capital line, there's a substantial portion that's related to a distribution center that is required as a result of the separation, but of course gives you a much longer runway for capacity going forward. So as I said, the numbers for both the synergies and cost to separate are largely in line with what we originally modeled and fit nicely in the financial model that we used as part of the decision for the separation initially. So just to wrap it up, I'll come back to the compelling strategic rationale. I think you heard this loud and clear and what Art said, what Sonia said in terms of the excitement that comes with the ability to take these 2 companies and play to their strengths, build new strengths and really drive a growth platform that's much more focused, that is really providing the capital allocation enhancement to drive the strategies that will win. It's a real catalyst for both companies to be able to think through an operating model structure that is more efficient.
And then ultimately puts them in a better position to continue to thrive in a retail environment that's continuing to change. So with that, I'm going to open it up for Q and A. We'll bring Sonia and Art back on stage. We've targeted about 30 minutes. We'll see how much time we need and we'll go from
there.
We have mic runners, so we'll use that since it's being webcast.
Yes, since we've been webcast, let's get a microphone. So plenty of hands.
Yes. Okay. Nina, we'll start with Mark over here.
Thank you. Mark Altschwager from Baird
and appreciate all the detail today.
Maybe first question for Sonia. Can you help us understand the processes at Old Navy that can drive more consistent performance versus many of the specialty apparel retailers out there?
And how will operating as a
standalone company allow you to minimize some of the misses that have driven the software performance
kind of late 2018 early 2019?
As I shared in the strategy, managing for consistency is a key priority for us go forward. And as we look at our product operating model, we have strength there. We play to our scale. We play to our repeatable model. Yet we do see opportunity to improve.
And one of the biggest areas will be capabilities around testing our assortment more holistically before we buy and testing for product acceptance with our customer as a key unlock for that consistency.
Adrienne? Adrienne, you Barclays. My question is for you. I think we have a good feel about the exact target market for Old Navy and some of the other brands. I'm still unclear as to discussion on who you think the core target is Gap going forward in its new transformation?
Thank you very much.
So when you say Gap, are we talking Gap?
Gap brand actually. Yes, Gap brand specifically.
So as I highlighted, we have an imperative in the company and this really applies to all of our brands to bring younger customers into the mix. I could have showed you some data that says that on the below 30 customer, we do under index across the board. Where GAAP is at its best is when and I'll just use the personal examples where my wife and then my daughter who has a 2 year old are shopping together. We view kids and baby and it has been in the past and we think it will continue to be an extraordinarily important vector for bringing in a parent, a younger parent into the brand shopping for their child even if she's not engaged in the woman's assortment. The archetype of who you target at from an age standpoint for the entire fashion apparel industry is always a 28 year old.
GAAP at its best has really been a much broader demographic. But right now, the target market and that's why I'm looking at the metrics associated with our most recent media campaign, we targeted through a channel strategy and content to reach a younger customer to generate awareness and intent to purchase. I was very pleased with the metrics. And that's really a sort of a 25 to a 40 year old customer is really what a target is to bring those people back into the brand. At the same time, if I look and you didn't ask this question, but I'll answer it anyway.
If I look at Banana, as I mentioned, we're really moving the needle right now in the men's business and really engaging a younger customer and we've seen that perform. We have to use what we've learned there and push it into the women's business. And then Athleta has a huge aperture opportunity here to really increase brand awareness across both older and younger customers.
Great. Since the mic will do Alex and then Roxanne and then we'll move over here.
Hi, Alex.
I'm right in a row here.
Alex Wolverson Goldman. One question for Tania. A lot of the growth at Old Navy is coming from the small store strategy. I wonder if you could give us a little more color on the economics of those stores, size of the store, how square foot productivity compares to the rest of the fleet? I think you mentioned that flow through was somewhat similar, but what should be the favorable contribution you should expect from those stores?
So we expect a similar cash on cash contribution to our existing fleet and a similar return in the mid-20s as we've stated. The stores will be the similar square footage, although slightly smaller volume units. And yet we are holding ourselves to that same economic model for the small stores. And as we think about small stores combined with online together, which is also a channel of equal profitability, we think that the combination will allow us to continue our healthy returns that we've seen thus far.
Just clarification, when you say small stores, you really mean
small markets?
Small markets.
Yes, small markets.
Store size is about the same.
The unit, meaning the volume from those stores slightly smaller because of the smaller market.
Hi, Roxanne Meyer, MKM Partners. You provided us with an operating model for Old Navy and for Gap Inc. In terms of sales, gross margin, EBIT, EBITDA margins from 2016 to 2018. I was wondering if you could break out the assumptions embedded in your 2019
guidance by brand? And then as
we think about the longer term, what your targets are for only being GAAP Inc as we think about margins?
Sure thing. So, perfectly fair question. We're not going to be guiding by the 2 separate companies for the remainder of 2019. What I would say is that for the first half of the year, we've been pretty clear that the bulk of the margin pressure we've been experiencing has come from Old Navy's results. And so, you can kind of factor that in.
We're obviously expecting to see improvement with Q3 as the business was able to impact the product in Q3 and then more fully in Q4. So that's how we would see the progression. And then on a go forward basis, we as we get closer to separation, we'll of course be providing more detail about the investment thesis and the growth expectations for each company.
Hi, Lorraine Hutchinson from BofA. You've laid out about $1,000,000,000 of incremental costs associated with the spin. As you sit back and think about the transaction and spinning Old Navy, how long do you think it
will take to really get
the return on that investment? And what will that look like? How will you measure success of the Old Navy spin?
Maybe I can start and you guys can add to it because obviously there's a couple of places where you're going to create value from the transaction, right? Some of it will and some of you have published in terms of your own views of what are the sum of the parts. And so there's no question by separating these 2 companies, you provide more transparency to the market and enable the market to value the 2 pieces based on what they see as the fundamental business prospects and value creation opportunities in the respective and there could be value unlock from the sheer ability to have that transparency. And then obviously, the rest of the value creation thesis comes from the application of the strategies that Art and Sonia talked about today executed with more consistency, more focus and frankly more accountability as 2 standalone companies with an investor group that is looking for delivery on the metrics. And in terms of how we will measure, it will come down from as we move into the separation timing and we talk about each of those tenants of the strategy.
We will be providing them what are the metrics that we will be using what will the metrics that you should be using to be able to hold us accountable for the plans we're laying out.
We've taken control of the mic over here.
You in the back, I'm
sorry. You have to
come back a little away.
Marty Shapiro, Retail Tracker. Sonia, for you as well. Could you talk a little bit more in-depth about the Old Navy customer? What percentage of your transactions are done on an Old Navy card versus another card, even a Gap Inc card? And is that an unlocked through loyalty?
And it sounds like your strategy with all of these small stores is heavily leaning on a click and collect model, a la Target, what they're doing versus more of a ship to home model. So what does that say for your expense structure and profitability
going forward? Would you like to add a couple more questions in there, Marni, as well? So this is all you guys always say. We always say limited to one question. Okay.
So the first question was around credit card, right? And listen, our Old Navy credit card is a strong component of how we engage with our customers. I'm not sure if we break out separately by brand, we don't. But I will say that it is a key foundation of what will make up our multi tender loyalty program go forward. And we've seen strong returns with our credit card program, and we expect to see that continue go forward.
Your second question was could you repeat that? Yes. I mean, I think our buy online pickup in store capability has been a key feature for us, the one that we will continue to lean on. And as well as our online fulfillment for our e comm channel direct to home, less so from our stores, so more from our online distribution centers. So, as I've been sharing, both of our channels are really important.
The stores will act as not only the shopping experience that we want to have experientially. We have 350,000,000 customer interactions a year in our stores. People want that personal engagement. They come to us for that. And as we layer in the BOPIS capability and build out that functionality, which allows us then to shift our customers to both channels, we see that as incremental.
I just I would jump on that.
Do I have
a mic here? Yes, jump on that for a second and just talk about, in particular those capabilities, because you implemented VOPUS first. We made an intentional decision to roll that out in Old Navy. That to me is a really great example of competing investment priorities in the company as it's structured today. Absolutely important for you.
I fundamentally believe and you see this in many places that as you move up the stack from a price point and a customer standpoint that BOPIS is going to be a much larger penetration into the business and some of our other brands. We're lighting it up in banana and in Athleta over the course of the next couple of months. And we expect that to be something to really engage with as well as the subscription model, which I didn't mention, but you've probably seen where we're implementing essentially a rental model inside of Banana, which we think is going to be interesting as well. So I think BOPIS is going to be a real unlock across the new GAAP, Inc. Portfolio and you've obviously gotten it running with it right now as well.
Carla Casella from JPMorgan. I know it's early days to start talking capital structure, but I'm just wondering if you have any looser thoughts about how you can capitalize each of the businesses or maybe even whether you think they could be higher or lower levered than what the current businesses today combined?
Tara, you want to grab that?
Sure thing. So obviously, as you can see from the data we've provided, there's a tremendous amount of cash flow generation coming from the Old Navy business. And so as we think about how we will set up the respective capital structures, we want both companies to be positioned with sufficient cash flow to be able to support their growth strategies. And so the debt will be allocated based on how we see those respective cash flow generation prospects. You know that historically, we tend to be pretty conservative on the debt side.
We've been sitting with a pretty low amount of debt all along and a pretty healthy amount of cash on the balance sheet. It's one of the benefits we believe that we offer as GAAP Inc. Today and we would expect to allow each company to be equally well positioned. There is no intent to create an overly leveraged situation coming out of this. We want both companies to be in a strong financial position as they launch their respective strategies.
Great. Thank you. Jay Sole, UBS. Art, you just mentioned with the BOPIS example how the both companies have sort of had competing investment priorities over the last couple of years and that maybe has created some tension within the company. As you work on the separation and you see how it's evolving, how do you expect the culture of the company to culture of the company to change?
You mentioned they're going to consolidate the number of decision makers in the company. But do you see things really improving for the better in terms of just some of the intangible things about the company working there? And how are you going to drive that?
Yes. I would say that we're what we're really
doing right now is we're peeling back the layers of 50 years of accumulated process, culture, practices, technology, etcetera. And it's a really healthy exercise to sort of crack open the whole chest cavity of cost and chest cavity of culture and technology and stare at it really hard. So this is very big on my mind right now. And I was just thinking as I was listening to some of the other conversation, what are sort of the key parameters in my mind that are not negotiable from a cultural change? So let me just go through them for a second.
First of all, we have to strip out. We have too many layers, spans of control, all those kinds of things that slow us down from a decision making standpoint. We're just not fast enough. We're not decisive enough. And a lot of it is, as I said before, distributed decision rights and we're consolidating those decision rights.
We're just going after the things that we need to do without a lot of debate and going and making them happen. And that will probably impact some people in the organization who don't want to sign up. Too bad, we're going to move forward. The second thing is, we've had a compensation structure that has been more safe and at risk. And as I and Tonya, you can talk about this yourself, I think you probably feel the same way.
As we stand up these 2 new companies, I absolutely intend to reboot our compensation structure and to really put comp at risk related to a performance and accountability for my senior team. I think it's essential. And I want people on the team who are all pulling in the same direction who can see the upside and are running toward it as hard as they possibly can. Cannot be retail these days if we're going to do what we need to do, can't be a safe environment. There's no such thing as a safe environment.
So that's a big piece of it as well. And then frankly, just fewer again, fewer decision makers around the table to really bring that together, a really tight core of people and a couple of new voices that I think to me that represent some of the new capabilities around loyalty, around data and analytics. We're sitting there right around loyalty, around data and analytics were sitting there right at the table with me. So those are some of the previews of it. It's a big piece.
It's one of the primary conversations I'm having with the Board right now, because it does have pretty material impacts as we think about how we run the company, comp structure of the company and even some key people in roles. I don't know, Sonia, if you want to add to that at all, but
The culture of Old Navy is has got some really strong components. There's a culture of winning. There's a culture of fun. And we want to maintain that. At the same time, we are looking to add almost triple our employee base as we add in the enterprise functions.
And it's such a great opportunity to embody the startup culture that I spoke about and to launch this new company with these tenants of customer centricity, winning and playing for the long term for the full potential of the brand, using technology to our competitive advantage. And so as we think about this once in a lifetime opportunity, we're being quite thoughtful about how we want to show up, building on our strengths and adding to some of the new attributes we want to include to strengthen the fundamentals of the company culture.
Tina, I think we need to go to the back row a little bit. Get people up there, Sharon.
They're really in the mobile. They're just there.
Everyone. Great. Thank you so much. First, Art on sustainability, I think you gave a really articulate example of
the Ditzy Gladys Blas.
What I didn't hear is how you prevent that bad guess from happening. And then secondarily, on the Jamie and Jack outlets opportunity, you articulated, I wonder why you would take a premium priced business and blow out the outlets because that has caused ruin for many other brands. Sonia, for you, I'm wondering if you could tell us as you move from 1200 to 2000 stores, what do you expect for your average store volumes? Is it like 4,000,000 to store, 5,000,000 to store? And which peer retailers did you benchmark yourself against to validate that that was a good target for you?
Okay.
That reduces up all our meeting question time as we answer those questions. So let me start with how you do it. The first thing is buy less inventory. We as an industry and I would say this is the industry, we have gotten to a place today where we are overly dependent upon markdown and clearance inventory in the system. And we put too many units into the business.
What it does is it puts promotional pressure on us and the industry in total. And so we're looking very, very seriously at opening
the gap. We always try to
buy below our traffic trends that we have AUR upside of opening the gap to a broader spread between traffic and unit purchases, the script units out of the business. Now what I could say is and of course just buy the good stuff. That would be easy to say. How do we just buy the good stuff? Number 1, responsive.
The closer to on shelf that we buy, the more confidence that we have that we're buying the good stuff. The second thing and you'll see this directly in Gap, where we were 2 quarters ago to where we are with the assortment in the stores today, We have taken probably 35% to 40% of the styles and CCs out of the store. You will have a hard time finding Gladys in a Gap store today, whereas 2 or 3 quarters today there was way too much Gladys going on in that store. Simply speaking, Gap doesn't have authority nor should Gap be playing in poly fabrications and ditsy prints. It's not where the brand stands.
And so we've stripped some of that out right off the top. And then Sonia mentioned testing. We're continuing to use testing. We believe there's an opportunity when I got back to inventory optimization to bring analytics there on optimization, right product, right place at the right time, early indicators of demand. We're doing some very interesting early proof of concept modeling on using social data, Google Analytics and scraping the web to look for early indicators of consumer demand by trend.
So it's really bringing the art and the science together, but it starts with a common set approach that this industry has been awash in inventory and it is time to tighten our buys up and eliminate that tail away both from a sustainability and from a margin standpoint. So the second question was?
Yes. Oh, sorry.
Jay and Jack. You jumped to the conclusion because you used the words blowout. We believe there are some modest incremental opportunities for store expansion as what I would call it, but in some of the key centers. So if you go to some of those key centers like Woodbury, like the Sawgrass, etcetera, which are those big gun outlet places. We don't have stores in those locations.
I have no intent. I believe there's an appropriate ratio of outlet stores especially, no intent to blow it out as you indicated. But I think responsible incremental site selection in some of these key centers, they're really tourist oriented. And this is a brand that even given its small size, the outcry from our franchise partners around the world, the Middle East and Asia, etcetera, give me this brand now. This is a brand that's well known and very well respected.
So it's really responsible expansion, not a blowout strategy where we think there's protection of the brand, but some incremental revenue and margin opportunity. Sonya?
So, we have quite a large store deployment today. And as we look at where we're co tenanted with, it's a lot of the lifestyle value players that we succeed next to. And simply put, one of the drivers that's given us confidence to put out our growth plan around store build out is the fact that we are under deployed relative to that competitive set. And so, we do we have confidence playing next to them in the same value center, and we see that they're further deployed than we are. We know we can compete with them.
So, So, I'm not going to name the specific names, but you can in the value space, whether they're beauty players or whether they're big box, discount, high low players, so a combination of the 2. And then you asked about our unit volumes for the stores. As I mentioned, the flow through will be equal, the profitability will be equal to our existing stores, and the average sales annual will be slightly lower. So, that's the right on the P and L.
Okay. So, Oliver, right here, Nina?
Hi, Oliver Chen, Cowen and Company. Thank you. Sonia, at Old Navy, there's been a tension between key items versus breadth versus depth and also managing basics versus novelty and also the tension between efficient inventory management versus not being boring. What are your thoughts about the evolution of that and the guardrails you'll have just to generate the consistency of positive comps and managing fashion versus art versus science? And Art, as we think about learning systems and data science, a lot of your background is digital.
What are your thoughts on what are the needle movers in terms of personalization as it may apply to customers or inventory allocation by stores and the future of the store.
No question for Teri too, Oliver. We did just on a trifecta here. So, Sune, you're first.
Yes. I think our customers come to us for both, right? She wants the fashion essentials that are trend relevant for the here and now in a expressed in a way in our apparel that is easy for her to consume. And then she wants the dependable basics that she can count on with size integrity for the family. And so we're that is the day job is finding that balance of both.
And as we look forward, what we have put in place are some controls around managing the assortment architecture, managing the breadth of the assortment by the good, better, best, the basics, the fashion, the seasonality aspects. And we think that that will help us manage that, as you say, tension with more confidence go forward. And then when you layer in some of the flexibility that our product operating model will give us to respond to true demand with unit flexibility, with shorter lead times, that also acts as an enabler to get that balance right as we're closer in season and dealing with unplanned events.
So to answer your question on needle movers, this is very close to my heart. The real opportunity for us right now isn't a ticket issue. If I think about pricing, it's a yield issue. The whole industry is promotional. We are promotional as well.
And within the chaos of pricing and promotion that is out there today, we know and we have proof points that we can improve yield. And each point of yield, you can do the math, each point of yield is worth a ton of money and has a very material impact on the bottom line. If I look at really bringing analytics and machine learning to bear, so I think we've mentioned before that we are in the process of rolling out a proprietary assortment and by planning tool, which runs all the way down to store level allocation. That has the API for machine learning and machine decisions relatively as it relates to store level allocation. So right level right product, right place at the right time.
Today, you will encounter this if you go out and go across a cross section of your stores or the new Gap Inc. Stores. You'll see one place where the inventory is sold through and another store that has an excess of inventory. Right there, there is a yield opportunity. And that is material and that's again, that's just the right allocation, the right replenishment and then also making sure, Sonia noted, that the store gets the right size curves.
The simple reality of our business simplistically is that we sell out small sizes first on the coast and large sizes first in the center of the country. And as we move towards even a store clustering model for personalization, getting that size curve right, so that we don't have those inventory balances is worth a ton of margin yield as we think about the business. And then the last thing you mentioned personalization. I just point out that we are personalizing today. And when you go to our websites in digital form, you're experiencing if we recognize you by a cookie or credentials as you come into the website, you're going to experience a personalized site opportunity where we're presenting your landing page differently, we're presenting our product recommendations differently through our Certona product engine, a number of different things we're doing there.
And when you personalize the web experience, every needle moves in the right direction. Our revenue per visit goes up, our conversion goes up, etcetera. So we're just scratching the surface. And I know everybody's talking about it right now. To me, it's really about focus.
We have a really nice robust population of data scientists inside the company. But frankly, we've been doing way too much in terms of focus and it's really narrowing it back to what I talked about inventory optimization, margin and working capital release and marketing effectiveness, which relates to again the imperative to bring a younger customer into our stores.
Ed?
Hi, thanks. Ed Yruma with KeyBanc. It seems like one of the success stories in Gap Inc. Was really Gap Factory. Now that you untethered the businesses, do you expect the competitive dynamic with Old Navy to change?
And then just as a quick follow-up, where will the Fishers involvement lie and kind of what Board did they remain on?
So we will become competitors on separation. Should we hug now and know what's coming? And that's just a simple fact. And Gap Factory does compete certainly closer to the price point Sole Navy has. There's less fundamental site overlap right now given where Old Navy stores are located versus Gap Factory stores are located.
But that is going to be a fact and we're going to be friends and then frenemies and then competitors, I guess is the right way to think about it. But again, Sonia pointed this out and so did Terry is that as much as we'll be competing, both of those businesses still have low single digit market share. So there's a ton of the market out there that comes out of other people's hides versus direct competition with each other. What was the second question? The second question was on the fixtures.
Yes. So working that out right now, we do have to stand up 2 boards. We'll get the opportunity to stand up 2 boards, which we're in the process really right now of doing that board level recruiting. We have not done a final allocation of which board knows member where we have a board meeting coming up and we'll continue to look at that. My expectation would be that the Fishers would have separate representation on each Board going forward.
We will not have Board members that sit on both boards. We just feel like it's the companies are too competitive and that's really something that we think clean board separation makes a lot of sense.
Craig
Johnson, Customer Growth Partners.
It's sort
of a related question on the Board, but just on the customer side. You had variously 32,000,000 active, known active, 42,000,000. So I don't know whether that 74,000,000 are unique customers or not. But certainly there's a lot of cross shopping across the brands. So the question is at separation, who owns the customer?
Who owns the e mail? Who permissioned e mail to market and
so forth? Absolutely critical question. We've been working that because we have to legally separate customer ownership. And then we have to be able to look and say if there's any potential revenue impact due to the separation of the file, how are we going to mitigate that revenue impact. So the simple answer is that some customers are owned uniquely by the brand that they signed up with in essence.
So if you gave your email to a Gap brand, in some cases, you gave your email specifically to Gap brand and not to Gap Bank. Those customers that are uniquely owned by nameplate will go with the nameplate. And then there are customers who are owned by Gap Inc. And our intent there would be that we would split those up and then both companies would own those customers and made a better man win, if you will, as we go forward. A woman.
A woman. The better person. Yes, exactly. So, and that's really the intent. We've looked at it pretty carefully here.
We'll also be splitting up our credit card right now, which is a multi brand credit card that covers all the faceplates. I assume, Sonia, you will have your own faceplate for credit card. And then we'll continue to have a multi brand credit card that straddles the Gap Inc. Portfolio.
Janet? Jan Kloppenburg, JJK Research. For Terry, you gave us gross dis synergies and net dis synergies. Could you repeat those numbers or the gross again for me, please? And could you tell me if they're going to track simultaneously or if there's some time lapse in between the gross and the net?
For Sonia, I understand that the testing processes are becoming more rigorous. I'm wondering if that discipline is embedded in the second half assortments or if it's something we'll see as we go forward. And for Art,
I was
just wondering if you could talk about Gap Inc. Expansion opportunities. And I'm trying to get to the organic top line growth opportunity of the company. You have Gap maybe via shrinking and you have Athleta growing. So how do we think about that top line?
And is there an international opportunity for Athleta? Thank you.
Sharon?
So on the gross synergies, of course, there will be a transcript available, but on the gross for Old Navy were $150,000,000 to $175,000,000 and the gross for GAAP, Inc, New GAAP, Inc. For $225,000,000 to $250,000,000 And that was about 2% to 2.5% of revenue. And then, of course, the net was closer to the 1%. Not sure I entirely understand your question in terms of tracking, but the intent of Right. Those mitigation actions will be going after very aggressively.
And so there'll be a lot of them that will be in place upon separation. And some of the gross dis synergies will occur at separation, some of them will occur as we move through TSA resolution. And so as I said, it'll be pretty lumpy and we will provide as much transparency as possible, so you can break those out. But obviously, the objective of both companies is to get after the mitigations as quickly as possible, so we can have those front loaded and offsetting.
On the lumpiness?
On the lumpiness, yes.
Sonya?
Yes. So developing the right assortment is this combination of art and science and the testing component is the science part. So right now, we test about 15% of our assortment and that will play into the back half. It's largely focused on the women's space. In addition, the art side is equally important and I have a lot of confidence in our creative teams that have built upon the learnings from the first half.
And also we've announced that we've added to our teams, Nancy Green is our Chief Creative Officer, and she's coming over after being President and CEO of Athleta for 6 years and has a great history in the brand in her prior experience. So the combination of our creative talent coupled with the science that will bolt on further in our future strategies that we spoke about will be the vehicles to drive the to manage that volatility.
And then let me address your question, and I was thinking getting into all three of us, your question on sort of the top line, bottom line profile. It really depends on business. So if I focus first on GAAP, we've been very clear about the fact that we are willing to let go of some market share and revenue that is very low quality revenue to improve the overall economics of the business. We are working our way through that with store closures right now. We believe that will largely play out over the course of the next 12 to 18 months.
Inside of Gap, we have an online business that is growing. The outlet business has been modestly negative, but the intent there we're quite confident about is to stabilize it. And so it will result in some short term revenue loss and then stable revenue would be my intent that is improving in quality as we improve the bottom line performance of the business. On Banana, it's really about stabilizing profitable business. The specialty channel needs to make some improvement, but we have an attractive factory store business, a growing online business.
And we believe that we can stabilize that and again improve revenue quality. But I don't see significant downside associated with bananas top line going forward. And then the rest is really a growth story. The overall online business obviously growing at a significantly greater rate than the overall market and we're confident we can maintain that. Do the math on 23 CAGR on an Athleta $1,000,000,000 this year, you can see what's in front of us there.
I won't say that we're going to radically accelerate that, but I think you should have felt my confidence about the opportunity for that brand that is really wide open as we look forward. And then the 3 smaller businesses, which right now are growth seeds, I want a plan that I can put in front of you and I will put in front of you that's really a 3 year plan. It starts out by a very robust acceleration of cash flow and operating profit. That's the first job in hand. To me that lays in place a platform for longer term growth that is really focused on how do we radically accelerate operating profit and cash flow right out of the gate.
And to do that as much as possible through controllable levers versus aspirational levers. That's our intent.
Dane, can you go to Michael?
Hi, Michael Binetti with Credit Suisse. Thanks for all the detail today. Could you I guess a couple of questions. Could you speak a little bit more to some of the specifics by each of the brands on the mitigation efforts for the dis synergies since it's a fairly large number there, it would be good to hear some of what you see. And then I guess just at the end
of this, we have to kind of we have to
come out of this and think about the earnings power of the company. I think in the first half of the year, the margins of the company were down about 200. It sounded like you were saying the Old Navy margins were maybe more than that on that side. So that can help us orient ourselves for what we're going to see as we roll forward some of the Old Navy numbers you put in that cut off at 2018. And then I'm assuming because of some of the big one time upfront costs, I know you don't want to get into full detail on the capital structure today, but do you think the GAAP side of the business needs some debt to get through some of those upfront costs as we look into next year and try to, I guess, put together some of
the bigger pieces as far
as what the earnings power will look for after 2019.
Okay, Teri, it's all yours.
Yes. Okay. So let me start with the last question first, because I've already gotten the first question and you might have to help me with that. So on the last question, we do have sufficient cash available to execute the separation. So there's no intent to lever to be able to meet the cash obligations for separation.
So you can kind of pretty much take that piece off the table. On the actions for mitigation, for and Art, you certainly can amplify this. We are in the process of a process that we're calling reimagination of New Gap Inc. And reimagination because as you think about the tenants that are expressed, there is a real opportunity to think very differently, not just about how we do the work, but what work we actually do. And as you have that consolidation of decision rights, which enables you to standardize a lot of the work that goes on in the organization, you are then able to create better platforms to support the business, more centralization, which can drive better technical mastery development and higher efficiency.
And so some of the pieces will come in big chunks, like as I think about the finance organization supporting a more standard process, there's a lot of different ways for us to organize and take out significant costs to the process. Others of it will come in small chunks, like today, everyone does their stand up photography differently, separately without scale. As you think about bringing that all together, you might only say $4,000,000 or $5,000,000 but that's just one small activity we do many different ways today. And as you start to really look at all of that work and think about where do you want to do it, how do you want to do it, do you want to do it, you really get very significant opportunities for us to go after.
Just a bunch of places, I mean, marketing operations, which is all the non creative aspects of marketing. We do it all around the organization and every brand today, pull it together and do it more efficiently, get better leverage with our vendors. Store operations, where it's everything from getting posters in the windows, which I would like to see go away, toilet paper in the bathrooms, etcetera, do it all together, standardize and get efficiency out of it. And this is a host of opportunities where we have grown up with separate brands, largely operating distinctly and separating inside the organization. And as I said on that slide, the brands should really focus on the product, the voice of the brand, engagement, the store, digital and physical store experience and what can we pull together whether it's hosted in a brand or posted at center that allows us to pivot to an efficient and an effective operating platform.
I wish I could tell you that it was this over here and boom, we're done. That's not the reality of this. 50 years of doing business the way that we have done it means that we've got to go in and really go after this function by function, spend by spend across the entire organization. And we are knee deep, no, we are chin deep right now in making that happen. And I've actually been as impactful as this is on the people in the organization, I've been incredibly encouraged and energized by the opportunity to see that when you open up the cost structure and you really stand back at it and you look at it through this lens, it's really exciting.
And for all of you, let me just add some thoughts on that, because we see opportunity as well. It's in 3 buckets for us. It's in the technology spend. And as Terry had shared, we're starting with an accelerated modernized IT platform as a result of the spin. And so we think we can mitigate around our increasingly cloud based platform through less service costs in the IT space, as one example.
Our dis synergies. Again, the focus of a mono brand and the efficiencies that that will give us across all functions and less handoffs that you have to deal with in a portfolio business, we'll be able to eliminate some of that work. And then lastly, around product cost is the 3rd area where, as I spoke about, with an increasingly focused vendor base with deeper relationships consolidating, we think that we can mitigate the majority of any product costs dissynergy, and in fact see opportunity there as we really lean into that full end to end operating integration with our vendor partners.
Let me just go one more on this one because I can't emphasize this enough. Those of you sitting in the audience can imagine, but not really sort of viscerally understand how important a cathartic event it was to make a decision at the Board level with the family to break this company up. It's been what this company has been for 50 years. It's a big deal. The energy of that breakup, that catharsis has really freed us to really question everything.
And that's really hard to get to with a company that has been operating like we have for as long as we've been operating. And to use that energy of a breakup as you're using it in Old Navy, we're using it in Gap Inc. To really say that there are no sacred cows, no stone will be unturned, is proving to be super energizing. I have to be honest with you. Here's a simple thing.
Sonia and I both do business now today in one of the most expensive cities on the planet to do business in, which is San Francisco. And I will tell you flat out, I'm not intending to move the company out of San Francisco, but to the extent that I can feed jobs into places outside of San Francisco, Terry has an incredibly well functioning shared service center in Albuquerque that is efficient, that is effective with incredibly dedicated people that do great work. Is there an opportunity to feed jobs into an Albuquerque? We have several 100 people right now in India in our tech space, feed jobs into those areas. We're a global company and we need to continue to look for what's the most efficient and effective way.
And the catharsis of cracking the company and breaking open and breaking it apart has really freed a lot of energy to think about things differently.
Yes. I guess the analogy I'd use for Old Navy is, look, we're 25 years old. We've been part of the Gap Inc. Family. It's really enabled our growth this far.
But I don't know how many 25 year olds are still living at home at some point, you need to leave and get out and really fly on your own. And that's really the point where we're at. I think for the next opportunity, the next wave of our future, it's time for us to really fly the nest and strike out on our own.
Perfect. Thank you, Sonia, Art and Terry. I think that concludes our session for today. As you know, IR will be available for any questions, calls. You know where to find me.
Thank you. Thank you.