Ladies and gentlemen, please welcome Tina Rahmani 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-K, our most recent annual report on Form 10-K, 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-K. The agendas for this morning will begin with remarks from Gap Inc.'s President and Chief Executive Officer, Art Peck.
Next, you will have the opportunity to hear from Sonia Syngal, 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, Teri List-Stoll, Executive Vice President and Chief Financial Officer of Gap Inc., will provide a financial overview of both companies on a standalone basis. Following Teri's presentation, we will have a Q&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 investor 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're gonna do that for me? Right. Exactly. Good morning, everybody, and thank you for coming. Really appreciate it. We've got three hours with you today. We're gonna try to stuff a ton into those three hours. We do wanna make sure that we leave enough time for Q&A. We're gonna move through. We'll have opportunity for Q&A. We'll take a quick break, come back with Teri, et cetera. I just wanna really set up very quickly these two new companies. I could 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 two things. I would characterize Old Navy as a pure play, Old Navy as a great example of monobrand scale, and the new Gap Inc., multi-brand richness.
That really is what underlies the thesis for separation. Monobrand scale, flat out, go make it happen. Sonia 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. It's 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 gonna go reasonably deep on both. We're gonna 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. We wanted to get the conversation started today.
I wanna 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. I really will just say one thing, which is that she is a leader, that I endorse with zero 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 three and a half 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. 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 was tall, gawky, and could not find a pair of jeans that fit me that I could afford. There's nothing more important at that age than feeling good in your jeans. This is what Old Navy strives to do. It is about making fashion inclusive and accessible and available to everybody.
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. 25 years ago, Old Navy opened its doors and disrupted fashion. It sought to make fashion inclusive versus exclusive.
This original manifesto that you're looking at here was written 25 years ago. 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. It begins with this line: "Imagine that the world runs right." 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 one. We've gone from that day 25 years ago to being an $8 billion powerhouse. 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 every body. This is Old Navy. 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. It's been different from the get-go, from day one. 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 things: wrinkles, taxes, stress, kids.
Mom, please.
Hunter, Mommy's speaking. You know what growing up doesn't mean? It doesn't mean you ever stop having fun. From the jump, we've been doing things differently. We imagined that the world ran right. Imagined not blowing your paycheck on a pair of jeans. Imagined having enough money to rock those jeans and take the family vacation to the beach, or just crack open a cold one.
It's always in good taste.
Fine. Well, call us crazy, but it sounded like fun. We should take fun seriously because fun makes people happy. Being happy is the only reason to do literally anything.
Oh, really?
To bring the happy, to get into the fun zone, you start by breaking the rules. Don't just open a store. Have the Rockettes open a store in Manhattan.
Magic.
Turn performance fleece into a household name.
How fetch.
Don't just wear a dress, wear the pants.
Can you spin, sis?
Before your fourth birthday, surprise yourself with $1 billion in sales. Then octuple that number.
10 double.
Make it $8 billion. $8 billion.
That's insane.
Turn it up a notch. Ask yourself what's the funnest of everything.
Behold the Griswold's white Taurus.
Do that and do it big.
You're fierce, you're fierce, you're fierce, you're fierce, and you're vulnerable.
What about $1 million donated to the Boys & Girls Club big? Get active. Open a store in China.
The doors are outside. Incredible energy.
Mexico. Times Square. Fun is infectious.
Shut the door.
Nah, let's kick those doors down. The more the merrier. We're Open to All, every single employee, and all our customers. To bring everybody in, to make shopping fun again for everybody and every booty, you gotta say yes. You've gotta create value. Don't be cheap. Cheap is easy. Value is an art.
Also, it's a science. Oh, here's the best part.
Where's the $1 million?
All that means we stand for equal pay, inspiring future generations, love is love, and showing some love to our mothers.
It's a big night.
Let's imagine, grow, squeeze, innovate, dance, break, do, do. Let's not just do it. Let's do it for fun.
Was the glitter too much?
Our scale, our momentum, and our profitability. As we approach $8 billion in sales, we stand as the number two apparel brand in the U.S. With 42 million known active customers, we've been working hard to know more of our customers. This file size is growing, 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. 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 small markets before, 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 $1.6 billion of sales, we are the fourth 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 focused 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 billion in sales.
I wanna 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. 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. By Q4, we have addressed the breadth of the assortment with more color, more print, more pattern, more choice. Coupled with exciting marketing, new partnerships, and customer 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 seven 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 billion sales goal and beyond. The opportunity to focus as a standalone mono brand and mono company is gonna give us that much more ability to move fast and to accelerate against our winning known strategies. Our competitive strengths are listed here. 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 family moments, whether it's Easter dressing, whether it is Fourth of July parades, whether it is 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. 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 e-com channel at $1.6 billion of sales and growing. We've got an operating model and product operations that fully leverages the scale of this business. 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. All of this culminates in an enviable financial model with great cash and great returns. As we think about ourselves as this fantastic brand with all this potential, how do we measure that? As we look at our brand health, we sit as the number two apparel brand with respect to brand health.
Compared to the others on the list, who are much larger than us, it is a remarkable accomplishment, and for me, gives us permission to grow. This chart here is a summary of our customers. 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 among the broadest in the industry. Some really fun facts in this. We have as many customers that have household incomes below 75,000 a year as above 75,000 a year. It really solidifies this notion that regardless of who you are, everybody wants value. 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 first and foremost with product. A great example is how we focus on iconic must-have items in our winning categories. The Rockstar jean is one of our highlights here. I'm wearing a pair today. We sell 40,000 Rockstars a day. It just shows you how this particular jean, we have continued to innovate against it. We have the latest technology in terms of stretch recovery. We've got high rise, the latest trend. We offer destruction. We offer the latest shades and the latest washes, all at $25. With iconic products such as this, we're confident that we can steal share from 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.
We focus on these jaw-dropping, traffic-driving items. A great example is a $1 cozy sock, a relatively new product we've launched. Last holiday alone, we sold almost 10 million units of this dollar cozy sock. It is a really fun item. Families enjoy them, and it acts as the excitement builder during that critical Black Friday, Thanksgiving weekend. Another great example is the $5 flag tee. Who's ever bought a flag tee for their kids or for themselves? Yeah. Hands are raised. Yeah. Good. Look, and seen them at Fourth of July parades. Right? This last Fourth of July, saw them everywhere. 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? Our $15 Cami dress. Really, this is about Easter dressing and having that go-to dress at that critical time in a really accessible price. 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 a billion-dollar business in active lifestyle.
It's been growing really well. It is the number 1 category in apparel now and the fastest-growing. We're paying a lot of attention here. As we look to the future, we see potential to grow with respect to adding fleece to the assortment. Also, dresses are another great example of extending the end use. This blazer that I'm wearing today is 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. We currently have about 1,140 stores across 49 states, the U.S., and Canada and Mexico as well. The returns, the four-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 had stayed at about 200,000 trade area selling. We have seen great response. We've heard this from our customer comments. They want stores closer to where they live. 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. 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're in over 10 countries with franchise partnerships, and we see that as a vehicle for growth in a highly leveraged model. Our e-com channel is also equally of vital importance with our stores.
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 e-com business is of equal profit as our stores business. We've been in this digital space for about 20 years. We launched in 1999. 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. We intend to continue with those investments.
We currently sit as the fourth largest e-com site. 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 both channels. The lifetime value of a cross-channel shopper is three times as great as a single-channel shopper. 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. Here we are. We make, design, ship, and sell 700 million units of clothing a year. That is a lot of units. Scale matters when you're talking about our size. We use our supply chain to give us cost advantage and flexibility advantage.
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. 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. 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 super wash 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. 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. 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 assessment three years in a row now. We're really proud of that. What our employees say is that they believe in the integrity with which the brand leads. They believe in what we stand for.
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 & 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. We stand for Open to All and inclusivity. We signed up as a founding member to the Open to All Coalition, which is an organization across multiple retailers to fight discrimination. We were the first 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 of critical and vital importance. I don't think anyone 25 years ago, when the first store opened, could have envisioned that we'd be standing at this remarkable place in history where we stand in this position of strength as the number 2 apparel brand in the U.S. and the ninth largest retailer. What is, I think, the most interesting data in this slide is that we sit at only 3% market share. The opportunity to grow share with weakening competitive set in the middle is really where we see and we have the confidence to grow as we pivot to the future. That's a little bit about who we are and where we compete. Now I wanna pivot to what will drive our forward growth.
Our growth strategy is very simple and very focused. 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. 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. We'll acquire new customers and drive lifetime value, taking that 42 million 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.
As we lean into the focus that standing alone will allow us, I'm confident that this will give us that path to $10 billion and beyond. A little bit on each one of these strategies, winning with product. Right now, we have the number 2 or number 1 brand market share position across knit tops, pants, shorts, sweaters, dresses, woven tops. 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 billion in addressable market share, we will accelerate share in kids and baby, jeans, and active.
Kids and baby is often an entry point into the brand. It's where mom comes, shops for her kids, then shops for the family. It drives frequency due to the growth of the kids in 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 our reach in our product space with emphasis on baby and emphasis on sleep. Our jeans business is strong. It's a billion-dollar business now, our denim business for the family, and we've added $300 million of sales over the recent years. 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. Our active business, as we spoke about, is also a billion-dollar business.
With the introduction and the expansion of fleece for the family, we see the opportunity to continue to accelerate the 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, for us, it is a vital priority, a top priority. I wanna 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. 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.
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. 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. These are all aspects of store-level allocation and localization that we want to go after in a big way. When you think about the scale of our units, those 700 million units, and optimizing them a little bit, a few pennies across that sheer number of units drives a lot of value to the bottom line. 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. 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. That will be a priority for us as well. The end-to-end digitization of our product creative process. A modern PLM system, 3D design, and full integration with our vendors, our top vendors, will really unleash, we think, innovation in our product, speed, as well as drive efficiency. We also intend to grow adjacent categories through expanded size and through new product offerings. Plus is a great example of this. We already have authority in size offering.
We offer one of the largest breadths of size from double zero to 30 in Old Navy with eight different lengths for the family. We have a strong and small and growing Plus business, primarily online with some tests in stores. As 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. 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. This is a really exciting component of our strategy.
As you know, we have a strong, healthy fleet today. The economics are fantastic. 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. 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." When Old Navy opened, it was like the cavalry had come across the hill. That was his quote.
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. 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. As you know, every time we expand a store, the opportunity that has on our e-com business is of vital importance.
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. 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. 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. Stores, 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 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 million customers, we know what they buy from us. To extract the full value of the big data that that intersection gives us is the work ahead. We started on that journey. An example is our men's business. We have acquired a lot of men's customers, and they're 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 male customers with unique content, with product that they're interested in, that's been quite successful. 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-comm site, the power of our site, we're focused on the experience of our stores. 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, pickup 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. 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. Customers. Look, ultimately, it's all about the customer, and we are early days in the journey from capitalizing on the full potential of our customers. We've worked aggressively to grow our file. You can see we've grown from 28 million known customers to 42 million known customers this year. That bar graph is growing with every year. We can match now the bulk of those customers to what they're buying. 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. 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 for a long time. We all know the drivers of value of a loyalty program, what 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. Listen, this is a brand that is unique. It has a unique voice, and it is a powerful economic model as a business. 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. 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 the cross-channel opportunity. When you step back and you think about 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.
When you step back and you think about the next 25 years, what could that bring for us? Really, the sky's the limit, and I like to think about us as an $8 billion company with the framework or the culture of a startup. We're an $8 billion startup. We have the scale associated with what that $8 billion gives us and with the attitude and the energy and the excitement of the full potential of a startup attitude. 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. With that, thank you very much, and I will pass it back over to Art.
Mono-brand scale, multi-brand richness. Let me just dimensionalize that for a second. If you think about what the operating model is of these two businesses. Old Navy, at its size, a mono-brand, five times the number of styles of unit volume per brand versus the multi-brand Gap Inc. 10 times the number of units per style versus the flow-through of the new Gap Inc. 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 and the opportunity to run these businesses fundamentally differently, to invest behind the operating capabilities, the technology capabilities of these businesses fundamentally differently. 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, we've got a lot of work to do. I'm not really 50. I'm a little older than that. First thing I want to say is that we connect, every apparel company does, unless you're selling down and dirty, just commodity product. We connect with our customers emotionally. Confidence through sustainable style. 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. I could 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 three-year time frame.
That's what we're going to 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 one, that sits on brands and platforms, and I'll talk about that. It is a game plan where it's connected to purpose and profitability. When I look at profitability in my mind is very simple. Out of the dock, on debut, we are going to accelerate cash flow, accelerate operating profit, and 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 than 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. Let's go on. Let me talk quickly about values. Sustainable, inclusive, and connected. These aren't values that we've 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 Fashion Pact. We were at the Élysée 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, et cetera. 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. Last, connected. Connected with our employees, with our customers, with our communities, and globally connected. Under customer, Sonia gave her statistics. We have 90 million known customers, 32 million known active customers, and 7 million and growing very rapidly in our loyalty programs.
I want to highlight just one thing. 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. We highlight here two 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. 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. 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 two new white sneaker brands in my Instagram feed while we were 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, 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. 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 million or $100 million because they fundamentally lack the capabilities to become multi-billion dollar brands. I challenge you to go back and say how many have grown over the last several years.
Multi-billion dollar vertical apparel brands, it is a very small set. We have Athleta. Under $100 million when we bought it, put it on the platform, nurtured its growth with capability and investment. We see $2 billion in our sights over the next few years. Let's talk market opportunity for a second. By being 50 years old, we've made choices. Some of them are explicit, some of them are implicit. They're choices that have limited our accessible market, which we're in the process of unchoosing right now. If you simply look. 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. We believe there's 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. 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 Athleta stores, which you will see over the course of the next couple of months. How do you build a brand in a modern way which isn't put only stores in a traditional regional enclosed mall?
There's a very big market out measured here in the hundreds of billions 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. 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 million 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 a 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 the 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. An e-commerce channel that is a multi-billion dollar business. Athleta that we see on a path towards $2 billion. They are both attractive and growing. I'll come back to this. 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. I want to talk briefly about Gap and Banana, then want to move to our growth brands and really focus on Athleta, which is a rocket for us. 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. Gap. Everybody in this audience will handicap Gap. 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 product. 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. 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. What we have not done is stitch these together in a seamless way. Hand to bag is a critical focus for us as we go forward, and it also connects to a younger customer. I'm delusional. If I press it harder, it'll actually work.
Anyway, let me take you through just a little bit of the anatomy of the turnaround here that we're working in the business. 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 multi-channel. 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 Gap 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, and 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 a turnaround. Let me share a few facts with you. We flowed product in late July, so we really have six weeks of read underneath us. I could go through a lot of numbers. You know we typically don't do that. 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. 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. I've lived this before and I've done this before, and the early indications are very positive. I want to take you then into one little piece of marketing. What we're doing these seasons, these days is it's not really a campaign. What it is we produce assets for social and video, and then we split our buys basically roughly 50/50 across digital, paid social, and then whatever organic social comes in is a bonus. A 60-second denim anthem cut down to 30s, 15s, and 6s, which is what shows up in your Instagram feed. This is one 15, features Alessandra Garcia. You may have seen it.
It's product focused and it indexed 600 times above where typical content has, and it's the best video product-oriented content we've had in many years.
We can get there faster if we all move together. We can get there faster if we all move together. We can get there faster if we all move together. We can get there faster if we all.
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, very high. That is 1 of many assets that is helping bring the customer back into our stores. Let me talk stores. 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. It'll yield significant benefit.
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 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. 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. It doesn't actually surprise me. What it has done is it's opened up a conversation about how do we do that. Now there's 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, downsize the store, reposition, et cetera. We are well into this. We'll continue to report on it, and we're going to make progress. 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. Those are the stores that our customers shop in every day, that they love, that we make money in. I want to show you two 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. The store is now driving a 35% two-year stack inside that store, comp stack in that store. We believe that there is nothing but upside there. I'll show you that secondly. I want to also show you a concept store that we have. We have three of them. This is Encinitas, California, north of La Jolla. It's in a strip center next to a $52 million Trader Joe's, and it's really about flipping the economics of specialty retail upside down. Lower traffic, lower rent, higher conversion, great four-wall model. Early days, we have three of them. One in Annapolis, one 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 gonna 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. We do have work underway. If we don't innovate and we don't test, we die. Let me show you Encinitas first. I'll show you Garden State 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. We're truly in the customer's path. We are right next to her grocery store, her dry cleaners, and where she's picking up her 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 mannequins. 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 knits, and just bringing the cool back to Gap.
I've never seen a customer this excited about a brand just being dropped in their community. Sky's the limit from here.
We're proud of our heritage and our legacy. 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 six 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, give her more room for her to shop and to navigate through the fixtures.
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 first month out at a positive 9, then a positive 15. For the record, in 2018, she was up 15 then, too. Not only is she comping and building sales, she's building it on her best year ever.
I mean, we comping a comp. It's a comp-a-thon that we're going.
Comp-a-thon, start in May, June, and July. That's how we go. Just three days that we missed this month, and we're going now for only two 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. I would encourage you to go out and see them. 17th and 5th, we created a depth of 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 a 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. Then go out to Garden State Plaza. I know it may be tough to go through the tunnel or cross the bridge to get to New Jersey. That's the 3D expression of the brand. That's not a tourist center.
That's an everyday customer coming in and shopping and loving that store. 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. I took the E train up this morning from World Trade to the Seventh 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. Where do you shop for them? What's Banana's proposition? Easier access. Nordstrom 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 four of them in my family as well. We think there is a simple opportunity here that as others 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, this is a solid, vital market where there's a share opportunity being put in play as department stores struggle. Our little rocket, Athleta.
We bought Athleta less than $100 million. We put it on the platform. We fed it with customers, with capital, with marketing money, with talent. We have a business that over the last seven years has grown at 23%. Athleta would not be where it was if we hadn't put it on the platform. It's a great illustration of the power of the platform. Do the math on it. You 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 billion right now. 80 net promoter score, which is exceptional. Exceptional. This is a brand that customers love when they become aware of it.
$24 billion market opportunity in active alone. Athleta uniquely straddles the space of the performance active lifestyle, and it's truly an omni business, 43%, roughly 50/50 between stores, one pool of inventory, and e-commerce. What is the brand? What is the positioning? Very simple, we think very unique. Performance, beauty, and sustainability. Those are the three 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. 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 U.S. today. We don't have an outlet presence. We'll be opening our first outlet store over the course of the next couple of months. 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. 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, I'm sorry, a Hill City truck taking to locations.
We'll be expressing the brand in eight 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. 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. You're fully aware of the department store struggles that is making market share available. 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, we didn't really buy it because it was cheap. We bought it because we saw an opportunity. Clean fleet, under-expressed in stores, online opportunity, clear positioning as the occasion-based kids and baby retailer, under-expressed in the outlet space, no international presence is 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. 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. 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 at the difficulty of driving fast and enduring change in an organization like this company. 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. Go to the next slide. Really reflects an important from-to in terms of a pivot from a cultural standpoint. Number one, 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 operations, store operations. You can go on a long list. 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. It gives us clear ownership, clear accountability, and most importantly, consistent processes across all the brands. Then the third 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 are 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.
Let's talk about the platform just briefly, and there are really five pieces here that I want to focus on. The first is an efficient cost structure. We'll come back to you, and we'll talk, and Teri will go through some of the dyssynergies. In my mind, what we have is an opportunity for further SG&A reduction that is measured in several hundred basis points of SG&A. We've done the benchmarking. We've done the calibration. We see what the opportunity is. We're deep into the process right now with a line of sight towards significant SG&A reduction. 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. Second piece is strategically applied data. This is not a new topic.
What omni was three years ago is a clichéd buzzword. Big data, machine learning, analytics has become the buzzword today. For us, this is real, and it's real because of two areas of focus. Number one, 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. The second is marketing effectiveness. The imperative for this company is to bring a younger customer into the fold. We spend close to $200 million 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 second 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 preseason to traffic trend, which is flat to low positive single digits. We've grown the business in the mid-30s over the last three years. How? By feeding units into the business, because Athleta is largely a units business, by using our responsive capabilities where we have an eight-week pipeline. 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. Mark Breitbard, who's the 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. Last, sustainability. You'll notice that I have line of sight to P&L levers attached to each of these. Why is that? Because these aren't a fantasy.
These do impact the P&L. Most people will have sustainability, and they'll have a picture of planet Earth there. It is important for planet Earth, it's also important for the P&L. Let me tell you a quick story. I'm holding an ugly poly woven ditsy print blouse. Just imagine that. Let's name her. Her name is Gladys. I can use Gladys because Gladys was my great aunt, like this blouse, Gladys was a little homely also. I can say that, rest in peace, Gladys. Don't do anything.
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 truck or train, to our DC, to another truck, to the back room, to the front room, to the clearance section. That is the long tail of waste that we, as an industry, generate. Next time you go in a store, don't start in the front and look at the first 20 feet. Well, it'd be great. Buy something. Then go to the back and look at the markdown 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. A lot of those mistakes are, we guessed wrong. 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. Eliminating that long tail of waste and the impact on margin and working capital release is significant. That's really why sustainability, first and foremost, starts as part of a P&L lever, as well as being the appropriate thing to do for the planet. Let me finish up here.
I want to go back to this, which is our starting point today, a three-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. 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. Let me end really by focusing back on the compare and the contrast. Monobrand scale, multi-brand richness. We're moving this company with urgency to operate in the new model.
Starts with consumer-relevant brands, what I call own hand to bag, a strong omni-channel platform, the advantage capabilities, taking advantage of scale across the total brand platform, leading the way in sustainability, all adding up to a three-year game plan. Accelerate cash flow, accelerate operating profit, and create value. Thank you. We're gonna take a quick break now. I really would like it to be 10 minutes. We're just a tad behind. Grab a coffee, come back in, and we'll start back up with Teri 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. Let's start by the numbers. I think you heard pretty loud and clear from Sonia 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. 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. 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 in two much more focused companies going forward. Significant scale, broad customer reach, unbeatable foundation for customer access, and sufficient earnings capacity going forward. Let me ground you a little bit first in the Gap Inc. historical results. These are the results as reported, and they contain certain adjustments that you're familiar with. Again, these are the historical 2016, 2017, 2018. The 2016 and 2017 amounts here are presented both as reported and then excluding adjustments from restructuring, impairment, and the insurance proceeds from Fishkill. I'll take you through the highlights for Old Navy, which is prepared on the carve-out basis of accounting. Then the results and highlights for Gap Inc. with Old Navy pulled out. I would caution that when we actually get to the separation financials, the new Gap Inc.
may look a little different than these historical numbers, because at that point, it will be reported with Old Navy as a discontinued operation. 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. Let's start with Old Navy. You can see a strong history of profitability of this iconic American brand. Sonia 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 in women's. Sonia talked about this. We do not believe this reflects any change in the fundamental strength and growth prospects of the brand going forward. The path to $10 billion and beyond is clear. 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. Now I'm getting ahead of myself.
That's common for her.
Really? We're not good at this. We have so many strengths. This is not one of them. Gap Inc. 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. As we've disclosed previously, that will provide $90 million 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 two-thirds of the total and the specialty the other third, down from about half today. That enhancement that Art talked about in his presentation. As you know, the customer journey is increasingly omni.
Art mentioned hand to bag. The traditional view of profitability by channel is inherently limiting. With mobile shopping 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 omni-channel 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 Gap Inc. 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 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 Art mentioned. Athleta clearly is well established to continue its growth trajectory in a very profitable way going forward. Let's get to the financial implications. Since announcement, not surprisingly, there have been two areas of focus, capital structure for both companies and separation-related charges, along with the dyssynergies 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. 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 to 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 a return of capital approach that fits their business strategies and plans for growth. M&A, you heard a little bit about that, is a possibility in the future for either company, but is certainly not the priority in the near term. Moving to separation-related costs and the dyssynergies. We are providing our current view of the expected one-time costs related to the transaction and also on the expected dyssynergies 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. Let's start with the dyssynergy discussion.
The combination of dyssynergies and stranded costs relating to the separation continue to be largely in line with the expectations, as I said. Some areas came in higher, some areas came in lower. Overall, we're at the low end of our initial modeling assumptions when considering mitigation plans. On a going basis, we currently expect gross dyssynergies before the plan mitigations in the $150 to $175 million range for Old Navy and the $225 to $250 million 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 Gap Inc. then retains some of those costs, which become stranded.
We are actively working the mitigation plans for these dyssynergies. The numbers presented here are net of those identified and planned actions at this point. Art mentioned the magnitude of mitigation is obviously more of a strategic priority for Gap Inc. than it is for Old Navy. 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. We are confident in our ability to deliver on the expected net dyssynergies, which net to about 1% of revenue of the respective companies.
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 dyssynergies 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. 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. Obviously the last point is at 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 I would turn to is the cost. Well, may or may not turn to it. Perfect. One-time 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 2019 and 2020, with some tailing into fiscal 2021. 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. Bringing those apart is where more of the cost is.
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. There's about $100 million included in there that represents effectively an acceleration of spend. 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.
As I said, the numbers for both dyssynergies 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. Just to wrap it up, I'll come back to the compelling strategic rationale. I think you heard this loud and clear in what Art said, what Sonia said, in terms of the excitement that comes with the ability to take these two 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 the better position to continue to thrive in a retail environment that's continuing to change. With that, I'm gonna open it up for Q&A. We'll bring Sonia and Art back on stage. We're 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 this is being webcast.
Yeah, since we're being webcast, let's get a microphone. Plenty of hands.
Yeah. Okay, Nina, we'll start with Mark over here.
Thank you. Mark Altschwager from Baird. Appreciate all the detail today. Maybe just 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? How will operating as a standalone company allow you to minimize some of the misses that have driven the softer performance kind of late 2018 and early 2019?
As I shared in the strategy, managing for consistency is a key priority for us go forward. As we look at our product operating model, we have strength there. We played our scale, we played our repeatable model, yet we do see opportunity to improve. 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, right here.
Adrienne Yih, Barclays. My question is for you. I think we have a good feel about the exact target market fitting for Old Navy and some of the other brands. I am still unclear as to discussion on who you think the core target is for Gap going forward in its new transformation. Thank you very much.
When you say Gap, are we talking Gap-?
Gap brand, actually.
Gap brand.
Yeah, Gap brand specifically.
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 Gap is at its best is when, and I'll just use a personal example, is where my wife and then my daughter, who has a two-year-old, are shopping together. We view kids and baby, and it has been in the past, and we think it can 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 the 28-year-old.
Gap at its best has really been a much broader demographic. 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, and I was very pleased with the metrics. 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.
Athleta has a huge aperture opportunity here to really increase brand awareness across both older and younger customers.
Great. Mike, we'll do Alex, then Roxanne, and then we'll move over here.
Hi there. Alex Walvis.
Pass it right down the row here.
Yeah.
Alex Walvis with Goldman. One question for Sonia. 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 annual contribution we should expect from those stores?
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. As we think about small stores combined with online together, which is also a channel with 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.
Yeah, small markets.
Store size is the same.
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 Old Navy and Gap Inc. as we think about margins. Thanks.
Do you want to start?
Perfectly fair question. We're not going to be guiding by the two 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. 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. That's how we would see the progression. On a go-forward basis, 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 laid out about $1 billion 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'll take to really get the return on that investment? 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 you have published in terms of your own views of what are the sum of the parts. There's no question, by separating these two companies, you provide more transparency to the market and enable the market to value the two pieces based on what they see as the fundamental business prospects and value creation opportunities in the respective. There could be value unlocked from the sheer ability to have that transparency.
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 two standalone companies with an investor group that is looking for delivery on the metrics. 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 tenets of the strategy. We will be providing then what are the metrics that we will be using, and 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.
Apparently.
You in the back. I'm sorry.
I'll pass it back.
You're gonna have to ask the rest of the way.
Sonia, for you as well, could you talk a little bit more in depth about the Old Navy customer? What % of your transactions are done on an Old Navy card versus an other card, even a Gap Inc. card? Is that non-locked through loyalty? It sounds like your strategy with all of these small stores is heavily leaning on a click and collect model, à la Target, what they're doing, versus more of a ship-to-home model. 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? This is all you guys always say. We always say limit it to one question, and then it's-
Okay. The first question was around credit card, right?
Yeah.
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. I will say that it is a key foundation of what will make up our multi-tender loyalty program go forward. 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?
Click and collect versus ship-to-home model.
Yeah. I think our buy online, pick up in store capability has been a key feature for us, and one that we will continue to lean on. As well as our online fulfillment for our e-com channel direct to home, less so from our stores, so more from our online distribution centers. 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 million customer interactions a year in our stores. People want that personal engagement. They come to us for that. 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 would jump on that. Do I have a mic here? Yeah. Jump on that for a second and just talk about, in particular, those capabilities, because you implemented BOPIS 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 in some of our other brands. We're lighting it up in Banana and in Athleta over the course of the next couple of months.
We expect that to be something they really engage with, as well as a 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. I think BOPIS is going to be a real unlock across the new Gap Inc. portfolio, and you've obviously gotten it and 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 business is today combined?
Teri, you want to grab that?
Sure thing. 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. 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. 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 Gap 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 both companies have had competing investment priorities over the last couple of years, and that maybe has created some tension within the company. As you work on this separation and you see how it's evolving, how do you expect the culture of the company to change? You mentioned that you'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 and working there, and how are you going to drive that? Thank you.
Yeah, I would say that what we're really doing right now is we're peeling back the layers of 50 years of accumulated process, culture, practices, technology, et cetera. It's a really healthy exercise to crack open the whole chest cavity of cost and the chest cavity of culture and technology and stare at it really hard. This is very big on my mind right now. I was just thinking as I was listening to some of the other conversation, what are the key parameters in my mind that are non-negotiable from a cultural change? 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.
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. 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 than at risk. As I, and Sonia, you can talk about this yourself, I think you probably feel the same way. As we stand up these two 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 retailed these days if we're gonna do what we need to do. Can't be a safe environment. There's no such thing as a safe environment. That's a big piece of it as well. Frankly, just, 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 represent some of the new capabilities around loyalty, around data and analytics, who are sitting there right at the table with me. 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 you think about how we run the company, the comp structure of the company, and even some key people and roles. I don't know, Sonia, if you want to add to that at all.
The culture of Old Navy has got some really strong components. There's a culture of winning, there's a culture of fun. We want to maintain that. At the same time, we are looking to almost triple our employee base as we add in the enterprise functions. It's such a great opportunity to embody the startup culture that I spoke about and to launch this new company with these tenets of customer centricity, winning, and playing for the long term for the full potential of the brand, using technology to our competitive advantage. 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 rows a little bit, give people a chance here.
I thought we were really in the middle.
Oh, they're just there.
Everyone can.
Great. Thank you so much. First, Art, on sustainability, I think you gave a really articulate example of the ditzy Gladys blouse.
Gladys.
What I didn't hear is how you prevent that bad guess from happening. Then secondarily, on the Janie and Jack outlets opportunity.
Yep
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.
Yep.
Sonia, for you, I'm wondering if you could tell us, as you move from 1,200 to 2,000 stores, what you expect for your average store volumes. Is it like $4 million a store, $5 million a store? Which peer retailers did you benchmark yourself against to validate that that was a good target for you?
That really uses up all our remaining question time as we answer those questions. Let me start with the how you do it. 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. 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 so that we have AUR upside, of opening the gap to a broader spread between traffic and unit purchases to strip units out of the business. 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 one, 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, you'll see this directly in Gap, from where we were two quarters ago to where we are with the assortment in the stores today, we have taken probably 35%-40% of the styles and CCs out of the store. You will have a hard time finding Gladys in a Gap store today, whereas two or three 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 bitsy prints. It's not where the brand stands. We've stripped some of that out right off the top. Sonia mentioned testing.
We're continuing to use testing. We believe there was an opportunity when I got back to inventory optimization to bring analytics to bear 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. It's really bringing the art and the science together, but it starts with a common sense approach that this industry has been awash in inventory, and it is time to tighten our buys up and eliminate that tail of waste, both from a sustainability and from a margin standpoint. The second question was?
Yeah.
Janie and Jack .
Oh, sorry.
Janie and Jack. You jumped to the conclusion because you used the words blowout. We believe there are some modest incremental opportunities for store expansion is what I would call it, but in some of the key centers. If you go to some of those key centers like a Woodbury, like a Sawgrass, et cetera, 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 that are 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, et cetera, give me this brand now.
This is a brand that's well-known and very well respected. 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. Sonia?
We have quite a large store deployment today, and as we look at who we're co-tenanted with, it's a lot of the lifestyle value players that we succeed next to. 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. We have confidence playing next to them in the same value center, and we see that they're further deployed than we are, and we know we can compete with them. I'm not going to name the specific names, but in the value space, whether they're beauty players or whether they're big box discount, high-low players or a combination of the two. 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.
Up in L.A.
Right, on up in L.
Okay. Oliver, right here, Nina.
Hi, it's Oliver Chen, TD Cowen. Thank you. Sonia, at Old Navy, there's been a tension between the 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? Art, as we think about learning systems and data science, a lot of your background's 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?
Okay. No question for Teri too, Oliver? Because you could have just done a trifecta here. Sonia, you're first.
Yeah, I think our customers come to us for both, right? She wants the fashion essentials that are trend relevant for the here and now, expressed in a way in our apparel that is easy for her to consume. Then she wants the dependable basics that she can count on with size integrity for the family. That is the day job, is finding that balance of both. 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'll help us manage that, as you say, tension with more confidence going forward.
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.
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. Within the chaos of pricing and promotion that is out there today, we know and we have proof points that we can improve yield. 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, I think we've mentioned before that we're in the process of rolling out a proprietary assortment and buy planning tool, which runs all the way down to store-level allocation. That has the API for machine learning and machine decisions as it relates to store-level allocation. 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 is a yield opportunity. That is material, and again, that's just the right allocation, the right replenishment, and then also making sure, as 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 coasts and large sizes first in the center of the country. 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. 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.
When you personalize the web experience, every needle moves in the right direction. Our revenue per visit goes up, our conversion goes up, et cetera. 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. 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.
Okay. 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 untether the businesses, do you expect the competitive dynamic with Old Navy to change? Then just as a quick follow-up, where will the Fishers' involvement lie and what board do they remain on?
We will become competitors on separation. Should we hug now and know what's coming? That's just the simple fact, and Gap Factory does compete certainly closer to the price points that Old Navy has. There's less fundamental site overlap right now given where Old Navy stores are located versus Gap Factory stores are located. 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. Again, Sonia pointed this out and so did Teri, is that as much as we'll be competing, both of those businesses still have low single-digit market share. 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 Fishers.
Yeah. Working that out right now. We do have to stand up two boards. We get the opportunity to stand up two 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 member goes where. We have a board meeting coming up. We're continuing to look at that. My expectation would be that the Fishers would have separate but representation on each board going forward. We will not have board members that sit on both boards. We just feel like the companies are too competitive. That's really something that we think clean board separation makes a lot of sense.
Okay. Nina.
Craig Johnson, Customer Growth Partners. It's sort of a related question on the board, but this is on the customer side. You had variously 32 million active, known actives 42, so I don't know whether that 74 million are unique customers or not, but certainly, there's a lot of cross shopping across the brands.
There is.
The question is, at separation, who owns the customer? Who owns the email?
Yep.
Who permissioned email to market, so forth.
Absolutely critical question. We've been working that because we have to legally separate customer ownership. 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? The simple answer is that some customers are owned uniquely by the brand that they signed up with, in essence. If you gave your email to a Gap brand, in some cases, you gave your email specifically to Gap brand and not to Gap Inc. Those customers that are uniquely owned by nameplate will go with the nameplate.
There are customers who are owned by Gap Inc., and our intent there would be that we would split those up and that both companies would own those customers and may the better man win, if you will, as we go forward.
Woman.
Or woman. The better person. Yeah, exactly. 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.
Yep.
faceplate for a credit card, and then we'll continue to have a multi-brand credit card that straddles the Gap Inc. portfolio.
Great. Janet.
Janet Kloppenburg, JJK Research. For Teri, you gave us gross dyssynergies and net dyssynergies. Could you repeat those numbers or the gross again for me, please? 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. For Art, I was just wondering if you could talk about Gap Inc.'s expansion opportunities, and I'm trying to get to the organic top-line growth opportunity of the company. You have Gap maybe be shrinking, and you have Athleta growing.
Sure.
How do we think about that top line? Is there an international opportunity for Athleta? Thank you.
Sharon?
On the gross synergies, of course, there'll be a transcript available, but on the gross for Old Navy were $150-$175, and the gross for Gap Inc., new Gap Inc., were $225-$250. That was about 2%-2.5% of revenue. Then, of course, the net was closer to the 1%. I'm not sure I entirely understand your question in terms of tracking, but the intent of-
offset the growth numbers.
Right. Those mitigation actions we'll be going after very aggressively, there'll be a lot of them that will be in place upon separation. Some of the gross dis-synergies will occur at separation, some of them will occur as we move through TSA resolution. As I said, it'll be pretty lumpy, and we will provide as much transparency as possible so you can break those out. 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 that on a quarterly basis, on the lumpiness.
On the lumpiness, yes.
Sonia?
Developing the right assortment is this combination of art and science, and the testing component is the science part. Right now, we test about 15% of our assortment, and that will play into the back half. It's largely focused in the women's space. In addition, the art side is equally important, and I have a lot of confidence in our creative team to build upon the learnings from the first half. Also, we've announced that we've added to our teams, Nancy Green as our Chief Creative Officer, and she's coming over after being President and CEO of Athleta for six years and has a great history in the brand in her prior experience. The combination of our creative talent, coupled with the science that we'll build on further in our future strategies that we spoke about, will be the vehicles to manage that volatility.
Let me address your question, I see you getting into all three of us, your question on sort of the top-line, bottom-line profile. It really depends on business. If I focus first on Gap, 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.
It will result in some short-term revenue loss, and then stable revenue, it 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. We believe that we can stabilize that and again, improve revenue quality. I don't see significant downside associated with Banana's top line going forward. 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 a 23 CAGR on an Athleta at $1 billion this year, and 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. The three 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 three-year plan. It starts out by a very robust acceleration of cash flow and operating profit. That's the first job at hand. To me, that lays in place a platform for longer-term growth, but it's 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.
Great. Megan, can you go to Michael?
Hi, Michael Binetti with Credit Suisse. Thanks for all the detail today. I guess a couple 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'd be good to hear some of what you see. Then, I guess just at the end of this, 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, 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. 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 Gap 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.
Yeah. Okay. Let me start with the last question first because I've already forgotten the first question, and you might have to help me with that. On the last question, we do have sufficient cash available to execute the separation. There's no intent to lever to be able to meet the cash obligations for separation. Can kind of pretty much take that piece off the table. On the actions for mitigation, Art, you certainly can amplify this. We are in the process of a process that we're calling Re-imagination of new Gap Inc. Re-imagination because as you think about the tenets that Art expressed, there is a real opportunity to think very differently, not just about how we do the work, but what work we actually do.
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. 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 save $4 million or $5 million, but that's just one small activity we do many different ways today.
As you start to really look at all of that work and think about where do you wanna do it, how do you wanna do it, do you wanna 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 in every brand today. Pull it together, 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, et cetera. Do it all together, standardize it, get efficiency out of it. This is a host of opportunities where we have grown up with separate brands largely operating distinctly and separating inside the organization.
As I said on that slide, the brand should really focus on the product, the voice of the brand, engagement in the store, digital and physical store experience, and what can we pull together, whether it's hosted in a brand or hosted at the 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. We are knee-deep-- No, we are chin-deep right now in making that happen. 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.
For Old Navy, let me just add some thoughts on that because we see opportunity as well. It's in three buckets for us. It's in the technology spend. As Teri shared, we're starting with an accelerated, modernized IT platform as a result of the spin. We think we can mitigate around our increasingly cloud-based platform through less service costs in the IT space, as one example. Our overhead, we think we can mitigate some of the dyssynergies. Again, the focus of a monobrand and the efficiencies that that'll 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.
Lastly, around product cost is the third 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 cost dyssynergy. 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 that'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. 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.
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. I will tell you flat out, I'm not intending to move the company out of San Francisco. To the extent that I can feed jobs into places outside of San Francisco, Teri 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 hundred people right now in India in our tech space, feed jobs into those areas. We're a global company. We need to continue to look for what's the most efficient and effective way. 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.
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. 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. 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 Teri. 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.