I would now like to introduce your host, Jen Foll, Senior Vice President of Corporate Finance and Investor Relations.
Good afternoon, everyone. Welcome to Gap Inc. Q3 2017 earnings conference call. Before we begin, I'd like to remind you that the information made available on this webcast and conference call contains forward looking statements. For information on factors that could cause our actual results to differ materially from our forward looking statements as well as descriptions and reconciliations of non GAAP financial measures as noted on Page 2 of the slide supplementing Teri's remarks, please refer to today's earnings press release as well as our most recent Annual Report on Form 10 ks and our subsequent filings with the SEC, all of which are available on gapinc.com.
These forward looking statements are based on information as of November 16, 2017, and we assume no obligation to publicly update or revise our forward looking statements. Joining me on the call today are President and CEO, Art Peck and Executive Vice President and CFO, Teri List Stoll. As mentioned, we will be using slides to supplement our remarks, which you can view by going to the Investors section at gapinc.com. As always, the Investor Relations team has
a very strong quarter of comps, along with our 5th consecutive quarter of gross margin rate expansion. The momentum we're seeing in the business does give us the confidence to again increase our full year guidance. Before I dive into the business, however, I do want to acknowledge that this quarter has had significant challenges, while at the same time contributing tirelessly to their communities. Our hearts and our resources are with those in the communities which have still not fully recovered. I'm also pleased to share that we protected all of our impacted employees with pay continuity.
This is a critical investment in our most important asset, our people. In a moment, I'll turn it over to Terry, who will share more details on our Q3 results. But before I do, I would like to reiterate our balanced growth strategy, how it differentiates us from the industry and how we're continuing to strengthen and sustain that differentiation. I want to talk about some of the key components of it. Balance Growth is made up of 4 pillars.
Number 1, investing in growth in value and active. And importantly, inactive, that extends into the performance lifestyle space. Number 2, accelerating a large, fast growing, highly profitable and accretive online and mobile business. As we spoke to you in September, we indicated that we are on the path towards that being a $3,000,000,000 business, and we are very pleased with results in terms of continuing to accelerate its growth rate. I'll talk about more about that in a moment.
3, continuing to reduce our exposure as a company to traffic challenged real estate through specialty store rationalization, largely in Gap and Banana Republic brands. And number 4, substantially improving the productivity of the business. Underpinning balanced growth are Gap Inc. Advantages that are helping us win. 1st, multiple iconic profitable brands that give us advantaged economics in finding, attracting, activating and retaining customers.
2nd, the ability to meet our customers where they are and deliver an exceptional experience, whether that is online, on a mobile device or in our 3,300 stores around the world. 3rd, leveraging responsive and innovative product creation capabilities to gain market share in loyalty categories. And 4th, continuing to identify and exploit our scale with Old Navy. Old Navy delivered another very solid quarter up against high compares from last year with a continued focus on loyalty categories. Denim was particularly strong and I want to illustrate what drove the business.
The sales comps were in the high teens and the margin comps were outpacing the sales comps. As of October, Old Navy is the number 4 retailer in denim, which is up 2 spots from LY. Success has been driven by a number of things, including destruction, color, print, hem treatments and silhouettes that resonated with the customer. But importantly, it was not the 14 weeks, depending on whether we ship it on vessel or we air it. As we continue to get faster, we will continue to see results like this as we reduce the risk associated with buying and holding inventory and where we can capitalize on demand.
And importantly, we will continue to get faster. I'm also pleased to share that in the last two quarters, we've developed a prototype of a low scope, low cost, but highly effective remodel, designed to ensure that even our oldest stores in the Old Navy fleet will always be up to brand standards. These remodels have delivered above their financial expectations and have had a positive customer response driving both top and bottom line performance. Additionally, over the course of the year, we've opened 20 Old Navy stores in North America and expect to have about 10.70 as we exit the year. As well, we are accelerating our new store openings in 2018.
Turning to Athleta. Simply put, Athleta is on fire. Top and bottom line momentum continues. We're seeing exceptional growth outpacing the industry with market share opportunities. 2nd, we're making highly targeted and highly efficient marketing investments focused on customer acquisition, which continues to grow the customer file and continues to accelerate brand awareness.
Q3 was also an important time for the brand given the importance of back to school. And you might ask why back to school matters to Athleta, but this was a real test to see the drawing power of the brand with the gross expense making it highly accretive. On online in Athleta, continuing to grow faster than the industry. We continue to also thoughtfully expand our retail presence, opening 7 new stores this quarter and about 15 on the year. We anticipate turning to our more mature brands, Gap and Banana Republic.
The teams continue to be focused on improving performance, while leveraging Gap Inc. Capabilities to deliver innovation and on trend product in loyalty categories. Starting with Gap, the most important news is again progress quarter over quarter. Importantly, we beat industry traffic during most weeks due to high returning marketing investments, and we also maintained healthy AURs as we've anniversaried the Fishkill fire. We have more work to do, more progress to be made, and we're not celebrating success.
But the fact that we are seeing consistent quarter over quarter improvement makes me pleased with the results and the work that the team is doing and the consistency in execution. In Banana Republic, the team is focused on the right priorities, but there's a lot of heavy lifting to do to improve performance. Right now, we're executing behind our product pillars, which translate into loyalty for the brand. And as a reminder, the core of these are pants, suiting, sweaters and outerwear, things that customers expect from Banana Republic, come to Banana Republic for and are loyal to the brand for. With holiday ahead, I'm particularly excited to see traction in the sweaters business to improve product acceptance and better investment.
Every quarter this year as well, Banana has been narrowing their spread to industry traffic with Q3 demonstrating continued improvement with a slight beat to the industry. When you couple that with a positive sales less traffic, it's quite clear that we are attracting more qualified footsteps and the customer is taking out their wallet and spending. Again, lots to do. We want to acknowledge the team is focused on the right areas and making progress. If you recall from my comments back in September, a key focus for both teams in both businesses is getting each business back to a level of profitability that we have seen quite recently.
We're confident about the progress and confident about the work being done and anxious to continue to see the results improve. Now I'd like to spend a moment on productivity. First, we continue to make progress towards our announced store closure plan with a healthy portion of our planned closures now closing by year end in 2017. We also anticipate delivering on our initial planned closures by the end of 2018, which will be a year ahead of our original expectations. We've looked at these stores through the lens of profitability and through the lens of their long term potential.
We are making tough calls to ensure our fleet represents our brands and we are in the appropriate centers. As we rationalize our specialty footprint, we're also taking the opportunity to drive a more efficient and profitable operating model for Banana. We announced earlier this week that we're moving our New York based Banana Republic teams to San Francisco. This consolidation with the rest of the brand will improve speed, it will improve quality and it will save cost. You will continue to hear from us on productivity each quarter going forward.
I wanted to share with you, however, a few of these steps that we have taken already. Let me close with some comments on the investments we've been making and we'll continue to make to drive growth. Over the past 6 months, brand health and customer acquisition have been critical focuses for every business in the high teens in Q3. Additionally, if you look at our online business, from Q3 of 2016, we have seen an acceleration of the growth rate in each quarter, quarter on quarter on quarter. These investments are also driving multichannel behavior with all of our brands beating industry store traffic in Q3.
This marks the 3rd consecutive quarter for a traffic beat for Gap and Old Navy and the first for Banana Republic. This is an important and excellent improvement compared to where we were even a year ago. We've also continued to build on our features and functionality and capability in our web and app based technologies to improve the customer so far. Beyond online and mobile, our multi tender loyalty program, Bright Rewards is now live at Old Navy in Dallas and Atlanta. Customers are heavily engaged so far With the test stores, we've seen a 2x lift in the number of customers we're able to contact versus our card based rewards program.
This is an exciting step forward to be able to reach our engaged non card holding customer and offer her a tiered version of our rewards offering. As we look to holiday, we will continue to invest in our brands and channels in the form of marketing, digital and store payroll to drive growth. Our performance year to date has given us confidence that this is the right thing to do and the right time to do it. In closing, let me reiterate our focus on balanced growth, combining growth in value and active, accelerating online and mobile, rationalizing specialty, while driving productivity improvements through scale and leverage. We are driving this from a platform that is much stronger today than just a few years ago, and I'm pleased that we are delivering consistent performance this year as the foundation for future growth.
Teri?
Thanks, Art, and good afternoon. As Art said, we're pleased to deliver another quarter of positive results, while also making progress against the balanced growth strategy we outlined in September. As you also heard from Art, as part of that strategy, we're accelerating our store closure plans and now expect to complete the initially identified closures by the end of 2018. Additionally, we have and will continue to identify opportunities to leverage our scale. Comp sales were up 3%, marking our 4th consecutive quarter of positive comp sales.
Net sales for the quarter were $3,800,000,000 a 1% increase from last year. The spread between net sales and comp sales is largely due to our international closures last year. We are very pleased to deliver another quarter of positive comp and net sales growth. Despite the negative impact from the Hurry up in the quarter, a combined total of 2 77 stores were closed for an average of approximately 6 days during the Q3. Looking at the brand level, Old Navy delivered a positive 4% comp against a positive 4% comp last year.
The last year comp excludes a negative impact of about 1 point from the Fishtail Fire. Similar to the first half, Old Navy's results were driven by broad based category strength. Continuing its sequential improvement throughout the year, the Gap brand comp was positive 1% driven by improved traffic and conversion. This is against a negative 4% comp last year, again excluding the negative impact of the Fishkill fire, which was about 4 points. At Banana Republic, comp sales were down 1% against a negative 6% last year.
This excludes the negative impact of the Fishkill fire of about 2 points. The men's business continues to be more consistent, while as Art mentioned, the women's business has more work to do. We feel good about continued traction in our pillar categories. It's worth noting that all brands outpaced industry traffic for the quarter. This marks the 3rd consecutive quarter that Gap and Old Navy traffic outpaced the industry.
We attribute this strength to improved and more consistent advertising. Additionally, we were pleased to deliver our 4th consecutive quarter of positive AUR. Moving on to gross margin. When excluding the 2016 restructuring costs, our 3rd quarter gross margin was up 60 basis points from last year to 39.7%. Excluding the restructuring costs from 2016, merch margin was about flat to last year.
Our rent and occupancy leveraged 60 basis points, primarily driven by our positive comp sales. With regard to FishKill, as we noted on our Q2 call, we had expected business interruption insurance recovery of about $0.08 to $0.09 in the second half of the year. During the Q3, we received about $0.03 of this recovery. As a reminder, these proceeds are intended to offset elevated offsets, sorry, elevated logistics costs we've been incurring throughout the year. Our current expectation is to receive the remaining 2017 business interruption proceeds in the Q4.
Regarding SG and A. Our 3rd quarter total operating expenses came in largely as expected at $1,100,000,000 up about $80,000,000 when compared to 2016 adjusted operating expenses. Similar to the first half, the increase was primarily driven by payroll related expenses largely due to bonus accruals. We also our 3rd quarter tax rate benefited from favorable changes in the tax impact of foreign operations, resulting in a tax rate of 37.1 percent and about $0.02 of EPS favorability in the 3rd quarter. We now expect a full year effective tax rate of about 38%.
Our 3rd quarter earnings per share were $0.58 compared to an adjusted $0.60 in Q3 of 2016. FX negatively impacted 3rd quarter EPS by an estimated $0.02 bringing us to flat year over year. Regarding cash flow, year to date, our free cash flow was $197,000,000 which includes approximately $60,000,000 of insurance proceeds related to property and equipment. The timing of lease payments and the increase in inventory since the end of last fiscal year resulted in lower free cash flow versus last year. We ended the quarter with $1,350,000,000 of cash.
Consistent with our commitment to return cash to shareholders, we completed an additional $100,000,000 of share repurchase in Q3. In line with our year to date cadence, we plan to repurchase an additional $100,000,000 in the 4th quarter. We ended the quarter with 389,000,000 shares outstanding. And year to date we paid dividends of $272,000,000 Regarding inventory, we ended the quarter with inventory up 3% compared to the Q3 of 2016. The increase in inventory is primarily for $463,000,000 consistent with our expectations.
And on a net basis, we've closed 7 company operated stores year to date and ended the quarter with 3,193 stores. With our acceleration of store closures, we now expect about 30 closures on a net basis in fiscal 2017. Now with regard to our earnings outlook for the remainder of the year, including the impact of the expected lower effective tax rate, we now expect adjusted earnings per share for fiscal 2017 to be in the range of $2.08 to $2.12 excluding $0.10 of insurance proceeds that we received in quarter 2. Let me spend a minute on SG and A for the Q4. We now expect the year over year increase in 4th quarter SG and A to be at about the same pace of increase we've seen year to date.
There are a couple of factors that are impacting 4th quarter SG and A versus our prior expectations. First, we now expect marketing spending to increase in the 4th quarter when compared to year to date trends. This is largely due to the fact that we had some production costs move out of Q3 and into Q4. But we're also planning some incremental spend, largely digital, to support the momentum we are seeing in the business during the important holiday season. As I noted, we've been pleased with our improved traffic trends, which we believe are driven in part by better and more consisting marketing.
Given the positive results we've seen this year, we believe this incremental marketing investment will help us better execute during the important holiday season. 2nd, we expect higher variable store related costs associated with our objective of continuing to improve the customer experience. And lastly, we continue to exceed our internal goals and therefore we expect higher bonus accruals in the Q4. We believe the investments we're making are supporting our balanced growth strategy. And as you've heard from us today, we're going to take the actions to fund these investments in the future by driving productivity across the company.
For the full year, all other guidance metrics remain unchanged. So closing, overall, we are very pleased with the solid results in the Q3, especially given the tough compares we were up against and some of the events during the quarter. I'm also pleased with the progress we're making against our balanced growth strategy. I'm energized by the plans and initial actions we're taking against the call to questions. We'd appreciate limiting your questions to 1 per person.
Thank you. And our first question
By concept that comprise the flat merchandise margin. And I guess how best to think about merchandise margin opportunity in the Q4? And then finally, just what comp is needed to leverage occupancy from here given the great performance this quarter?
Okay. I'll start with the last one and I'll try to remember all the questions you asked, Matt. We've historically said we need a low single digit to mid single digit comp to be able to leverage Rod. I mean that's really what you saw this quarter was we got that and you saw it come through in the leverage. On the margin questions, we don't get into as much detail as you would like us to, but I can say as we look across the quarter, there were no significant outliers in what we saw.
So we're seeing about what we expected and we will remain focused on the AUR expansion that's helped drive some of the fundamentals we've seen this year as we go into the Q4. The only challenge, of course, is that the Q4 historically is more promotional. And so you're going to see that in the absolute rates, but we are very comfortable with the healthy margins across the brands.
Great. Best of luck.
And our next question comes from Ike Boruchow with Wells Fargo.
Hi, thanks for taking my question. Terry, I guess this question is for you. On the store closures, it sounds like you moved them up by a year, 30 net closures for this year. How many of the 200 stores that you've laid out previously is incorporated in whatever took place in Q3 and your plan for Q4?
So this is how I'll answer it. The 200 store closure that we laid out is split between what we will accomplish over the Q4, which is an acceleration and then spread out over next year. And as you said, that is an acceleration of about a year. We're going through the list of store closures now and finalizing the plans of the timing and how we will manage through those. But net net, we feel very confident that the acceleration this year and what we have planned for next year will take us to the finish line there.
So maybe just another way, is there a way we should be thinking about your net footage next year, after all the store closure initiative takes place?
Yes. We haven't gotten to that level of detail publicly.
Yes. I would just say that, as you can imagine, this is a delicate dance that we're doing with our landlords and there's a fair amount of negotiation going on right now. And so as we start to harden this down, we'll certainly share the relevant and appropriate details. But we're up to our eyeballs right now in the midst of what is a really constructive dialogue as we're working on our business.
Can you maybe just give us some perspective by division sort of what's happening year over year and how maybe you're thinking about where marketing investments should go next year? And then second question on the fabric platforming that you've talked about before, obviously you've given us a sense of where Old Navy is, but maybe give us an update on Gap and Banana sort of where are they relative to Old Navy on your viewpoint on the fabric platforming?
Yes. Sorry. And what was the I was listening then to the second question and flushed the first one out. Can you go back on that again? Advertising.
Yes. Advertising by division.
Don't want to go into specifics here. I'd say the most important themes are, is that we're continuing to move the mix towards a variety of forms of advertising, probably more away from the traditional print, etcetera. And again, pivoting much more heavily into digital, where we can look at line of sight, we can get a clear measure of our ROAS and make intelligent calculations about how far down the ROAS curve we want to spend. And that's probably the biggest change that we're continuing to implement across all the businesses. We've had a very strong focus on then 2 components, which is filling the funnel with new customers, and that is a consistent focus across the entire business and then reactivating and increasing the frequency of last customers or current customers.
And we're seeing excellent traction to be honest across all of those as we've gotten more focused and we've managed the mix. I don't want to put a pin in at the level, but what I can tell you is, is that when we see the returns, which we are and most importantly, they manifest themselves in terms of the accelerating growth rate online on one side and our beats to industry traffic on the other. We're going to continue to spend where we know that that dollar spent brings us back a multiple. It's just good business. And then on the other side, fabric platforming.
Yes, I mean if I rank them, what I would say is, athletic is probably the farthest along. And again, it's our smallest business. And they've really gone after it with a vengeance. And we're absolutely seeing business outcomes, as I noted, associated with their ability to be highly responsive. And I would just again point out the fact that as much as I'm giving you more specific numbers now, and again, oftentimes the spread is whether we air it or put it on vessel on the ocean.
We're continuing to look at ways to continue to get faster right now. And sometimes it's how do we see faster? How do we get it to our DCs faster? Do we start doing some direct vendor to store deliveries, that kind of thing, because we're seeing absolutely consistent outcomes, excellent business outcomes associated with the speed. If I rank order, I put Athleta first, I'd probably put Old Navy second with Gap close behind, but it's a different business model.
And then it varies category by category and Banana still has some work to do. But the team there is really heads down on being a super fast follower from what we've seen in other parts of the business.
Thanks and good luck for holiday.
Thanks.
And our next question comes from Simon Siegel with Nomura Instinet.
Thanks. Good afternoon and congrats on the nice results guys. So congrats on that positive comp at GAAP. Just recognizing that you were lapping the compare from the fire, any thoughts on the right way to think about the go forward GAAP global comps into Q4? And then sorry for the dumb question.
Just to clarify, when you talk about traffic, is that store level or does it also include online? Thanks.
Yes. I think on GAAP, what I'm really looking for here and I noted it in my comments is consistent quarter over quarter improvement. And we've seen that. And I'm not going to call that improvement. And that's really what my expectation is of the business that we're going to continue to see.
Sorry, then the second one was I'm focused so much on Traffic. Traffic,
yes. It's been
a long week already. Traffic, so when I'm talking about industry traffic, that's really looking at physical traffic into our stores. We don't really have the same kind of metrics as they apply to online traffic. We look more there at overall demand and growth rates, but it's just a little looser there. So when I say we've been beating industry traffic, it's really the standard industry traffic measures.
And again, really nice numbers from Gap and Old Navy pretty consistently and nice to see Banana then in this quarter get on the bandwagon as well. And the magic formula here is get traffic moving and then on top of that sales less traffic, which comes out of your inbox levers around AUR, around conversion, around the size of the basket. And that's the underlying formula that we've got going here now more consistently.
And I do just want to clarify on the GAAP comp compare that we gave you. It is adjusted for fish kill. So the negative $0.04 last year is more of a normalized, so you can see the progress. The positive one is against a normalized negative $0.04 That is about $0.05 on the year.
Okay, great. Thank you. Best of luck for holiday guys.
Thanks.
Your next question comes from the line of Kimberly Greenberger with Morgan Stanley.
Great. Thank you so much. Art, back in September, you talked about some SG and A savings opportunities that you see sort of medium ish term in the business. I'm wondering if you can just put a little more meat on the bone there. And then I think at the same time you were discussing some SG and A savings opportunities, you were talking about other areas that you would like to invest in.
So could you maybe talk about that a little as well? And on balance
I've heard this question in different forms several times, and I fully appreciate that. At the moment, I'm probably going to spend frustrate you a little bit to spend my but answer you back a little bit more with the process of how we're approaching it rather than the specifics. And the way I would characterize the difference is that we and many others have often approached cost reduction on an episodic big bang basis. And we and many others have had less success with that sticking and really getting efficiency and productivity in the organization than we should and then we will. And so this is different.
We are taking, as I noted, the restructuring of the Banana headquarters structure, accelerating some of our stores and then there are bits and pieces around the organization. We are taking some of those actions right now. But we're also really approaching this as an ongoing, focused, highly managed productivity initiative that quite honestly, as I said in September, we I anticipate this is going to live for several years and become part of our culture of how we do where we feel that we have an opportunity to differentiate whether it's through customer acquisition or our in store experience. I would also call out the fact that we are continuing to invest in the underlying capabilities in fulfillment in our distribution centers. And I've talked about some of that before where we are investing in leveraging existing building capacity in our retail DCs to be able to fulfill direct orders out of those DCs as well.
And that really is meeting the continuing and accelerating demand that we're seeing in our online space. And that's a big part of it. There's technology investment and there are other pieces as well, but that's an important customer facing piece. Like I said, we'll talk about productivity, but it's going to be a continued conversation as we identify opportunities. If and when we come up with an opportunity to say we're going to take a one time by bundling things together, you'll be the first to know on that as well.
But we're in the middle of the work that we're doing right now and we still have more work to do.
Great. Thank you, Art.
And our next question comes from Ana Adrivo with Oppenheimer.
Great. Thanks so much. Good afternoon and congrats on seeing improvements in the business. A couple of questions. On the GAAP division, Art, maybe what is your view on the product content right now?
And talk about what you're most excited for the holiday? And just a follow-up to the 4Q guide. The SG and A growth rate implies pretty big improvement in the gross margin. Maybe talk about what's driving that acceleration? How do you guys think about the promotional stance into 4Q?
Thanks so much.
Okay. Yes, I think I heard it. You got very faint, in the second one. So if I'm off track, just stop me and correct me. On the first one on GAAP, what am I most excited about?
Again, I'd say consistency and period over period improvements. If I dig inside of what's going on, we're seeing good traction in the bottoms business in women's, which is always an important place to see traction with denim really delivering right now. And our denim platform in Gap is responsive and so able to put units back in the business. Super solid traction also there in the active and in the performance lifestyle space, excellent traction in Gap Body. And we just opened a couple of stores now, 1 in the adjacent space in the Banana Republic store on Broadway in SoHo, where Gap Body Love is being expressed.
And we feel there's a real opportunity here starting with product where we're very much on time. It's a composite of things. It's obviously product acceptance, which comes from the work that we've been doing now for several years on fit and do that consistently season over season. And our customers are registering that and responding to it. And that's the 1st and foremost, most important lever to beginning to get our yields up and back off of promotion is the right product properly bought.
And again, that's a lot of the work that I've been talking about now for a couple of years with all of you. And we're starting to see business outcomes associated with doing that. Where we are putting innovation into the product, we're also seeing that the customer is very much willing to pay for it. And Athleta is an excellent example of that being a very high rig price business with everything in its assortment, whether it's lifestyle or performance having elements of innovation. But we're seeing that pay off frankly across all of our businesses.
Banana introduced the rapid movement chino a couple of months ago, and it's been a blowout winner with men in what it delivers, which is stretch, comfort, performance, and then, stain management, water resistance as well, all in a great fitting, great looking, pretty good classic Chino pants. And he's responding to that and he's willing to pull out his wallet. I'd actually be worried if it is the product of the diversified focus across better product, a better experience, product innovation, etcetera, plus traffic, that's I get pretty excited about that, because that's the winning formula that sits on a solid platform.
Okay. Very helpful. Best of luck.
And our next question comes from Ed Yruma with KeyBanc Capital Markets.
Hi, good evening. Thanks for taking the question. Art, you've deleted the idea of Performance Lifestyle a couple of times on this conference call. I know you highlighted the rapid move in Chino. But I guess how big is the opportunity for Performance Lifestyle?
And
what I would tell you is that as we continue to bring innovation, technical innovation that delivers comfort, care characteristics, active performance features, we continue to see the customer respond when we bring that into ready to wear fabrications. And so I'm not going to call how high is high here, but we're very encouraged across all of our brands as we have continued to do this and see the customer respond. And it's super interesting because it's just as relevant in a men's casual beach short as it is in a men's Italian wool suiting that might happen to have stretch in it or coming down the road that is washable rather than having to take it to a dry cleaner. And that's actually a meaningful benefit for a man and a woman and that you save a lot of money and there's a big convenience factor associated with being able to launder yourself. So as I talk about performance lifestyle, it's really in some respects sort of the reinvention of some of these ready to wear categories, drawing on the best of the active and performance space, but expressing it in traditional silhouettes and traditional fabrications in the ready to wear space.
And it's a place where we don't see it happening, frankly, a lot. There are some very small brands out there that are playing around with it. We think we're one of the few actually doing it at the mass and scale level. And it's been very encouraging so far to see how the customer is responding to this. I mean, just to state the obvious, it's important that this product be attractive, be occasion appropriate, not be weird, not be techie, not.
And our next question is from Chapin Mayella with Barclays.
Hi, good evening. So in September, when you provided detail on the margin profile by banner, I believe you disclosed the GAAP ramp had a very low single digit operating margin in 2016 and recognize that FX has been a headwind that can reverse and some of the planned store closure activity could also help future profitability. But can you talk about other key unlocks that are specific to the Gap ramp? And then just as a follow-up, what do you see as a more sustainable margin for that banner over time?
Yes. I mean, I'm indexing my expectations and the team will tell you my knee and their back in terms of improvement off of how the brand performed relatively recently. Some of it under my time when I was actually running the brand. And so without revealing the number, I can tell you that we have seen a performance that is significantly better than what we're seeing most recently. And the reason that's important for me, just to be clear, is that we can all acknowledge the secular trends surrounding the industry and those kinds of things and interpret those to me whatever they mean.
As I've said before, I view this as money we have lost and therefore money that is recoverable. And that's the work that we're doing right now. And so I'm not I don't want to go into it right now because I don't set expectations, etcetera. But it's definitely something that both Banana and Gap are looking at. And again, indexing expectations back on recent performance.
If I say where should it come from with respect to Gap, it's kind of
all of the above.
Clearly, FX has put pressure on the business and we've delineated that. We have some store closures that we're doing, which will help as well. But it starts by frankly, fundamentally continuing to make the product better to get our yields up, to get our promotional intensity down and to manage the cost structure inside of the business. And those are all things that we're working aggressively on.
Perfect. Thanks so much.
And our next question is from Lindsey Drucker Mann with Goldman Sachs.
Thanks. Good afternoon. Art, in your prepared remarks, you mentioned an Old Navy remodel. Could you give a little bit more detail, A, on what that's all about? And B, how you're thinking about rolling it out?
And then just a quick housekeeping one for Terry. The $0.03 from the Fishkill recovery, can you confirm if that's slowing through cost of goods this quarter or some other part of the P and L? Thanks.
Yes, let me talk about the remodel. The reason I'm calling this out is that we have a lot of stores in the Old Navy fleet that are still the original fitments. We call them the old, old navies. And you would recognize them with the circus like signs and a supermarket type cash register, booth sets, that have been around for a while, etcetera. And they're very typically very productive source for us in locations that customers are still shopping in, but they look their age.
And maybe not maybe don't merit a full gut remodel. So what we've gone in and we've done the relatively simple and the relatively low cost things, typically starting with paint, oftentimes we'll paint the fixtures, redo the lighting, perhaps remodel the cash wrap, sometimes we'll even shrink the store down because it perhaps is too large and so we'll build a false wall at the back to tighten up the store and make it feel a little bit more intimate. And we've been rolling those out now with some tests before we pull the trigger on deciding to go bigger. And we really found that the customer response. And 1st and foremost, oftentimes they will say, is this all new product?
Because it's displayed in an environment that is fresher and more respectful. And as I said, we're seeing the top line lift and the bottom line lift. And so it's very encouraging to us. And we've got a bunch of it and it's encouraging to see the economics that come with it.
Yes. On the housekeeping matter, Lindsay, the $0.03 is in cost of goods sold.
Can you quantify any of that, maybe order of magnitude, what kind of top line lift or order of magnitude, how many of these remodels you've done already and how many you plan to do in 2018?
We've done more than a handful, I would say, right now. And I don't I honestly don't have the numbers in front of me in terms of 2018. What I can tell you is that there the returns on the expense, which is relatively modest to the CapEx is quite good. So it allows us to put this down. But I don't know the exact number right now, Lindsay.
I'm sorry about that.
Yes. Over the course of 2017, we'll have north of 100 remodels completed largely Old Navy, but a couple of similar approaches, it's Gap and Banana.
Great. Thank you so much.
Yes.
And our next question comes from Dana Telsey with Telsey Advisory Group.
Good afternoon, everyone. As you think about speed, what needs to happen to get faster? When does it happen? Is it a different pace for the different brands? And what does it mean in terms of inventory and gross margin?
Just quickly on the second thing, with the high teens comps in denim and Old Navy, which is very impressive, how can the learnings from Old Navy perhaps be incorporated into the Gap division to improve their performance in denim? Thank you.
There's nobody I would have expected more than you, Dana, to ask about speed, and you delivered that question quite rapidly. So congrats on it.
Thank you. Thank you.
It's this is one and I know my responses on this continue to probably frustrate simply because there isn't a macro answer that makes any sense. The averages here confuse because it is category by category, brand by brand. As to how fast we can be, we are in places now constrained not by our design process and our vendors cutting and sewing, but by the logistics associated with it, whether it's on vessel or frankly getting it into a port and then getting it on rail or on truck and into our DCs and out of our DCs and into our stores. So in some of these categories, why I said on the call, we're starting to look at ways to continue to chip a day, a week, whatever off on some of these things. And again, I would highlight on denim, it takes 9 minutes to make a pair of jeans.
And it takes a lot longer obviously from the standpoint of releasing a PO today to actually having a continued opportunity here. This is not there's not an endpoint. This is an ongoing journey. As to leveraging, we are leveraging today as a company
better than what
I've ever seen, quite honestly. I've mentioned some of this before, but we have converted our sourcing organization to a category based focus versus having a variety of competing denim offices or knits offices all around the world. We've significantly rationalized and are now sharing key vendors across the company. In some cases now, we are starting to share key base clause across the brands that can be treated differently, washed differently, destruction, laser treatment, etcetera. And so there's a big opportunity in front of us for continuing to share.
And then obviously, sharing in terms of best practices as well, which we're also doing. And again, I noted on Gap, Gap and Old Navy have been leveraging back and forth. In Gap Women's Denim, we saw a 13% comp and a 22% gross margin comp. And those are really nice numbers. And again, they happen for a lot of reasons.
But part of the reason they happen is because we're increasingly responsive. We're also on trend. We've got good fit, good quality, etcetera, etcetera.
Thank you.
And our last question will come from Mark Altschwager with Robert W. Baird and Company.
Just along the lines of focusing on the growth channels, hoping you could speak a little bit more specifically to the performance of your mall versus off mall stores and any takeaways on the outlet versus non outlet by division or whatever level of granularity you're willing to share?
Yes. The level of granularity we're willing to share is probably a lot less, if you would like. And you
would be willing to take from us.
We don't get down to mall, non mall kinds of performance. I think there's no question we have more of our specialty stores in some of the mall based properties and some of those are struggling more. So as we rationalize those, those are probably a little more concentrated in the mall base. But I don't know I'd go any further than that. Yes.
Great. Thanks. And maybe just to close out, Art, maybe a softball for you, but just wondering if you could talk about the broader apparel environment and how you're viewing it heading into holiday. I mean, consumer is in decent shape, weather seems to be helping at the margin, relapping the election and some tougher traffic from last November. You spoke a lot about the controllable things that Gap is focused on, but just wondering what your crystal ball is telling you for the broader industry?
Thanks.
I mean, first of all, in the broader industry, we I continue to believe that there is and there is happening in front of us a consolidation taking place and that we are poised to win on the back of all of the advantages that we have and all the work that we've been doing, speeding up our product pipeline, innovating, delivering performance, all those things that are happening right now. And so that's, I think, really important. And I sort of view this as almost regardless of consumer sentiment, we've got an opportunity to drive growth and gain market share. My expectation, frankly, of all my businesses is just on making that happen right now.
Great. Best of luck over holiday.
Thank