Good afternoon, ladies and gentlemen. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Gap Inc. 3rd Quarter 2015 Conference Call. At this time, all participants are in a listen only mode.
For those analysts who wish to participate in the question and answer session after the presentation, you may now press star 1 to enter the Q and A Q. I would now like to introduce your host, Jack Calandra, Senior Vice President of Corporate Finance and Investor Relations. Please go ahead, sir.
Good afternoon, everyone. Welcome to Gap Inc. Q3 2015 earnings conference call. Before we begin, I'd like to remind you that the information made available on this webcast and conference call contains forward looking statements. For information on factors that could cause our actual results to differ materially from the forward looking statements, as well as reconciliations or descriptions of measures we are required to compare to GAAP Financial Measures, 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 19, 2015, and we assume no obligation to publicly update or revise our forward looking statements. Joining me on the call today are CEO, Art Peck and Executive Vice President and CFO, Sabrina Simmons. Sabrina will be using slides to supplement her remarks, which you can view by going to the Investors section at gapinc.com. With that, I'd like to turn the call over to Art.
Thank you, Jack. So I'm going to be pretty short today, and I just want to reiterate some of the key points as I look at Q3, Q4 and then spring and beyond next year. Q3 was challenging for Gap and Banana, and again largely due to the acceptance in women's product, which is not what we wanted it to be. Let me make something very clear. We know what the issues are with our product, and we're addressing those pretty systematically.
I spend a lot of time reading reviews of our product online, and our customers are very clear in telling us what we're doing well and what we're not doing well. And I'm very confident having seen the product, having been with the teams that we're addressing these issues, and that as we get into spring of next year, we're going to see And I've spoken to you about And I've spoken to you about how we are essentially lifting processes and capabilities from Old Navy and installing them in Gap and Banana Republic. I've seen the product in spring now and in summer across all of the brands. And I'm really excited about how we will be back on track in spring and beyond next year. I'm also confident in the momentum of the business at Old Navy, and I'm looking forward to the product that they're putting in at the beginning of next year as well.
So let me focus on inventory for a moment. We spent a lot of time in Q3 focused on inventory and getting clean. And I'm really pleased and Sabrina will provide detail on this. We've come into Q4 with our inventories in very good shape. That said, we're in a competitive environment.
And regardless, Q4 is always a very promotional quarter. And so we've reflected the fact that our expectation is that it is going to be a very promotional environment in Q4 and we are prepared to play there. One of the things that we have done very well and we've been very committed to is expense control. We were prudent and delivered against this in Q3 and you have my commitment that we are going to continue to remain very disciplined as we go through Q4. I'll hand it off to Sabrina in a minute, but I want to say something about where my head is relative to looking forward at the prospects of this company.
I'm very confident that we can win. And I'm confident that we can win not on the basis of anything other than the work that the teams are doing to position all of our brands for better and more consistent performance as we get into 2016. And now I'll turn it over to Sabrina.
Good afternoon, everyone. As usual, I'll begin today by reviewing 3rd quarter performance and then provide an update on full year guidance. I'd like to note that our 3rd quarter reported results include about $13,000,000 in costs related to our previously announced strategic actions. About $7,000,000 of that total is in SG and A with $6,000,000 in gross margin. This brings our year to date costs related to our strategic actions to $107,000,000 So starting with sales for the 3rd quarter.
On a constant currency basis, net sales were about flat. Foreign exchange negatively impacted our reported net sales by about $100,000,000 in the 3rd quarter. As reported, net sales were $3,900,000,000 down 3% versus last year. Total sales and comps by division are in our press release. Moving to inventory and gross margin.
As previously disclosed, elevated promotional activity pressured margins as we manage through units during the quarter. We did, however, exceed our goal on inventory and ended the 3rd quarter with inventory per store down 4% year over year beating our previous guidance. We expect 4th quarter ending inventory per store to be about flat on top of last year's decline of 6%. 3rd quarter gross margin was down 290 basis points to 37.3 percent with about 60 basis points of the decline driven by foreign exchange. Merchandise margin deleveraged 240 basis points with the greatest pressure at Banana Republic.
Rent and occupancy deleveraged 50 basis points. Given the challenging business, we are pleased that our teams continue to manage expenses tightly during the quarter. Marketing expenses were down $34,000,000 to $142,000,000 due largely to lower spend at Gap Brand. 3rd quarter total operating expenses were below last year at $1,000,000,000 including about a $26,000,000 benefit from foreign exchange. Turning to earnings.
Excluding the negative impact from the strategic actions, which was about $0.02 earnings per share were $0.63 or $0.61 on a reported basis. Foreign exchange had about a $0.05 negative impact on 3rd quarter earnings per share or a 6 percentage point negative impact to EPS growth. Additionally, Q3 of 2014 benefited from a discrete tax item that resulted in a lower effective tax rate of 34.5% in the quarter compared with 37.4% this year. Regarding cash and distributions, during the quarter, we closed on a $400,000,000 term loan. The new funds provide us with additional flexibility, including the opportunity to repurchase shares at what we consider an attractive valuation.
Including the proceeds from the loan, we ended the quarter with over a $1,000,000,000 in cash. Consistent with our commitment to shareholders, we spent $200,000,000 repurchasing shares during the Q3 and over $800,000,000 year to date. We ended the quarter with 404,000,000 shares outstanding. Including our dividend, year to date shareholder distributions have totaled about $1,100,000,000 Regarding capital expenditures and store count, year to date capital expenditures were $505,000,000 and on a net basis, we opened 66 company operated stores year to date and ended the quarter with 3,346 stores. Store count and square footage details are in our release.
And now I'd like to share our outlook for the rest of the year. We are revising our full year earnings per share guidance to $2.38 to $2.42 and we now expect operating margin to be about 10.5%. Our guidance excludes the charges related to our strategic actions, which we continue to estimate at around $130,000,000 to $140,000,000 All other full year guidance metrics remain substantially unchanged. Now let me take a step back and briefly outline 2 major factors that have changed meaningfully since we set our initial guidance at the beginning of the year. First, Banana 1st, Banana Republic significantly decelerated with fall product when we had expected some marginal improvement.
2nd, it appears to us that the consumer more broadly pulled back on apparel inventories probably more elevated than desired entering Q4. While we've done the work to position ourselves for a successful holiday season entering with tight inventories, we feel our guidance reflects a prudent outlook given what will likely continue to be a highly promotional environment. As a reminder, 2015 has been negatively impacted by several other items, the 2 largest of which are foreign exchange and the first half port issues. Normalizing for these items, our guidance range implies an underlying EPS decline of about 5% to 6%. In closing, as we enter the Q4, we'll continue to push forward the turnaround efforts at Gap and Banana and work to maintain the solid year to date performance at Old Navy.
Thank you. And now I'll turn it back over to Jack.
That concludes our prepared remarks. We will now open the call to questions. We'd appreciate limiting your questions to 1 per person.
Thank you, sir. And we will take our first question today from John Morris, BMO Capital Markets.
Thanks. Good afternoon, everybody. Tough environment out there as we've heard. Art, I think intriguing with your comments, so I want to get a little bit more color about it in terms of what you are learning about the product as you do your own research and discussions with the merchants there. Maybe talk a little bit about by the divisions, GAAP and Old Navy, but also there I'm just thinking there are probably some things that are working as well as what may not be working.
So if you can kind of touch on those items. Thanks.
Yes. Thanks for the question. I think it's a really on target question. If I just go to Old Navy, what I would say is Old Navy continues to develop product very consistently with the filters and processes that they've been using over the course of the last couple of years. If you look at what's in the store right
now, the good news is
that while we had to work through some inventory in Q3, we are seeing excellent product acceptance right now. So you have your normal few styles that don't work, but overall the product acceptance is very good, pretty systematically across the board. It's just it's a as you noted upfront, it's a really tough macro environment right now from the standpoint of the customer. And secondly, compounding that, not to make excuses, but a statistic that October was the warmest October ever and we're still seeing the temperatures in the Northeast, etcetera, pretty warm, which obviously means people aren't necessarily ready to buy into particularly sweaters and outerwear, but product acceptance is good. In Gap, we are and that's really what we saw in October, obviously.
We're waiting to see how Q4 kicks in, etcetera. As I mentioned in the call, I am very much deep in with the teams across all of our brands, Athleta included, in looking at product that is in development for next year. And we've referenced this before in GAAP. We know we have issues around femininity, around the optimism of the color palette, around the silhouettes that we bought in as big key items. And we've specifically and intentionally corrected those.
Fit inconsistency
has been an issue.
And I think I mentioned this before, we have a very senior person now in a critical role in the company overseeing fit across the entire company and really getting fit consistency particularly in our bottoms business where it's critical at the end of the day. And I mentioned on the call that I look at reviews. What I would say is this, which is if you look at reviews, if you get into our stores and talk to our customers, we have a process called voice of the customer where we listen to feedback very specifically. We do consumer insights. There's a 100% consistency with what our customers want, what is not working for them across all of those touch points.
And those are the things that the teams are acting on in both Gap and Banana to get the product back centered to where it needs to be. And so I don't want to go through right now style by style or anything like that. But again, if I come back to Gap, casual, optimistic American, we have re centered the development very much around those filters with consistent fit with femininity. And if I go to Banana, which is really updated classics with a twist, which is how we've always talked about that business and quality fabrications, the product development has been very consistent with that as I look at spring summer.
Thanks, Art.
Yes.
Our next question is from Lorraine Hutchinson, Bank of America.
Thank you. Good afternoon.
There's obviously a lot of optimism around spring and the new merchandising teams assortments. I was just curious to hear your thoughts on how you're thinking about inventory for both Gap and Banana going into the spring. Are you buying inventory for a turn to allow those concepts to comp if those products really resonate? Or are you holding back a little bit and forcing them to prove that before you buy the product for it?
Lorraine, I've been pretty consistent on this, I think, and hopefully I'm consistent. You'll tell me if I'm not. But I really believe that as you're going into a place like this where there is a turnaround that you buy tight. And we're buying tight. Our issue is that we are not we don't have the pricing authority right now that we need to have, even from where we were a few periods ago.
And so to me, you buy tight and you let some AUR come into the business. And then we do have some capability to feed units into the business if we're seeing styles and programs that are working. And I would rather go in tight with the ability to feed the business than come in heavy and regret it at the end of the day. So obviously, we're looking for comp. We're always looking for comp, but I'm not going to drive comp by just making a massive investment in units until we really have confidence about the product.
And so again, buy type, feed the business, that's the strategy that we'll take for both of those businesses over the course of the next couple of quarters next year.
Thank you.
Yes.
Next up from JPMorgan is Matthew Boss.
Hey. So Art, a higher level question. Since taking over the helm, I mean, what would you say has been your biggest disappointment versus initial expectations? And then just any changes from the competition that has surprised you or forced you to change course in any the competition that has surprised you or forced you to change course in any of your initial game plan? Yes, I would say my
biggest
disappointment and
Sabrina mentioned it in her comments was I expected banana to be in a better spot in the back half of
the year. And if you go back and look over my
comments from earlier in the half of the year. And if you go back and look over my comments from earlier in the year, I was really hoping that we would get more traction with the new design direction. Obviously, we've made some changes in design and we did that pretty quickly when we felt like we weren't where we needed to be. I have confidence in the current team. I have confidence in the team owning spring summer.
So it's not going to delay what we expect to see, as we get into the beginning of next year, but I was not expecting and I'm very disappointed by the deceleration that we've seen, particularly with Banana in the back half. I think I had a much better calibration as to where Gap was and what we were going to be working through, but less so with Banana. And that's been a real disappointment to me and a bit of a surprise. I would say competitive context, probably the biggest issue here is just as we've gotten into Q4, I was surprised to see people carrying inventory in as heavy as they actually did. And as I said in my remarks, we're play to play we are prepared to play in a very promotional environment.
But I hope you would give us the benefit that we do really focus on managing inventories pretty aggressively. And I think it's going to be a tough quarter. I think we've had signals a tough quarter from the standpoint of the consumer promotional environment. And I think we've had signals for a while that the consumer was standing on the sidelines a little bit. And it was it's just a little bit of a disappointment that we may have some excess inventory and a really promotional environment as we go into Q4.
But again, we're prepared to play. It's why we spent what we spent in terms of getting clean in Q3 because we did not want to carry that inventory into Q4.
Great. And then just one quick follow-up. As we think beyond the near term of the Gap brand and the expectations into the improved assortment in the spring. If all went according to plan, to achieve a return to positive comps, I guess, is traffic the key inflection driver of that change? And then is it possible given the game plan to achieve positive comps in the front half of the year or is it really a back half of the year P and L story?
So the way the levers move in my mind, which is pretty consistent with the way that they have moved, so I'm big believer in what's history show us is you improve your product. We don't plan on making huge marketing investments as we get into the beginning of next year. I think that's imprudent. You improve your product, customer discovers it, you start to see conversion move on the basis of the traffic that you have in the store. Word-of-mouth these days is a super powerful form of marketing.
If you just think about Instagram and Pinterest and the other social media, that's a very powerful form of marketing. And that will start to bring traffic in, but it's traffic is a lagging metric, not a leading metric. And is it possible comp? Of course, it's possible comp. But again, we're looking for comp out of getting pricing authority back 1st and foremost rather than loading a bunch of units into the business.
Great. Best of luck.
Thanks.
The next question comes from Lindsey Druckerman, Goldman Sachs.
Hi, thanks for taking my question.
This is Eddie McLaughlin on for Lindsay.
Can you give us some more insight into what you saw for traffic over the quarter, whether the cadence changed? And if you saw any difference by region or by on and off mall?
Sure. So not surprisingly, right, traffic has been strongest at Old Navy. And so they're mostly an off mall brand. Banana and Gap are much more in the mall. Vast majority of the stores are in the mall.
And I would gas traffic was the worst. Banana was somewhere in the middle. And Old Navy, like we said, in that value sector with their stronger product assortment, not surprisingly, did pretty nicely even against our reads of mall traffic. With regard to regions, Northeast in the Q3 was probably the weakest, but honestly, there was very little differentiation between all of the regions.
Got it. And then one follow-up to that. Old Navy, is there any more detail you can give on the breakdown of that comp between AURs versus units?
No. We do monthly sales calls, so we give a lot of that every single month. But I'd say overall for the quarter, given the fact that we came out of September a little heavy and needed to clear in October, units per transaction were probably one of our strongest positive drivers.
Got it. Okay. Thanks.
Sure.
Our next question today comes from Anna Adriva, Oppenheimer.
Great. Thanks so much. Good afternoon. I guess looking at Old Navy lapping that 11% comp in the 4th quarter, Maybe talk about specific product or marketing opportunities that you are especially excited about for the holiday? And then as a follow-up, great to see the other segment rebound in the Q4.
We were hoping you could talk about performance at Athleta. Thanks.
Yes. I mean, if I look at Old Navy, I would say we hope obviously Old Navy is decked to play in the categories that really matter in Q4. It's an important outerwear business and important sweaters business. As I mentioned, we haven't had that cold snap yet really across the country that starts to get those businesses going. But we've seen this before, and when you get the cold, she comes in and she shops.
So I'm really confident about the product that we have in the stores. But with it being as warm as it has, we're still waiting for demand to really pick up. Also pleased with the traction that Old Navy is getting in denim and particularly in fashion denim. They've been quite on trend, especially with Rise and Silhouette. And we're seeing, again, good product development there that I believe will carry us forward in Q4 as well.
And then last thing is that even in Q3, we saw a really encouraging consistency across all divisions of the business. Now there's always going to be a difference between men's and women's and kids and baby, but it's nice to see it when all the businesses are registering good product acceptance. And despite
the fact that we are clearing
through inventory, which puts some pressure on the business, I do believe we have very good consistent product acceptance across the whole box. And then the last thing I would just call out, which we really expressed in the last few seasons is the full family active expression, which is in a category where there is obviously higher than market growth. We have that now in the box all the way down to baby in a full family, really put it in the stores without displacing any other programs. So it's about incremental productivity. And I'm very bullish over the long run-in terms of what that category is going to be able to drive for the brand.
Yes.
The only thing I'd add to that is from a marketing perspective, we definitely have been standing behind Old Navy. So even though marketing dollars were down in the quarter, they definitely were not down at Old Navy and will continue to stand behind marketing in Q4 at Old Navy. So they'll have at least as much marketing in Q4 at Old Navy and likely more radio, maybe not the same TV, but more radio for sure. So we're clearly standing behind that one strongly.
Yes. And I'm always looking as we look at our Q4 commercial plan in particular, which is what are we doing in terms of incremental non comp events. And I think we have a very strong commercial plan lined up for Q4 as we get into obviously next week and then the several weeks leading up to Christmas.
That's great. Very helpful. Thanks. And just on Athleta follow-up. Thank you again.
With regards to their marketing thing? Yes.
This was on the other announcement.
Yes. So in terms of the other growth rate, I mean, you can see underlying is pretty healthy. So you kind of there too have to take into account the fact that we're lapping having Piper line sales last year and we don't have them this year. And you guys knew we had told you that Piperline for the full year represented about $100,000,000 in sales. So when you correct for that, you can deduce that the underlying sales for Athleta are going to be very healthy numbers.
Thanks so much.
Next, we'll hear from Dorothy Lachner, Topeka Capital Markets.
Thanks and good afternoon everyone. Just wondered if you could give us some color on international trends across the brands, given the slowdowns that we've heard about and obviously some newer security concerns, just wondered if you could give us a little bit color on international?
And so what I'll tell you from that is that we're really pleased with our Canada business. It looks like on a reported basis that sales are down year over year, but we also called out that we're facing $100,000,000 of headwinds in foreign exchange. So a lot of that is hitting Canada. Asia also looks down year over year. That too is fully explainable.
Both Canada and Asia's decline are all foreign exchange driven, not underlying business driven. And then Europe is a little bit more mixed. So there's probably a little bit of business performance as well as the foreign exchange in there. I don't know, Art, if you want to add anything?
No, I think that pretty well covers it off. Mean, in most cases, the businesses have done decently well. Canada has been exceptional. It's just that when you have a headwind like that, it obviously depresses the reported performance.
Sure.
Great. Thank you.
Yes.
Next up is from Adrienne Yih, Wolfe Research.
Hi, everybody. Good afternoon. My question is on the SG and A dollars, obviously, very, very controlled. I was wondering what the impact has been of going to the $10 minimum wage in July. And then that marketing spend down about $30,000,000 not from Old Navy.
So did it just come out a little bit half and half from both of the other brands? And when would you expect, I guess, in the spring, would be the increase in marketing spend for those 2 brands? Thank you.
Yes. So regarding minimum wage, we said at the beginning of the year, Adrienne, that we thought for the full year, the impact would be about $0.04 on earnings. So there's no change in our view, probably more back half related because we stepped up the wages to $10 beginning in June. So still about at that $0.04 With regard to marketing, the decline was primarily in Q3, the decline was definitely primarily driven by GAAP. You might remember last year, we had actually a television campaign.
It wasn't a big huge widespread television campaign, but we actually yes, we did a lot of video and we were on TV somewhat. So most of it is GAAP. We also have slight declines in Banana. And then again, the absence of the marketing from Piper line last year is the third reason that marketing is down in the Q3. When we get into next year, we'll talk about it a lot more, but I think Art and I are in agreement that we'd like to see the signs of product acceptance come through in the important levers of conversion and average unit retail before we invest too much too early in marketing.
Okay, great. Best of luck for the holidays.
Thank you.
From Cowen and Company, we'll go to Oliver Chen.
Hi, thanks a lot. Regarding the product evolution and what's happening for spring next year, you gave us a
lot of good details.
So I was curious about the classifications where you saw the most opportunity or it sounds like it could be a combination of classifications. And also, from another angle, the opportunity in terms of product, what do you think thoughts about the opportunity in terms of demographics and if there's any intersection between the demographics where you used to have opportunity relative to the products and kind of that dimension as well? Thank you.
Yes. I mean, let me talk about categories. And I'm glad you raised the question because
part of
how we're thinking about spring and GAAP as an example is where did we not get our fair share? And as a consequence, number 1, where are we developing into it and then buying it buying into it to support it. So Oliver Knits is a great example, women's knits. We underdeveloped in 2015. We conceded a fair amount of market share in our women's knits business just because we didn't have the range of development.
And as a consequence, as I've looked at spring and then summer, we have very intentional development to reclaim and hopefully more than reclaim our fair share of the knits business. And it's silhouette, it's fabrication, and it's for multiple uses. And she comes to us, she comes to Gap brand. Knits is an important part of that spring and summer assortment year round, but spring and summer in particular. And so it's part of why I look at this and I say, how much risk do I find versus opportunity.
And when I look at I say it's a fair share opportunity of getting our fair share in terms of both development and buying. I'm pretty confident that there is some upside for us there. Dresses is another example where especially through later spring summer, there should be a terrific accessible dress business in GAP, shirt dresses and then a variety of knit dress fabrications in particular, short, medium and long maxi dresses. If you look at our LY assortment there, we were very underdeveloped with only a couple of silhouettes. And again, fair share, we left a bunch of money on the table because we really weren't playing with the range of development that we should have had.
So both of those are good examples of where I feel like there's opportunity. I'll just go to a third, which is denim. And when I look at products, Oliver, we always take last year's category development and compare it against this year's category development. And so if I look at denim, what I saw last year was a lot of development that was relatively overlapping. So if you had washes, the washes were quite similar across the same silhouette.
When I look at our development this year, I see much more intentional development to create multiple reasons to buy rather than reasons to buy this or that. And so I feel good about the denim development and our opportunity there as well. Those are the approaches that we've taken to every category, whether it's wovens or knits or denim, but those are probably 3 standouts for me where I feel like there is a share opportunity. On the demographic piece, I've said this before and I'll say it again, I feel like Gap is a brand when it's at its best. And I saw this in spades in 2012 where we were on trend with products that our customers expected.
We got a mom in there and a mom with her teenage or young 20s daughter in the store. And if you look at where we are probably underpenetrated today, certainly in the millennial customer, the customer is an older customer in Gap, which we've talked about. And that represents a share opportunity for us across all of our businesses for sure.
Great. That's really helpful. Best regards. Happy holidays.
Thanks a lot. You too.
The next question comes from Thomas Philando, SIG.
Hi, thanks. My first question is with the change in the leadership at Old Navy, I was wondering, can we anticipate seeing any adjustments to the merchandising strategy or in store point of view? And if so, might when might we see those changes? And just a quick one for Sabrina. As we think about 2016, considering the first half, the port issues this year, should we think about that as a full recovery opportunity in 2016?
Thank you.
Okay. Let me talk about any changes, Tom. And it's a good question. I hope that you would give us credit for building on strength. And whether it's Stefan in the building or not in the building or Jill now as interim leader, there's a team that has found their legs and is driving a great business.
And so this is much more about building on strength and maintaining the momentum than any particular need to do a reset of the business at all. That said, we will always tune and tweak and look for opportunity. And one of the things we always do, which hopefully you'll see when you go into our stores is as we get into Q4, we tend to back away from more fashion visual merchandising in the stores towards a more key item presentation just because of the volume and the capacity that that gives us in the stores and it's an easy shopping experience. But that's about tuning and tweaking for the season, not about a reset as to where the brand is or a need to do anything or change anything fundamentally. Sabrina, you want to take on the port?
Yes. I mean, it's a little early, Tom, to talk about the first half. We're well aware of the opportunity we'll be lapping in the port. There's always puts and takes of what's going on in the environment when we get there. So I think we'll talk more about that as we actually get an opportunity to talk to you guys every month.
So we'll say more a little later once we're past this important holiday season.
Okay. Best of luck to you. Happy Thanksgiving. Thank you.
Thanks, Tom.
Next from Royal Bank of Canada is Brian Tunick.
Thanks. Good afternoon. I guess two questions. I guess it feels like e commerce growth the last couple of years and some of the things you guys have done as well have helped to offset mall and store declines. Do you feel like there's anything incremental you can do now on the e com side or omnichannel side to push on that button because clearly mall traffic and store declines are likely to get worse from here?
And then the second question for Sabrina, on the line of credit and your appetite for buying stock back here, is there a minimum cash balance or just kind of viewpoint as we look into next year, what your appetite could look like to be buying back stock at the pace you have the last couple of years? Thanks very much.
No problem. Thank you. Let me just I'll talk quickly about the e commerce piece and then I'll hand it over to Sabrina on the other one. So to me, the big issue and the big opportunity and it's both an issue and an opportunity is the continued growth of mobile traffic. Anybody who is telling you the truth will tell you that it's become probably a majority of their traffic growing very, very fast.
And so we are really aggressively focused on making sure that as our traffic pivots from a desktop or a laptop or even a tablet onto a mobile device that we are able to monetize that traffic. And so it's about a number of things that we've talked about before that we continue to push aggressively on, starting with responsive design that delivers a great mobile experience off of one website, but then making sure that the shopping experience is easy, greater use of imagery versus text, a great checkout experience, tap to apply promotion capabilities, which we put in place. And so making sure that the experience is both emotional, immersive and aspirational on a mobile device as a brand experience, but also transactionally efficient as a customer buying on the mobile device. That's probably the biggest opportunity that we've got right now and we're very aggressively focused on it. It's moving very quickly.
We're excited about it. Our traffic is growing, but the mobile device experience is different than the desktop experience. And we need to make sure that we can make money there in the same way that we can make money on the other real estate. Sabrina, do
you want to? Sure. Yes. I think I'm going to start by saying, broadly speaking, nothing has changed with regard to our view on our capital structure and our cash balances. So for some time, Brian, you'll remember it's important to us we target investment grade ratios and we've targeted between $1,000,000,000 to $1,200,000,000 of balance sheet cash.
We've dipped a little bit below that at times, but that's broadly been our target and nothing has changed. Now Q3 always tends to be like it is for many retailers, sort of our lower point in cash flow because we're building inventories. And then of course Q4 is a high cash inflow quarter for us. So we really took the opportunity to execute this term loan just to give us a little bit of flexibility timing wise before all of these Q4 cash flows came in so that we could continue with our philosophy of being opportunistic and make some purchases on behalf of the shareholders, perhaps before all of that Q4 cash flow comes in. So again, broadly speaking, no major change in our philosophy at all.
Thanks very much.
Next up is Susan Anderson, FBR.
Hi, good evening. Thanks for taking my question. Sabrina, I was wondering because it seemed like you guys ended Q3 pretty clean on inventory, but it seems like you guys still expect the promotional environment out there to be pretty strong in Q4, which is typical around holiday just based on your guidance. Maybe if you could talk about just kind of like by brand where you expect the biggest impact. It sounds like BR was the biggest in Q3, you expect that to continue in Q4 or is it just really kind of across all brands?
Thanks.
Yes. I would say it's fair to say, Susan, that we're not expecting big meaningful turns from the current trends we've seen both at Banana and Gap. Now we know Gap's performance actually has marginally improved on a 2 year basis when you look at the comps, etcetera, but it's marginal. And so we're not expecting any big upswing there. And then Bananas has decelerated, so we're certainly not expecting any major change in trend there.
I think more broadly speaking, we're just looking at the environment. And as Art said, we need to be prepared to compete. Even though our inventories were pleased that we exceeded our goal in terms of coming in clean, We're just being realist about the promotional environment we may be facing. And that's sort of where we landed in the area we landed.
Okay. Thanks. That's helpful. Sure.
And our final question today will come from Kimberly Greenberger, Morgan Stanley.
Great. Thank you. Good evening.
I guess afternoon in your case. I wanted to follow-up on inventory. It looks really very clean here at the end of Q3. I guess the only thing that surprised us a bit during the quarter is that Old Navy ended up with a bit of an inventory overage and it looks like you effectively cleared through that product in October. But Old Navy had a really terrific 4% comp, I think if I got the numbers right in the quarter.
So I'm just wondering, does that suggest that the inventory bought for Old Navy was actually bought for an even higher comp? And maybe you can talk about the risk parameters that you apply to each of the divisions as you're thinking about how much inventory risk you're willing to take? Thanks so much.
Yes. So I'll back up a little bit, Kimberly, because we definitely try and buy to current demand. We never buy on hope. And so a lot of the work we do on inventory is to make sure that the teams are grounded in current trends, current traffic trends especially. What happened with Old Navy was really all about September's trend dropping off from what we had seen.
So September again was that all important 5 week month and we never saw Labor Day come or I'm sorry, 5 week month and we never really saw Labor Day come. And in a high velocity business like Old Navy, where every day of a holiday and certainly every week is very meaningful, when you get backed up, it spells trouble for October. We fortunately, earlier in the year, made a decision across all of our brands, especially Banana and Gap, that we were going to go into the last quarter much tighter. So we have pulled back units across all of our brands and we feel comfortable that the combination of how we're entering with the much tighter receding that will go on in the 4th quarter, we're going to be tight. We're going to be in good shape in terms of inventory.
We've guided to that about flat at the end of the 4th quarter, but it's important to remember that that's lapping a minus 6. So we're going to a minus 6 on Q3's ending 2 year minus 6. So we're feeling pretty good because we want to walk that line that we want to have enough inventory to give us the possibility of those positive comps. And yet we want to be tight.
Great. Thank you.
I'd like to thank everyone for joining us on the call today. As a reminder, the press release, which is available on gapping.com, contains a full recap of our 3rd quarter results as well as the forward looking guidance included in our prepared remarks. As always, the Investor Relations team will be available after the call for further questions. Thank you.
Ladies and gentlemen, that does conclude today's conference. We would like to thank you all for your participation.