Good to see you. Welcome back to San Francisco. This is our 7th year of hosting an investor meeting. And what we decided to do was change the format a little bit, not that it was getting stale. I don't think we got much feedback that I know of.
I don't know if we listened to it, but we didn't get any anyways. But we decided to change the format and introduce you to a few more members of management and expose you to them today and give them a chance to talk to you about the company's strategic priorities and the brand presidents who you hear from all the time, you'll also hear from them. So in order to get this all in, there'll be a little less time with me. I'll introduce today and what we're trying to accomplish and I'll come back at the end. We've saved a little bit of time because last year for those of you who were here, it seemed that there were a lot of questions at the brand presidents.
There's a lot of demand for the brand presidents to have more questions. So we made time for them today in the agenda. So I think that's all sort of set up in the next 4 hours. So what I want to take you through is the 2 parts that Katrina took you through is what are we going to do this morning and what are we going to do after lunch. So this morning, we're going to cover off the company's 4 significant strategic priorities.
So in this order, we're going to go through omnichannel, responsive supply chain, seamless inventory and global growth. So Art is going to kick things off. He's going to come in and talk about all the tactics and strategic initiatives we have that are going to really create this competitive advantage for us on omnichannel. So it all started with the customer and the customer today and more importantly the customer tomorrow, we've been working towards where is she and he going to be in the next 3 to 5 years. And as we look at that, we feel very good with the plans we have in place.
Because if you look at how the market is unfolding today, you have in one extreme, you have some of our global competitors building up to 500 stores per year 20,000 square foot stores. At the other extreme, you have pure players like Amazon who are strictly committed to digital. And through all the work we've done, we feel the customer is looking for something in the middle. And this marriage between digital and physical, digital on its own, physical on its own, but really digital in a physical environment is where customers are looking for companies like ours to create that marriage. And Art's going to talk about that today when he comes up.
And we believe where the company was a leadership position today, but more importantly, we can create a bigger leadership position going forward because of the 15 year head start we have against most of our global competitors, the investments we've made and the foundation that's in place and Art will take you through all of that. And then Sonia will come up who's our EVP of Supply Chain and she'll take you through responsive supply chain. This is something that the business is making quite a bit of a move on. Historically since I've been here for sure, We have been almost 100 percent a cost focused business on distribution, on logistics, on sourcing and that served us well in the P and L. But as we look forward in order for us to grow our operating margin from the rate it is today to what we aspire to, we have to find a better balance between cost, flexibility and speed.
And Sonia is going to talk to you about that. Now we started this process already and I think at last year's meeting when we were talking about this, this starts with us changing culturally. I mean, this is deep rooted belief about how we should bring product to market. And I think we've crossed the cultural bridge and that's behind us now. And we brought some new people into the business same time, whether new people in sourcing or new people in the brands, from some brands and retailers who we respect who are helping us, namely Stephane, having worked 15 years at H and M to make sure we understand how to find that right balance for Gap Inc.
Between cost, flexibility and speed. So Sonia will come in and talk about that. And if you were in the lobby today, for people who are playing at home, because you weren't here today in San Francisco, from 9 o'clock to 10 o'clock everybody in the room got a chance to go out and see summer product from Gap, Banana Republic, Old Navy, Athleta and to see some of the technical ideas we have to make this marriage between digital and physical come true. The way responsive supply chain to me showed up today is in quality of product. There's one thing that from a discipline perspective that's been elusive to us, but we've got it now is something as simple as fabric platforming.
And if you have less fabrics and you have a commitment to longer term fabrics, what you get on the other side of that is quality. And that's what Sonia is going to talk to you about. Seamless inventory, Tom is going to come out Tom Kaiser was our CIO for 4 years. What Tom is really besides his technical strength, what Tom is really good at, he is a change agent and has done this his whole career. So we asked Tom to come out of his CIO responsibilities and take up this new role of leading seamless inventory for the business.
And it's amazing what he's gotten done in just we were meeting the other day, amazing what he's got done in just 3 months. And this is a whole new team we've put together and this is really taking the company's operating model and changing it. For those again who've been watching the company for a while in February 2013, we changed the company's structure to one that was very decentralized, very siloed. So independent leadership whether it's an outlet or online or specialty stores, we had a separate international division from a domestic division and now we have global brands. And with a global brand structure, what you need now is an operating model that helps us move the inventory into this new global brand structure that Stephane, Jack and Steve lead.
So Tom Kiser on their behalf is working. It's going to get done in the next 18 months to completely change how we move inventory around in a global brand structure. And that's what Tom is going to take you through. And lastly, my favorite initiative, which is global growth because the P and L all starts with top line. And anybody in the room here could look at the growth of the business, could look how we manage expenses, how we drive operating how we drive merch margin or operating margin.
It all starts with how do we grow in this environment in which we're in. And growth for us is about gaining market share in our domestic established markets, but also going out to new markets. So it's growth in online, growth in outlet, growth in franchise business, growth in new brands as you saw at the Atlanta today and growth in new countries as you'll hear from Jeff Kerwin, who's our President of China. Jeff's going to come up and talk to you about what is eventually going to be probably around the corner even faster than I believe it's going to be our 2nd biggest market. It's the 2nd biggest apparel market today as Jeff will take you through it will be our 2nd biggest market.
Next slide Avery. In the afternoon the brand presence are going to come up. They have individual time with you. And then as I mentioned earlier we want to put them collectively to do some Q and A. They seem to have people have a lot of questions on their mind.
Let me answer one of the first questions that's probably on your mind, which was we've gotten off to a disappointing slow start. So we're not happy about that. But like anything, we look at our business and always try to understand what is something that we could do better and what is something that our circumstances in which we're dealing with. Now we brought in a little bit more inventory than we probably needed from January to Feb. But we've cleaned up inventory in Feb every year.
And when we've had a little bit too much, it's not been a problem for us. When we ran into some operating conditions in North America that were more challenging than we thought they were going to be. So that in combination with fairness and I think an execution problem on product being a little too spring forward. So I think those operating conditions that only exasperated the inventory issue we're talking about. I think it's behind.
So from our lens, we're looking at the business now and going we got a 10 month year. We weren't happy with Feb, weren't happy with March. We've recommitted to the company's guidance. We're very confident in what we have going on. We're very confident in what you're going to hear from the brand presidents today.
We know we have the right 4 strategic initiatives. So that's why I'm here today and I know that I believe in the mantra of strong start, strong finish. I've always believed in that. It's 2 months. Reminds me of 2011 for those who followed the company back then we ran into this thing called the cotton crisis.
That was an isolated year. This was an isolated 2 months and that's all it is. And you'll hear from the brand presence, say, you'll come to your own conclusions, but that's how I look at it from my perspective in the business. It was an isolated 2 months. So last thing I want to talk to you about is everything you're going to hear today from the leaders in our brands and from the people who are leading the initiatives, everything you're going to hear leads to the company's mission to be the world's favorite for American style.
And that's what you heard at the little video you saw. That was me speaking to 5,000 store managers at a conference last year in May, first time, brought them all together to San Francisco to launch this mission the business has. And what is that the goal from this mission is to be number 1. That's what the company is planning. That's what we're working towards.
We don't see what we like about our goal of being the number 1 global retail apparel company in the world is that there's nothing in our way from getting there. We look at our business today and say the number one advantage we have is choice from luxury to value and the brands we represent. That's an advantage we have. The second advantage we have is access from a specialty store to an outlet store to an online store and more and more countries. So when we look at our goal to become number 1 and then the work we're doing on digital and physical, we believe we have the initiatives, we have the team and we have the track record that will get us to be the number 1 global retail apparel company.
And that's what you'll hear about today and that's what we're driving towards. So with that said, why don't I ask Sabrina to come up and take you through about a 12.5 minute presentation on the financial view of the business. Sabrina Simmons?
Thank you. Good morning, everyone. Thank you for joining us today. I'm pleased that we completed another year of solid performance and I hope you'll agree we've been consistent about the strategy and economic model we're focused on to deliver value. Specifically, last year, we grew net sales to over $16,100,000,000 and importantly, in line with our strategy, our revenue mix shifted toward our higher returning channels, especially online, which grew 21% for the year.
And both our operating margin expansion and our EPS growth were greater than just about all of our competitors. Zooming out, over the past 5 years, we've increased our net sales by $1,600,000,000 and expanded our operating margin by 2 60 basis points. Over that same time period, we've grown earnings per share at a 15% compound annual growth rate, despite macro factors like currency and cotton being more headwinds than tailwind for us. Additionally, we generated about $6,000,000,000 in free cash flow and distributed $2,000,000,000 more than that or nearly $8,000,000,000 through share repurchases and dividends over the same time period. As we go forward, we intend to stay focused in our approach to driving value.
As measured on a full year basis, we plan to drive revenue growth with healthy merchandise margins and leverage expenses to drive operating margin expansion. And as always, we remain committed to distributing excess cash. Our goal is to strike a good balance between driving the top and bottom line as well as distributing cash. We think we've struck that balance especially well against our competitors. Looking at our performance against our domestic competitive set, you can see that we've achieved a much higher sales base, which is $16,000,000,000 is 5 times higher than the mean.
But most importantly, our operating margins are 8 points higher with EPS growth also far higher over the last 5 years. If we look against our global peers, despite a more modest top line, we've grown our EPS at a faster rate over 5 years and we like our trend. Our operating margin expanded while theirs contracted 1 to 2 points in just the last year. Clearly, we've made progress on our path to beat them. As a result of our performance, our 5 year total shareholder return is well above the S and P 500 average.
So we're proud of our past track record, but what's really exciting is a future. We believe the retail environment is shifting and it's more critical than ever to look at growing our brands holistically across all of our channels. There's no doubt that the importance of online and mobile will continue to grow. So it's imperative that our investments be reflective of that future and be balanced across all of our channels and initiatives. Therefore, as we continue to invest in our stores, we're also increasing investments in our supply chain and omnichannel capabilities, supporting future growth across all of our channels.
Let me talk about our capital allocation philosophy and how we balance our investments. We invest in our business to the degree we can deliver strong returns as measured by return on invested capital. Then we allocate capital based on our strategic initiatives like omnichannel and amongst divisions like Athleta, for example, who've demonstrated a track record of meeting their commitments. Further, each individual investment must be in our hurdle rates, which are above our cost of capital by a healthy margin. We've used this approach to ensure a strong return on invested capital even as we've increased our capital spend.
As you know, our strategy is to grow our portfolio of brands across multiple channels and geographies. Our experience and understanding of multiple channels and their interaction with one another is a real competitive advantage that we'll continue to build upon. With that in mind, let me discuss the important role that each channel plays in our growth strategy. Let's start with our stores. Within stores, there are 2 channels, specialty and outlet.
With regard to specialty stores, we're pleased to have been early movers in optimizing our U. S. Store fleet. We've removed about 6,000,000 square feet since 2007 from our U. S.
Specialty fleet. While we shed our lower productivity square footage, we've been opening higher productivity stores through our Athleta brand. We've also been growing internationally through Gap and Old Navy in Asia. And additionally, store growth has come from our higher return outlet channel. In the last 5 years, we've opened over 200 global outlets.
In 2014, we expect total square footage to increase by about 2.5% following the same pattern of growth. Now we've made significant progress in improving the health of our store fleet, but we know this work will continue to evolve as the retailing environment evolves. An example would be our newest market, China, where we have a great opportunity to balance growth amongst all of our channels from the outset. Moving to the next channel, online. Our online business delivers strong returns and continues to grow quickly.
We have a sizable base. In just the last 5 years, our sales in this channel have doubled to about $2,300,000,000 Over the same time period, we've successfully increased the penetration of online sales by 7 percentage points to 14%. And what's more, we've achieved this while increasing store sales. And by the way, the increase in the store sales was achieved on 2,000,000 fewer square feet. As you'll hear from Art in just a few minutes, we believe our omnichannel capabilities can drive far more growth ahead.
We have the opportunity to continue to grow online sales contribution domestically in all six brands. We also have international opportunity as our penetration is only about 4%. Our online presence is newer in Europe, Japan and China, giving us a long runway ahead. The next channel is franchise. Since launching in 2006, we've grown the franchise fleet to 375 stores and we expect another 75 in 2014.
We believe there is ample growth ahead in this high return channel, especially given Old Navy's recent franchise launch. As we said before, our outlet online and franchise channels have higher returns in specialty. We've successfully shifted contribution into these higher returning channels, growing outlet online and franchise to 31% of our business. This is a full 12 points higher than it was in 2,008 and we expect this mix shift to continue over time as customer demand is naturally moving this way. So now that I've taken you through some of the existing growth opportunities by channel, let's discuss the financial model.
Consistent comp and revenue growth is our number one priority. Our goal is full year modest positive comps. In addition to comp, we expect our global growth initiatives to contribute meaningfully to revenue growth. And importantly, we aim to deliver this growth while maintaining healthy merchandise margins. Going forward, merchandise margins opportunities will be enabled 1st and foremost by great product, a topic which the brand presidents are going to cover with you later today.
2nd, by deploying tools in 2015 like Test and Respond and Rapid Respond, we'll take some of the guesswork out of our assortment decisions. This should increase the probability of customers responding favorably to product, which in turn should result in better merchandise margins. Sonia is going to take you through, as Glenn said, these supply chain tools in detail later this morning. In addition, these same tools should support our goal of disciplined inventory management as buying inventory later and into more predictable demand should increase churn. So let's keep moving down the P and L and hit expenses.
We have a strong track record in managing our expenses and leveraging them as a rate of sales. We've been able to achieve this while continuing to make sizable investments in our growth and infrastructure. Going forward, our objective remains leveraging not only rent and occupancy on positive comps, but also operating expenses as a rate of sale. While we remain focused on leveraging rod within each individual region, the mix of our sales is shifting toward regions like China that have higher rod costs. This fact coupled with the fact that most of our U.
S. Fleet optimization is behind us for now, means our threshold for rod leverage is likely to be a little higher going forward with more modest leverage on each point of positive comp than in past years. With regard to SG and A, we assuming we achieve our goal of revenue growth, we would naturally expect total expense dollars to increase. As a rate of sales, however, we expect operating expenses to leverage. You can see on the slide our history of managing expense growth well below sales growth.
You can especially see the benefit of our fleet optimization efforts with Rod leveraging 140 basis points over the last 5 years. With the balanced approach I've described, healthy gross margins combined with expense leverage, we're confident we have a path to expand operating margins, grow earnings and generate strong free cash flow into the future. Turning to cash. Over the past 5 years, we generated an annual average of $1,700,000,000 in operating cash flow and $1,200,000,000 in free cash flow. Over that same time period, we have returned an average of $1,600,000,000 in cash per year.
Our philosophy regarding cash remains unchanged. As I discussed, our first priority is to invest in projects we have high confidence will deliver appropriate returns. 2nd, we maintain enough cash on our balance sheet to fund all of our working capital needs and hold a reserve. Excess cash is then available for shareholder distribution. Regarding dividends, we look to increase our dividend as net earnings increase, keeping our yield and payout competitive.
Looking at our track record, we've increased our annual dividend by a compound annual growth rate of over 25% since 2004 to $0.88 per share this year. Regarding share repurchases, our approach remains opportunistic. Since 2,004, we've repurchased about 630,000,000 shares at an average price of under $21 per share. This equates to buying back over half of our shares outstanding. And our stock price at the end of 2013 was 84% higher than our average repurchase price.
So let me end by saying that we're pleased with our accomplishments, but we're fully aware that it is all about delivering consistently into the future. Despite a difficult start to the year, as Glenn said, we are totally committed to getting the business back on track and delivering another year of solid performance, as evidenced by the reaffirmation of our full year guidance last week. So thank you very much. I'm going to turn it back over to Katrina. Thank you, Sabrina.
So with that, I'm pleased to introduce to the stage Art Peck, who's our President of Growth Innovation and Digital.
Good morning. I will apologize in advance for my voice. So you're going to have to listen to me for the next 20 minutes like this. So I'm here to talk to you about call it digital, call it omnichannel. Actually what I would call it is where the world and the customer is going.
And I'm going to tell you some things that you know. I'm probably going to tell you a few things you're not aware of. And I'm not going to tell you the thing that you most want to know, which is how many basis points are going where on your models. It's just too early for that. These are the early days.
What I can tell you is everything we are doing in the digital and omni channel space is demonstrating positive economic outcomes for the company. Everything that we're doing in the digital space is demonstrating positive economic outcomes. But it's too early to quantify. It's very early days. Last year, I stood in front of you and told you where we were.
I'm going to give you an update to the agenda. I'm going to talk a little bit about the assets that we have in place and a little bit about the roadmap that is in front of us and some of the things you're seeing. And if you haven't spent a few minutes at the technology spot out in the lobby, I would encourage you to do it and see a demo of some of the things that we're doing and some of the things that are coming. Let me start with a slide that to me is really, really important.
And all this is, is this is
the industry since 2004 in the United States, apparel and accessories through 2013. And it shows on the top in the light blue what's purchased online, in the darker blue in the middle what is influenced online but actually purchased in stores, and then on the bottom what is purchased in stores only with no digital or web influence. And I actually find the data to be really compelling. Let me just narrate the slide for a moment, which is very steady growth on what's purchased online, year over year a point, 2 points going from that 3% to the 13% and Sabrina would have showed you that our number was roughly 14% penetration right now. If you look at the middle bar that is the blow away bar.
Basically it says that with the exception of 15% of the population which may be people who don't have digital access, it may be people who are not inclined to use the web. But with the exception of that, this is an industry that has gone digital. With the brand entry, the brand portal, the brand engagement being predominantly digital, even if people choose to take their purchases and do those purchases inside a store. So there's been a lot of debate in the industry about is going to digital, is the channel shift, whatever word you want to use, is that a good thing? For us, it's actually really not a conversation that we have.
It's happening. The customer is going there. Trying to not trying to keep the customer from going there is like trying to dam the tide. We are going to go there with the customers and it is a good thing for this company. It is a good thing economically as the channel shift takes place.
Let me move on to talk a little bit about how we think we're positioned to win. And the first thing I would really spend time on is our technology. If you go out to the bar out there, you will see what we call the glass pipeline, which are the 2 center screens. As you probably know, we are largely on our own proprietary technology in terms of our digital platform and we believe that is a good thing, not everywhere but largely. What it means is we control our destiny.
And in a world that is moving very fast, I'll talk about the implications of mobile shortly. We think controlling our destiny and being able to invest at scale are absolutely critical in terms of creating competitive advantage. Talent, starts with talent, it ends with talent. We sit in the richest deepest talent market on the planet for digital capabilities. Yes, we have a lot of competition around here, but we have amazing talent inside this building.
But we've gone globally also in terms of our talent footprint and I'll show that to you. And talent is critical. We do believe that sitting here in Northern California adjacent to Silicon Valley is a competitive asset and a competitive differentiation. And if you put all that together, it allows us to be nimble. This is a space that is moving if possible faster than I would have said it was moving a year ago or 2 years ago.
And I personally believe the pace of change is going to accelerate. So today putting talent together with technology allows us to move quickly, allows us to be flexible. We are investing in this space. We're going to put $300,000,000 into our technology over the next 3 years to continue to push ourselves forward. So it's not a static environment at all.
But we believe that the combination of these things is an asset. If you just look at talent, we have talent all over the world today in terms of technology, but we've also gone to some of the core markets to recruit and to have capabilities. In Silicon Valley here, in Brazil and in India, we had a recruiting event at IIT, Indian Institute of Technology several months ago. I hate to say it, but if we went to Caltech or to MIT, we probably wouldn't have 800 people in a 500 room 500 person venue with standing room only show up. But we are seeing amazing talent there and we're building talents again in these three locations, which we think is an asset for us.
Let me pivot to mobile. Let me start by talking about what mobile is. To be clear, and I know a number of you are working on laptops or tablets out in the audience, It's not mobile. This is what mobile is. So let me narrate the journey of this particular device today and why it's important.
It started on the kitchen counter where it was charging. I checked my e mail this morning making coffee and went on 7 miles for a run this morning. I did subject myself to that. I'm not sure it was a smart thing to do. It came in on the train with me where I did an e mail, checked what was going on in the news, the stock price, what was going on in the market.
It's been with me all day long. It will continue with me through the day. Importantly, it changes context with me. It's pervasive, it's persistent and it's contextual. And that's what makes mobile special pervasive, persistent and contextual.
I did see a woman yesterday on BART trying to use her laptop standing. It was not a pretty picture. It was not a pretty picture. But this is the device that goes with you all day long. And if I said that we were 100% where we want to be on mobile, I would be lying to you.
I think it's caught everybody by surprise. If somebody tells you that it hasn't, they're probably not telling you the truth. It is growing faster and by faster there are 2 or 3 very relevant metrics to look at. 1, email opens. Email is a huge driver of the business for us.
We have seen our email opens on this device spike significantly just over the last 12 months, over the last 12 months. The second thing is web traffic, super important in terms of web traffic. Old Navy has the highest percentage of visitors coming off of this mobile device of any of our brands. Old Navy's customers for many of Old Navy's customers this is their primary form of web access and that's why you're seeing that. So it's growing faster.
It's contextual. It's persistent. It's pervasive. And I would say it's also today at least, it's an and. And what I mean by that is what the pervasive and persistent elements of this device mean to a customer, to a web user is that they are now engaging our brands in ways that they didn't before, in places and times that they didn't before.
We have a term in the business called spear phishing. That is when somebody uses this, they come in on the mobile website, they realize they forgot to get the uniform for their kid, they punch in, they spearfish, they pull an item out and they go home. That was device that we didn't that was behavior we didn't see before. So it's generating incremental traffic. If you look at our total visits, foot traffic, web traffic, desktop, laptop, tablet, mobile.
Our total traffic over the last 10 years is up massively. But it's up significantly through the persistence of these devices and now the availability and pervasiveness of these devices. And that is a very good thing. So if you think about where we are in mobile today and I will move on in a second, for us it's a huge opportunity. What I will tell you directly is that the opportunity to better monetize the huge amount of incremental traffic coming off of this device we see as very significant.
And you will see pretty radical progress in our mobile led experience, the experience delivered to this device over the course of the next several months. Responsive design, a big buzzword in the industry. What it means is you design your website once. By rules of configuration, it automatically reconfigures the content according to the real estate size. So we are rolling out responsive design right now as we speak and improved checkout experience and improved browse experience, a number of things happening that will enhance our ability to monetize the traffic off of this device very quickly.
Let me move on. What I do want to say is as we go through this that we are focused not on cool technology. Cool technology is great. You'll see some out there. But cool technology that has line of sight to economic outcomes.
And I always carry around in my mind with my teams 3 big numbers that we need to move the needle on. Traffic is number 1, traffic in our stores and traffic into our digital properties. Conversion is number 2. It's a big number for us. Website conversion, you know, is lower than store conversion.
It is for everybody. Store conversion has opportunity for us as well. Move the needle on conversion and you move the needle on the company. And then yield is another one. And by yield, I mean the difference between our ticket price and our average unit retail, where we get gross margin appreciation out of by improving our yields.
And those are really the three things that we have in line of sight to virtually everything that we are doing in the technological space, in the digital space. I'll move on. So we did some research on and we've done lots of research. Honestly, some of my favorite research is to go and stand in the store and talk to customers for half an hour, but we do it we do quantitative research, qualitative research, we do shop alongs, we peer into people's closets, we do all that stuff. And the composite of all of that has yielded a number of dissatisfactions, if you will, compromises that customers have in shopping retail, apparel broadly and our brands specifically.
And it's been very consistent in terms of what this has yielded. Let me just talk through a few
of these. So top of
the list is people want to go into a store and find out if the thing they're looking for that they can't find is actually in the store. I know what a concept. The reality is in this industry that today you do that by flagging down a sales associate, holding up the item that you have, telling them the size color combination that you want. They then break away from you, go to the cash wrap, go to the POS terminal, check-in the POS terminal and ultimately hopefully come back and find you some place in the store. They want to be empowered.
That's what a lot of this says, customers want to be empowered to improve the service experience in this industry. So self checkout and order in store, associate mobile inventory check and order in store. In essence, the same thing, I do it myself or others do it for me. In store personalized offers, personalized check-in and offers, fitting room request screen. We all know that you go into the fitting room, how many times?
You go into the fitting room once. You take your clothes off once. You try something on once. And if it doesn't work out, you're not going back in. There is a huge opportunity to monetize our fitting room experiences and this popped up here, which is what this says is this industry is not delivering good fitting room experience.
So let me do it through technology instead. Let me be there at the fitting room and say, Size 31 doesn't fit, I need a Size 32, could somebody please bring it in for me? Reserve online, hold in stores, what is that doing? That is allowing me to know that when I go to the mall, park in the parking lot, walk into the mall, walk down the aisle, go into the store that I have a higher probability of having a successful shopping experience. That's a big traffic opportunity, a big conversion opportunity.
Self checkout, you see that in other industries, it's not really at all intruding into this industry now. Associate mobile checkout, same idea, which is I got a long line with the cash rep, how can I get out of that line and get some help on the floor, and then a smart shopping bag? So being lucky is good, being smart is good. Being both is probably even better. This is research that's come together over the last 12 months.
Of those that are on the top of the list, we're working on a number of them right now. Self inventory check is real today. Find in store, you can do it, an associate can do it for you. Order in store will come out in early June on a pilot basis. We'll be out with that.
In store personalized offers, I'll come back and talk about that. Sitting room request screen, it's not on the list yet, but it's something that's really intriguing for us. Reserve online, if you didn't see it out there, check on your tablet or your phone or maybe you've used it. It's a live feature for us today in Gap and Banana across most of the fleet in the United States. We've had since we introduced it several months ago, just under 500,000 reservations have been made.
So we are really starting to get traction. It's an awareness issue right now more than anything. If you talk to people who have used it, they absolutely love it. It allows us to monetize their footsteps in the store. We can bring outfitting suggestions to bear when they come into the store.
We're driving higher transactions when they come into the store, bigger units per order. Everything is good. The metrics are wonderful on reserve in store. We just need more of them. Self checkout, it's underway right now.
We're doing prototyping in a prototype testing store here in Northern California. And associate mobile checkout, same thing really in terms of either being able to order in store and having it shipped or associate checkout experience capability. And it happens on this device right now. It's our device of preference. It's an iPod Touch with a sled that has a card swipe slot on it.
Nothing revolutionary about that. This could be an Android device. It could be a wide variety of things. And I'll come back and talk about what we're doing in our stores with our technology that basically makes us device agnostic in our stores going forward. Let me move on.
So last year I talked about really ship from store. That's where we were. Ship from store is a wonderful thing to refresh your memory. It sits on real time inventory availability. We know where all of our inventory is and it allows us to expose all of our inventory regardless of where it is in our DCs, in our store, on our website to all of our demand.
So in a world where remember yield is important and in a world where yield is important fragmentation, especially fragmentation of inventories into 3,000 stores is the enemy of yield. Ship from store really nothing more than anything else allows us to virtualize our inventory, expose all of our inventory to all of our demand. It gives us a significant, let me underline that, significant opportunity to arbitrage rate from online demand to inventory that might be over inventoried in a given store and therefore subject to markdown. We've seen very exciting results out of ship from store so far. More progress however, find in store, I highlighted that.
You can check it right now if you choose to do that. If you go on to the website, you will note here as you're looking at a style, the Find in Store icon down there that quickly pulls up where it is available green, yellow, red, very well received by our customers and we're really now starting to roll it out in our stores where sales associates are going to be discussing this feature with our customers in our stores. Reserve in store, again up and running in Gap and Banana here in the United States, just under 500,000 reservations over the last several months. If you haven't used it, try it. It basically builds on find in store, but allows you to then have the unit pulled from inventory, set aside your name on it in a store and then depending on the store different kinds of experiences.
But it's again what it's doing is traffic foot traffic into the stores. I know that I'm going to go into the store and have a successful shopping experience. It allows conversion. It allows UPTs. It allows it builds on yields.
It is a very good capability for us.
You can
see how it lays out here. In Barcode Auto Center, these are our local stores obviously for Banana as well. And you can try it out there if you want to when we have a break. What's following? Order in store.
I'm not going to get breathless when I talk about these things, especially with my voice the way it is. Order in store, we think is going to be huge. Really think it's going to be huge. And you can see a live demo out there. I'd encourage you to look at it.
Basically what it is, is one of the biggest dissatisfactions in this industry is that I go into a store and I find 3 things that I like, but I want to buy these jeans, 30, 31, 32, 1969 Japanese salvage denim jeans and I can't find it in my size. And today basically I'm out of luck. What this allows us to do is either you as an individual or a sales associate in the store to say don't leave the store empty handed. We are going to make sure that we find everything that you want, order it in the store, validate your credentials, ship it to your house, ship it back to the store, ship it to wherever you want to pick it up. Simple, easy experience.
Scan the tag, validate the style, put it in your shopping bag, validate your credentials, hit order and done. Super easy experience, super straightforward. It's a UPT opportunity. It's a conversion opportunity, it's probably a traffic opportunity at the end of the day. If I know that if I go in and I don't find what I want, I can find what I want, start to build a loyalty element of the brands, it works all the metrics in a very positive way.
Trial in early June, order in store. Web based POS, let me spend a moment on that. The simple story on web based POS is we are pushing our legacy systems out of our stores and pushing our e commerce store into our stores. That's the way to think about it. And what that does is it allows our stores to then number 1, be on the cloud, which cuts down on a lot of things, cuts down on maintenance, cuts down enhances reliability, does a number of good things.
The second thing it does is it makes us device agnostic in our stores. So today we are committed to a large footprint POS terminal that sits in our stores. On a web based when you go into web based POS, it's on a robust Wi Fi private network. It allows us to essentially transact across any device that happens to have a browser on it. 2nd and important thing it does is it brings the ability to bring everything that is available as a web service to either our customers or our sales associates or both.
Reviews, product information, inventory information, all kinds of things potentially it allows you to bring into the stores to our customers and to our sales associates. On top of that, a loyalty program. I'll speak to you about loyalty in a moment. This is loyalty 2.0 for us. And what I mean by that is loyalty as a vessel for engagement.
The historical perspective on loyalty has been that it's about share of wallet and frequency. We like share of wallet and frequency. We also like deep customer engagement. We have it today on our websites because next I'm going to talk to you about personalization. I want to come back and finish the conversation about customer engagement and loyalty in an in store environment assisted by a digital program.
Let me talk personalization. Personalization isn't an objective. Personalization is a means towards relevance. And what I mean by that is, we engage with our customers today more on a mass basis than we do on a personalized basis, whether it's through e mail, which is largely mass, advertising, digital advertising, a web page that everybody sees, it's pretty much a one size fits all sort of engagement that we have. What we know today because we are in the early stages of personalization and I'll show you some of the things we're already doing is that as you increase relevance, it shouldn't be a surprise, as you increase relevance, you yield very positive customer benefits and very positive economic benefits for the business.
Let me take you on a quick tour, a preview of what's coming in terms of personalization because it is early days, but there's a lot there already. So start very simply with email versioning. I know you will probably tell me that you get a lot of emails. You might tell me you get a lot of emails from us. What you don't know is there's a lot more where those emails came from.
And what I mean by that is, if you opted in on the website and said that you're primarily a kids and baby shopper or if we've observed that your behavior on the website is that you're primarily a kids and baby shopper, we will version you on an email. So today there were probably 9 GAAP e mails that went out that were focused with different messages for different customers. This is early, but it has huge impact on click through rates are higher, dwell time on the website is higher, conversion on the website is higher. Simple stuff, but important stuff that demonstrates that relevance pays off. Triggered e mail.
Now this one gets a little bit more interesting. If you abandon a cart on our website, you might have gotten an e mail that said you abandoned the cart and what you left in the cart is getting a little lonely, could you come back and buy it please. But there's a lot more triggered e mail where that came from. And right now in May, we will be rolling out a much broader suite of triggered e mail. Abandoned cart, sense of urgency you left it there, don't you want it?
Browse based, let's say you looked at an item and we're going into a low inventory mode. We come back to you and tell you there are only 4 units left of this, don't you want to go buy now? Maybe there's a price reduction. And we want to maybe you didn't want to buy it on full price, but we tell you this item is now in promotion or it's on First Mark, don't you want to come back and buy it? Rewards expiration, which some of you probably get today out there already today.
And then personalized on a wide variety of other fronts. We actually do send birthday emails out. There are a number of other places if you opt in and reveal personal information, where we can do triggered emails that deliver much more relevant content, much more action oriented content. On all of these that we're doing today, click through rates are higher, dwell time on the website is higher, conversion is higher. We yield very positive economic outcomes from triggered emails.
Digital advertising. I'm sure some of you have gone on and browsed on our website or another website. And then as you're touring the web through other places on the web, the item that you looked at magically reappears in a digital banner ad that's been placed on that website. For us, we call that trackable online media. We've been doing this now for over 2 years.
It's very high efficacy in terms of generating traffic, generating conversion, and that is highly personalized all the way down to you as an individual, basically driven by the cookie on your browser that follows you around the web. Localization, doing it today. You come to the website, either you come in through an email or you come directly. We geo sniff you, the industry terminology to determine where you are. I know it's a strange term.
And then we push localized information to you, again more relevant. Maybe your store is having an event. So for Athleta, maybe we're having a yoga clinic that night or something like that. But it allows us to recognize who you are when you come in digitally and put content in front of you that is locally relevant to you. Rewards based, you get these today.
This is super compelling, huge in terms of conversion, huge in terms of UPTs, dwell time on the website. You come to the website, you see you have a sense of urgency associated with rewards points that are expiring and you feel like you have to use it. It's really relevant to you, really creates high sense of urgency. And personalized web pages, you will never know this is happening to you. But today on our websites, if you are a again predominantly a kids and baby shopper, we will read you as you come into the website.
We will acknowledge the cookie that you carry on your browser or perhaps you're coming in through your login credentials, so we recognize you by profile. And we will put a website in front of you that is personalized to your shopping preferences. We keep you. There's a term in the industry called 1 and done, dramatically reduces 1 and done where people come to the site, they take a look and they bounce off. If you come to a homepage that is tailored for you, tailored for what you want to be there for, you're much more likely to engage the stories that are on that homepage than if it's something that's not relevant.
We're in the very early stages of this, but it pays and it's been a very attractive just again in terms of your basic web metrics, dwell time on the website, how many click throughs, where you go, how long you stay, what you do on the website and conversion as well. So there is a richness of personalization manifesting itself in a digital world. I said this to you last year and I'll say it again. One of the keys we believe in personalization is cool not creepy and it can go to a not a good place. But for us cool really boils down to the fact that we're delivering to a customer through personalization relevant experiences that are beneficial to them.
That is cool. So where do we go with this? And I'll finish on this. So today in the store, we recognize you when you pay, yet we recognize you when you pay. That prevents us from engaging with you other than through a sales associate obviously, it prevents us from engaging you in a relevant way through the entire shopping experience.
And so for us the biggest frontier in personalization is in fact in our store environment and that's where loyalty comes in. The simple model that we have in mind here is if you have an incentive to walk in our stores and digitally tell us, hi, I'm here, this is who I am, that allows us to bring to you a number of very good things, relevant experiences, relevant information, relevant offers in a store. It's not a profound thought, it's not a new thought, but it's actually a big deal for us. And we are in May going to be testing a loyalty program that we believe has the potential to open up that dialogue either before the customer comes in the store when they're in proximity or when they cross the lease line in the store so that we can begin personalizing the store experience through this device. Let me close on this device because a lot of what I just talked about is relevant to the website, but a lot of it comes together through the fact that this brings together the digital world and the physical world.
It allows those 2 worlds to come together in a way that we've never seen before. And let me go back to context. When you're outside a store, this device is a browsing device, it's an e mail device, it's a variety of things. What we're really focused on right now is when it changes context and we know when it changes context because we know when you're inside our stores. When it changes context, what is the store level experience that we can bring to you through this device, offer information, price information, experiences, etcetera.
So we are excited. We see great outcomes. We see terrific positive consequences coming. We're investing in the technology. We think we have the talent to support it very robustly.
We control our own destiny. I would just say stay tuned. It's going to be a very, very exciting ride for us. Thank you.
Great. And with that, I'll open it up. We have time for two questions for Art and then Art is actually going to be at the technology bar at lunch. So for those of you who have further questions, he's available. So, Matt?
Sorry, Matt McClintock, Barclays. So Art, you talked about order in store being potentially a big deal. Could you compare and contrast that to reserve in store? It would seem by the chart that Sabrina put up there that more and more consumers are looking online first before they actually walk into the store. And that would seem more of a reserve in store type feature as opposed to order in store, which be that person that would physically go in the store and then look for the inventory itself.
Just so we can better understand that. And then lastly, second point, you talked about building brand awareness for reserve in store. How do you plan to do that? Okay. That was 2 or was that 3?
So let's just talk about order in store for a second. If you think about the industry's overall conversion rates, they're typically in the if you're doing in the low 20s, you're doing well or you're doing poorly, you're doing in the high 40s, you're doing super well. Still says that regardless of any brand out there, any of our competitors, more than half your customers are walking out the door empty handed. We know that not an insignificant reason to walk out the door empty handed is because you were there to shop, you might have found something that you liked, but your size and style and color combination wasn't in the store. So if I just go back to my 3 big numbers traffic conversion and yield, there is a huge amount of that traffic today that is walking out the door where we feel there is a really big conversion opportunity.
They're in the store, they're facing a sales associate. For us to be able to say, pups, we screwed up, we don't have your size and style, but we will have it to your house later today or tomorrow or whatever else it is, we feel that's a big conversion opportunity. So it really allows us to have a capability that faces every pair of footsteps that walks into the store, whereas reserve in store, we hope it grows and we're going to put our shoulder behind it and I'll talk about that. But that's going to be a subset of our traffic. Order in store applies to every single pair of footsteps that actually comes in the store, whether it's a conversion opportunity, a UPT opportunity, an average order size, it moves all the metrics in the right direction.
It's going to require, we think, and we are excited about it, a different form of customer engagement. We're also going to make it available to an individual to be able to do on their own. But the fact that it allows us to monetize every pair of footsteps potentially that comes in the store, it's a big deal. On Reserve in Store, it's really about continuing to generate awareness. So it's amping up the capability on the website, pushing the marketing in front of people.
So we're doing that. It's accelerating and amping up and pushing a message forward in the stores as well. Well, I think it is, is it's actually marketing it more around the emotional benefits of what comes from the experience than the technical capabilities of what is embedded in the experience. And that's what we're pivoting the marketing to and you'll see that over the course of the next few months.
Great. So one more question for Art. Yes, I think it's David in the back.
David, how are you?
I get a lot of CRM, all three brands and it seems that it is relentlessly price promotional. And the message I take away from the CRM is that you're very good at keeping me engaged. And if I watch this stuff regularly on a regular basis, I'll have the opportunity to buy everything I want at 40% off. So could you comment on that being my takeaway from your offer?
I'm sorry, that's been your experience. It's probably because we've been only personalizing those 40% off messages to you as an individual. How good are we, right? It gets to the point of messaging becoming frankly more relevant. You might be interested to know that our highest click through e mail message, anybody want to guess?
It's highest click through e mail message. Not birthday, it's new arrivals, which is exactly what you want, it's new arrivals. So I will acknowledge we've probably been with the situation in February March that Glenn referred to, we've probably been a little bit more promotional than we would have liked to have been. Increasing messaging relevance, we know that there are far more powerful messages out there. And that's again, that's where we're going to get to on personalization.
And just the simple fact that she clicks through and he clicks through more on new arrivals says there is a customer that's very engaged in the product and the brand. But you're right, it can't be about a price message all the time. Thank you.
Thank you, Art. So next I'd like to welcome up Sonia Single, who's our EVP of Global Supply Chain. All right. Thanks, Katrina. Hi, everybody.
I'm Sonia and I'm responsible for our supply chain, which includes our global logistics network and sourcing operations around the world. As it's my first time talking to you, I thought I'd share a little bit of background. I've been with the company about 10 years, half in supply chain and half leading our P and Ls, most recently leading our Europe business followed by the launch of our international strategy for Old Navy. And prior to Gap, I was at Sun Microsystems in high-tech for 10 years in supply chain operations and I began my career at Ford Motor Company in product design and in manufacturing. I'm sure you're all thinking that I look younger than I am, which is what I'm hoping.
But anyways, a little bit of background, because I think it talks to the passion I've got around product and supply chain driving competitive advantage for the company for product companies. And so today, you've heard from Glenn talk about our global brand model and the importance of having a world class supply chain. We've made a lot of progress in this area and I want to have a conversation with you about that. But it starts with I think giving you a little bit of the perspective of the evolution of our supply chain. When I first started with the company about 10 years ago, we were a relatively simple business.
We had 3 big brands. We retailed in 4 markets. Our online business that I spoke about was nascent and our outlet model was a remake business. In those 10 years, we are now 6 brands. We have 8 product engines including the outlet engines.
We've got 50 about 50 markets that we retail in and we source in over 30 countries. We've got 3 very strong channels between retail, online and franchise. And so through all this complexity and growth, we have driven operational excellence with our supply chain, proud of the cost advantage that we brought to the company in our efforts. But now we're at this pivot point and we have made this shift in recognizing that to be number 1 and Glenn talks about being number 1, number 1 product companies cannot be number 1 without having a world class supply chain. And the key characteristic the critical characteristic of a world class supply chain is that it's demand driven, it's customer led, it's responsive, it's agile.
So we're shifting now to maintaining our cost advantage while we lead with speed and responsiveness. Let's take a look at what this means for us, because really it's all about driving margin expansion for our brands. If you look at the push model that's characterized specialty apparel retailing in the U. S, let me describe what a push model is. It's when we about 9 months ahead design the product, we place our buys based on last year selling trend, We issue our purchase orders to our vendors.
We spend many months making the fabric, manufacturing the product. We push it up to our stores. We sell as much as we can on brand price and we take pricing action to promotions and markdowns for the next season. And so this push model, we're ahead of our local competitors as Sabrina shared. We feel good about that.
But as we look to our European competitors and having worked in Europe where these European competitors dominate, you can really see the advantages of their business model. They sell more at regular price, they discount less and their brand equity is very, very high as a result. So what we're looking at with respect to setting these competitors is that they are both have a supply chain that's over 50% based on being responsive. They trigger based on true customer demand. Sephora and I talk a lot about his experience at H and M and certainly H and M Inditex had 2 quite different approaches, but with the same foundational principle.
And so in fact, you hear a lot of Inditex's executives speak about how supply chain is their competitive advantage, is the way that they their business model runs. And certainly, we look at that. Now I just want to be clear, we're not talking about moving to a fast fashion model. Our aesthetic is something that we're very proud of. It's about adapting some of those business processes and doing it in our own unique way.
So let's talk about the architecture, the building blocks of what a responsive supply chain is and some of the science behind it. At the foundation is fabric platforming. And this is where we land in partnership with our design teams, the key fabrics that are going to be the foundation, the building blocks of our assortment. These are the fabrics that have high quality attributes. They last a long time.
They have stretch and recovery. They're versatile. They can be used in a lot of different styles. And we choose these fabrics for scale. And by the way, we get great cost advantage the more we consolidate on these fabrics.
So we define these fabrics across all of our key categories and we place them at our strategic vendors around the world. We position them. What that allows us to do is to use these 3 triggers that I'm speaking about today vendor managed inventory, rapid response and test and response to trigger and pull from those fabrics in response to customer demand. So each of these triggers, each of these capabilities is targeted at a key piece of our assortment. If you start with vendor managed inventory, this is for our longer living product.
VMI, we use in order to get size level advantage on our in our stores. And we've seen amazing progress. By the end of this year, we'll have about 50% of our long living product on VMI. Our systems are tied into our vendor systems. We trigger and we replenish.
And so we've seen about a 6% improvement in service level with these efforts in BMI. So it's a great start for us. Rapid Response, which is more around our seasonal product, this is where we manufacture a portion of our assortment. We send it to our stores. We read the selling for the 1st couple of weeks.
And based on that intelligence, based on that insight, we then manufacture the rest of the flows for that season or 2 seasons. And so this lets us take a lot of the volatility out of the business. We're able to shift from the lower performing CCs to the higher performing CCs. And then test and response. So test and response is used for our big ideas every season.
This is where we manufacture a small capsule of the big idea. We accelerate, we air it into our stores. We have a handful of stores that are statistically sound. We analyze the selling performance and then we place our big buys with that information. So much more real time based on customer demand and enabled through our fabric platforming.
Now the best way to really illustrate this is through some live examples. So let me take you through a few. This is a great visual of Gap brand and you can see here this is one of their key fabrics that they platformed. What's exciting about this photo is that every single fabric on this slide is the same base cloth. So you can see the advancement that's been made in fabric technology.
I mean the versatility in color, in finish, in coating, it's quite remarkable. And so as Stevens designers in New York go into the fabric libraries, they get inspired, they leverage these fabrics and they design into them and it's a great step forward for us. The progress that Gap's making is remarkable in the area of denim. By the end of 2015, they'll have over half of their denim assortment on platform fabrics. And this is just an example of 1 brand in 1 category.
We're making progress in all of our brands here with respect to fabric platforming. And we expect actually by the end of this year to be at about 40% platformed. So here's another great example from Old Navy. So you may remember the Pixie Pants that was marketed last month. This is an example of the PixiePants ads.
We were advertising this and selling this great product. We were also quietly doing a test in stores where we were assessing the appetite for a longer length PixiePant and whether it would cannibalize the ankle length of cut that we have in stores today. And so we were assessing silhouette preference. We were assessing color ranking for this longer length. This is the really fun part about our business.
We have everyone from Amy Poehler to the PhDs that are analyzing this pants all leaning in to make it really, really successful. It's the art and science of the business. And what we learned was that there was no cannibalization and that color ranked quite differently than the shorter length. So with that insight, we've fed that into our June July buys. And so coming soon to a store near you, you will see this longer length pants with customer color preferences embedded.
And another great example from Banana Public Factory stores. So we started with a ranking of color and pattern in our stores for the 1st flow. Upon reading demand, true demand from the customers, we were able to move in and out of the lower performing CCs to the higher performing CCs. Color trending is very tricky. As Art spoke about, the customer is moving at an incredible pace.
And it's very hard to predict down to the month exactly what color, how fast that color is going to be on trend or not. So this real time ability to respond in season is an enormous advantage for us. I do want to talk about the fact that this requires a lot of heavy lifting in our vendors and mills. We're talking about significantly reducing our lead times, both in our fabric mills as well as our vendors. It's not dissimilar to what Toyota did in the 70s with lean manufacturing or what Dell did in the 80s with making computers to order or what our European competitors did in the last decade.
So it is a substantial shift in our manufacturing model and not many companies can do this. Only the best ones can do it. And the good news is that our vendors are committed to this. I was in Asia a few weeks ago meeting with all of our strategic vendors and they're alongside us. They're with us in this journey because they know that our success is their success.
And many of them are not new to these concepts. So we're committed along with them to make this shift. And I think the reason why it's so clear is that the benefits that we expect are multifold. The first and most important for us is AUR and the margin expansion through higher ranked price selling, hopefully fewer 40% off emails as a result and through increasing accuracy of our buys, we expect to see that AUR trend up. And then the impact on brand integrity and our fashion credibility by having more of the product that customer wants and desires will help with this.
And then finally service level, having size level availability on the shelf for our customers for our key ideas is a critical enabler and will let us over time reduce our of supply as Sabrina mentioned earlier. So the benefits are multifold and we're excited about this. And our tests that we've shared with you and in fact we've got hundreds of tests like the ones I've talked about happening in our business this year. All of these are giving us confidence about the opportunities ahead. So the journey, we're starting this journey.
Glenn alluded to the fact that this is a big shift, but the momentum is certainly there and we expect to have a meaningful amount of our assortment on a responsive supply chain by the end of this year building to a goal of 50% on this capability through the end of 2016. We benchmarked our competitors. We know if you think about fabrics platforms that companies like Uniglow, companies like H and M, they run the bulk of their business on about 300 base fabrics. So we have a lot of intelligence about what others do and we're weaving this into our architecture. We're going to continue to innovate here.
I think that we're not stopping with our current approach to responsive supply chain. We have to keep moving. The customer is moving very quickly. And so we are constantly looking at new and exciting ways to be increasingly responsive. But this is an aggressive goal and it requires a pretty massive transformation, not only physical transformation as alluded to by the capacity line on this chart, but our capacity also talks to organizational capacity.
Everyone that touches product today in the company will be shifting is shifting. The inventory manager today that's reading her business on a weekly basis is now using that information to trigger the supply chain as well as take pricing action in the stores. The designers are using these fabric platforms to design into the next generation product. And we have our stores that are helping us execute these tests and read the information from these tests. So it is truly a cross functional effort and it's a big change for us.
But I'd say where I have the confidence is that there's a lot of alignment and there's a lot of commitment. I talked to our brand presidents on a weekly basis about this topic. There's a lot of commitment throughout the product engine to make this happen. And our vendors are there. Our vendors are committed and they're working alongside us to make this change as we speak.
We've negotiated our needs and they're delivering. The knock on impact, the benefits that we see, we expect to see in the area of CSR as well is meaningful. And so that's an exciting byproduct of this change. And then finally, the internal readiness. As I mentioned before, not many companies can make this change, only the best ones can.
And I see our product teams, they can taste the success of the examples I've shared and the momentum is accelerating as we make this change. So it's there for us. The product teams want it. The leaders are leading us through it and we feel like it's our time to make this happen. So with that, I will take any questions that you have.
Adrienne, do you have a question? Thank you, Adrienne Tennant. When you get to the penetration of 50% from those three initiatives, what is the ultimate lead time? So it's 9 months today. And then can you give us some reference the pure play demand centric models, what is their lead time today?
And so should we think about it going from 9 months to 6 months over time when you get to that 50% level? Thank you. Yes. So our current manufacturing cycle time is roughly 2 seasons, about 6 months from when we issue the POs to when we see product in stores. We expect that to cut to about at half.
So that's a big move forward in terms of our speed initiatives. We also look at our competitors as I mentioned, Some of this is complicated by where some of our competition retails and where they source. So it's a mixed bag. I don't have specific information for you. But I'm confident that we'll be benchmarking ourselves and making sure that we maintain the lead there.
Okay. Next question, yes, from Alliance. Thank you. Valerie Brown from AllianceBernstein. So you've mentioned that your vendors are ready and willing to support these initiatives, but can you talk about any changes you've made in terms of your internal decision making processes?
Because when I talk to vendors, they often call that out as a key distinction between U. S. Specialty retailers and your global competitors? Yeah. It's a great question.
And both Glenn and I alluded to the fact that internal readiness, internal change is often what's held companies back from taking advantage of the faster manufacturing. And so this is where I'm most confident. We're training 100 and 100 of our team members internally as we speak. Last week, we had a great training at Old Navy in our men's division, where the entire cross functional team is learning how to read the business and trigger the supply chain. So changing our internal processes to take advantage.
It is a shift and it's new capabilities that we're building within the company. So we're not underestimating it. We're investing quite a bit in terms of the change management efforts there and the education effort. Okay. One more question for Sonia.
Oliver?
Oliver Chen from Citibank. Sonia, thanks for your time. Regarding where do you see the most opportunity with respect to classifications in terms of the classifications with the lowest hanging fruit? Also how do you marry this against the vision for SKUs in terms of if that's increasing or decreasing?
Good. So in terms of the areas, I think I mean, I think all of the assortment is right for the taking. And that's why we've got this multipronged approach between VMI test and response and rapid response. They're all giving us material margin advancement. And so depending on the type of assortment, we're applying the different methodologies.
So we're going after all of it, the fashion, the basics. We think there's opportunity across the gamut of the product, across the categories. I'd say we're starting with apparel versus non apparel, but I'd say that's probably the one key distinction where we're leading. In terms of SKU, really the brands are determining their assortment in terms of SKUs and CCs and the role of supply chain is to enable those strategies. So it's not about a mandate to simplify choice at all.
It's about building the right building blocks to enable the right customer choice that the brands want to put forward. So it's a real partnership. Great. Thank you, Sonia. With that, I'd like to welcome to the stage Tom Kiser, who's our EVP of Global Product Operations.
Good morning. My name
is Tom Kaiser. I'm EDP, Global Product Operations. I've been with Gap Inc. Now as Glenn mentioned a little over 4 years. I joined the company in January of 2010 as the Chief Information Officer.
I moved into this new role in January. And so the update I'm going to be giving you today is unlike the other updates that you're seeing where we're in true execution of strategy, this update is really about the blueprint phase that we're in around seamless inventory. I joined Gap Inc. From Limited Brands in Columbus, Ohio, where I was between an employee and a consultant there for almost 9 years. Limited Brands is now L Brands in case you're confused.
At Limited Brands, I helped lead an effort to build an inventory operating model and really a product operating model soup to nuts for them and served as their CIO for a number of years there as well. I brought cards in case I forgot my name. So what is seamless inventory? So seamless inventory to us, the definition looks a lot like the definition you would see for any inventory management strategy. It's about putting the right product in the right place at the right time to fulfill customer demand and to maximize your margins.
What's different for us and why the word seamless is so important for us is as Glenn mentioned earlier and as you've heard as we've moved to global brands and global structures, we really have to think about inventory management, how we buy, how we plan, how we move product from a global standpoint and we need to think about it from an omnichannel standpoint. So really eliminating the traditional lines and barriers that have existed with how traditional retailers manage their inventory. That means a whole new way of thinking about analytics of product, whole new ways of thinking about how you match up supply and demand, whole new ways of how you actually move product physically and when you make the decisions on when you're going to move the product. As Art mentioned earlier, we've learned an enormous amount from the ship from store exercise as we've opened up our store inventory online and really gotten a view of just how high, high could be if you take away the constraints and the limits of product. And we want to be able to have that flexibility within markets and in within stores as well and have the ability to move that product around.
So why now? So the global brand structure is demanding it quite frankly. As we've moved from our local market and channel P and L structures and into true global brands that want to win globally and need the flexibility and speed to win globally, we need the capabilities, the analytics capabilities and the capabilities to move product and to match that supply and demand much more quickly than we've typically done in the past. Our customer demands it. The evolution of our customer, the way they're shopping, what they expect from us for product, They demand these capabilities as well.
The movement of global retail and the movement from mass to personalized is a very interesting concept to think through. The money has been made in this industry on mass retailers, people who could look into the future and pick the product and push the product out in mass and when they hit enormous money was made. When they missed you mark down and you moved on. As we move to a personalized world, if we think forward 10 years, 15 years forward where we know everything about our customer, what kind of inventory processes do we need to have in place then? How do we build the flexibility and the speed to be able to react to much more information, much more specific information about our customers?
And then there's a humongous evolution that's going on that we see every day especially in this city around supply chain and specifically around fulfillment and the expectations our customers have around fulfillment. Things that were unimaginable and really unaffordable just a few short years ago are now possible. So how do you take advantage of that? How do we build the capabilities and analytics to take full advantage of that? I'm going to take you through what could be a little bit of a painful chart, but bear with me as we go through this.
Just to talk a little bit about the way our processes work today and then how we envision the processes working in the future. So as you've heard mentioned, as we move to the global brand structure, we've really focused in on our product, the product side of our business. So global design, global merchandising for our products. But today, we still have within that when it goes time to actually buy the product and plan the product, we are doing that within and a channel. So in this example, which is just an illustration, Country A stores buys product off of that global line, Country A online buys product off of that global line, Country B stores buys product off of that global line.
Those purchase orders go to, in most cases, the same supplier who's managing those individual purchase orders through the process. We pick the product up and move it into Country A store fulfillment, Country A online fulfillment or Country B fulfillment. For that duration of time, there's a lot that we learn about the product as we talked about all the different testing. There's a lot that we learn about customers. There's a lot of things that change in the environment.
But for the most part, from when we cut that purchase order, which is roughly 3, 4, 6, 7, 8 months in advance to when the product arrives in the DC, there's really no change to that product flow. And really the levers that we have to pull once it's inside of that market and that channel are to sell it at right price, sell it at promotion or market down. We've added in the last 2 years ship from store, we've opened up the store inventory to online where we can pull out product. But those are really our only levers. We have some examples of where we've been able to move some product, difficultly across the markets.
As we've gone into new markets, we've needed to lift and load and fulfill behind them. So for example, we vastly oversold our expectations when we opened Old Navy in Japan and needed to move product from the U. S. To Japan, which we were able to pull off. But it's not an easy process inside of our existing models and constructs today.
So our future. We talked before to you about the evolution of our product and really making product that we can sell in any market and any channel that we're doing business. Global labels, global tagging, really global attributes of our product. We put a lot of effort into that and made tremendous progress on that. And we're seeing some unlocks already, but this is a key component and a key dependency of us being able to truly open up seamless inventory.
Building cross channel logistics, we have been world class for a number of years at our store based logistics and our online logistics, but they have been very separate organizations and they've been very focused on separate things. We are in the process now of building out our strategies of really bringing our logistics and fulfillment capabilities together, so that every fulfillment center is not just a store fulfillment center or an online fulfillment center. They are 1 and the same. So we have maximum flexibility to move product within a market between channels and that we build the pipes and the connectivity between markets so that we can move product across our full supply chain. Advanced analytics.
So in our online business, we've built out a world class analytics over the last handful of years full of data scientists who really provide an enormous amount of information on how we run our business and how we make decisions. Part of this initiative is to really elevate that organization and bring them to the inventory or to the enterprise level for our inventory analytics, so that we are truly bringing supply and demand analytics together all the way through the pipeline of our products and making decisions as real time as possible to impact where product is actually flowing to. And that will be for both for preseason as we go through the buy process, but also during the life of the product as it is in a DC, as it is in a store, as it is in an online DC. How do we make sure that we are putting product in the most likely place that it can be successful sell fulfill customer demand at the highest possible margin. So as we envision what MVMT could look like in the future and again we're in the blueprint phase of this.
This is hypothetical, but directionally correct. Global design, global assortment in place, global demand comes together from all of our channels and markets into global purchase orders flowing through our supplier over the top of this advanced analytics all the way through the process, advanced testing all the way through the process, so that we're making decisions at the last possible moment of where product is going into a specific market, in this example country A or country B and into a specific distribution center. And we're also building the connective tissue between each of those pools of inventory. So where it makes sense, where it's cost effective, where something has dramatically changed, we can flex that inventory and move that inventory either between DCs or even store to store, store back to DC. So it's really building the pipe so that we have the connectivity and then building the analytics over the top of it so that we can direct that inventory to maximize our margin on every single piece of product that we have.
We have some great examples in several of our markets today where we're doing bits and pieces of this. In Japan, when we opened up online about a year and a half ago for Gap and Banana Republic, we opened up online with just shift from store. So, one pool of inventory and servicing that out of the stores as we're expanding that now into online true fulfillment out of the DC. It's the same pool of inventory. It's the same DC.
China when we opened that in 2010 just with stores as we followed up with online, again, single buys of inventory managing that inventory out into online and stores. Athleta, which we bought several years ago as a catalog business, we moved online, we moved now aggressively into opening stores, again, single pool of inventory, single buys, single management of inventory. So we have some really, really good learnings that are coming out of those and we have a whole series of pilots that we are launching over the next month to fully inform the model. So as we think about how to apply it truly to a true full length global brand, we have as much proof point as possible. So what we're doing with this initiative is we're taking our time and making sure that we're fully informed.
So we're in a blueprinting phase and we're really spending this first half of twenty fourteen to truly define the model. What is the ultimate seamless inventory operating model that we want our global brands to operate on? We're making sure that it's fully informed with competitive analysis, really looking at our traditional competitors, looking at some of our non traditional competitors, what are the things that they're bringing from an inventory management standpoint that are truly driving value that will be applicable in our model and in our culture. We're applying the learnings from the different models that we have in place today and we're doing a whole series of pilots to try to further inform the model. Our ambition is that we come out of the first half of this year with a fully vetted inventory operating model that we want to move forward with.
It's requiring a lot of discussion and a lot of input from different parts of our business and a whole lot of alignment work is still to be done around that. But we're very excited about making sure that we're clear on where we're going before we launch to get going there. Our ambition is for 2015 to really be the 1st global brand that we're standing up on this inventory operating platform. And then based on learnings from that and subsequent rollouts across the rest of our business. So hopefully from just my brief overview, you have an idea of what some of the opportunity truly is.
When you look at an inventory management deployment in a specialty retailer, in an apparel specialty retailer, there are some positive returns that come from that just if you're doing it within a market and within a channel. So as we think through how to do this globally, as we think how to build competitive advantage for our global brands with this. We believe we have a significant opportunity on margin, on reducing product that we're selling via promotion and markdown, on turns and so forth. Just getting that product in the right place at the right time and really reducing significantly the amount of stranded inventory that we end up within the operating model that we have today. So customer gets what she wants, we get what we want, which is the margin and the return on every piece of inventory that we sell.
So with that, I look forward to providing updates to you as we get further into this and as we progress toward our ambition of building this global inventory operating model.
So thank you.
Thank you, Tom. All right. Next up, I'd like to welcome Jeff Kerwin, who's our President of Greater China.
For people who don't speak Chinese, that's I'm happy to be here with you guys today. I've been in China for 3 years. I've had an incredible experience so far. It's an exciting place to be. I've been with Gap Inc.
For about 8.5 years. Prior to this role, I was running the stores and operations for Old Navy. Prior to that, I had a general management role overseeing Canada for Old Navy. And prior to that, I was with Target for about 6 years running one of their larger regions. And before that, multiple retailers.
But here today really just to talk about the China business, the Greater China business. So I thought I'd start off a little bit just by setting the foundation of the market. So I'm sure many of you know a lot of these stats, but some of them to me living there and feeling it for the last 3 years is incredibly compelling. 1,400,000,000 people is just a massive number, but what's interesting to me is that it continues to grow. 20 1,000,000 babies are born every year.
They're giving birth to the population of Australia. I mean, it's just amazing how many people are being brought into the country. What's promising as a retailer are a lot of the stats up here. One of them that really, really gets me is by the year 2020, the government is predicting that 300,000,000 people will enter and be added to the middle class. So taking the population of America and adding them to our target customer base where we can address them across all of our brands and channels.
There's a new channel that's growing, it's outlet. When I got there 3 years ago, I asked about outlet. People told me there was about 75 or 80 of them. I went and visited probably 40 of them and I would tell you there was probably 15. So my version of outlet is what you guys probably see here, which is good construction, great development, sophisticated retailing, and it was about 15, but it's growing.
Professional developers are coming in. They're building aggressively and they're seeing the demand. So what's happening in China is people are really looking for that value equation and they're shifting into this channel and that's a place where we have a strength and many of our competitors don't. When the government in China sets out a 5 year plan, what I've been able to learn from a lot of people there is most of it gets done. There's not a lot of conversation.
So what they put on the plan for 5 years, most of it gets done historically, the last 6 or 7, 5 year plans, the majority of the stuff has gotten done. The good thing for us is they're switching. So they're switching from an export model to a consumption based model. So higher wages, policy decision, how they're bringing in and attracting new retailers, it's truly becoming a consumption model and you can feel it when you're in the market. What's interesting for me is how well we do in China isn't just the success or failure in China, it's how we impact the world.
Last year 80,000,000 people traveled abroad and spent about 100 $1,000,000,000 It's a pretty amazing stat that if we can do a great job in this market, we can impact the world with the way that they're traveling and spending money. And then you heard a lot about digital and social and e commerce from art. Whatever you think you feel here in America, put it on a turbocharged power boost and that's what you get in China. Everything is growing faster there, specifically in the e commerce space. So knowing all of those tailwinds, we're retailers.
We know we have to be competitive. The competition in China is becoming fierce. What's different about China and North America is that our international retailers are there, they're penetrated, they're growing fast. In many cases, they're across 40, 50, 60, 70 cities in the market. But it's also interesting our people who have failed in the past are coming back because they see the power of the market.
Lane Crawford came, failed, coming back, just opened up a flagship store on Nanjing East in Shanghai. Same thing with Forever 21, came, failed, still see the power of the market, their back opened up in Hong Kong, Shanghai starting to open up a few more stores. A few American retailers, ones that you know, Levi's, Nike doing really penetrated into the market. But other than that, all of the other apparel retailers coming from America just starting to get a foothold. We have a good customer to go after.
The customer is it's interesting. We are targeting what we call the golden generation. And the golden generation is the 1st generation in China that is really being born into the digital age, freedom, ability to express themselves and immense responsibility. And what I mean by that is, there's one child, so they grow up and they're spoiled rotten. But then when they get older, the competition is fierce in school and then they suddenly realize they have the responsibility to take care of their entire family.
So it's a really interesting dynamic that's happening there and they're demanding excellence from us and other retailers, meaning they want quality. They've been brought up in this environment where there's a lot of fake brands. There's a lot of not quality material being shipped into the markets and there's a lot of question about who they can trust. So they're looking for brands that they can trust. They're becoming sophisticated Tier 1 cities, they're already there Tier 2, they're closed Tier 3, they're starting to learn to be sophisticated in how they shop and what they expect and how they're starting to express themselves.
We have a common phrase in China that says, maybe Japan people are really fashion forward. In China, people are fashion brave. They're willing to try and they want to be shown how to wear products. So one of the things that we want to make sure that we do is introduce our brand successfully across Greater China. When we entered in 2010, we had an aided awareness level of 35%.
Over the course of the last three and a half years through marketing, design of our stores, broadcasting on e commerce, actively engaging in social and digital, we've been able to really dramatically change that number. And this number is conservative. This is kind of below the average. When we talk about kids and baby and how well we're known across the moms in China, that number is in the 80% to 85%. 3.5 years, we've basically caught up to our international competitors who have been there for 10 years.
So again, back to that other stat of 80,000,000 people traveling abroad, this is an important number for us. It's the entry into that funnel that brings them into our store. So Gap has this and we're starting the journey with Old Navy. So how we're going to compete? We think that the company's strengths bring to bear in China very, very well.
So when you think about the stats that we talked about, the emerging middle class opening up the population that we can target, to be able to go in and target them across all of our brands and channels is a very powerful competitive advantage for us. We also know that today we've already established ourselves as the authority for American style. Listen, H and M, ZAR, they've got some fast fashion leverage there for sure, but we are the authority for American style already in China with Gap brand and just recently launching Old Navy and reinforcing that authority. But outlets growing, our major competitors don't have space in the outlet. E commerce is just taking off.
I'll get to that more later. We're leveraging the strengths that Art talked about from the center And we're also deploying a lot of work locally where we might be able to learn something locally and feed it back into Art's system and both move a little bit quicker. And then Old Navy. So we had an exciting week about 3, 4 weeks ago. We launched Taiwan and we launched Old Navy in the same week.
Old Navy, we opened up on Nanjing East on one of the busiest corners in all of China. It's right across from the Jing'an Temple, which is one of the most visited tourist centers in the country. We joke locally a little bit that we think that sign could be seen from space. It's 3 stories tall, weighs 3 tons and this entire facade lights up blue and actually changes the color of the temple. So it's a pretty interesting location.
We chose it though because we thought it could do 2 things for us. It could give us huge brand exposure. What you don't see from this is there's a road that's one of the major highways right here that millions of travelers go on every week and they're able to see our branded sign. But what it gives us is the opportunity to really start to penetrate quickly into Shanghai, but also take advantage of all of those tourists that are coming from Greater China and get them aware of our brand quickly. We're also taking all of our learnings over the last 3.5, 4 years that we applied to Gap to be able to ramp up our customer awareness even quicker.
And we now have about 2,500,000 people in our database that day 1 we were able to introduce them to our brand. And just like Gap, 2010, we opened our 1st store, we opened e commerce on the same day. Old Navy first day, e commerce the same day. So we're able to really speak to our customers very quickly. What I'm most excited about I'm sorry, go back.
What I'm most excited about Old Navy is when you think about this country, there's 100 cities with over 1,000,000 people in it. There's about 50 cities with over 5,000,000 people in it. Depending on what you read, those numbers could be just a little more or a little less. Gap has the ability to grow aggressively in China. With Old Navy's price points, in my opinion, from my view of being there for 3 years, we can push Old Navy deep into China.
The initial reaction so far has been great. We just did last week in store, we did a 400 person survey of people who left and didn't purchase. And we asked them what their reasons were. One of the reasons that we were worried about, because we want to make sure we were price positioned just right was did they leave because of price, 4% left because of price. So we're hitting them right where they want to be as far as the value equation with Old Navy.
And then again, I think we can push this brand deep into the country. So Gap, Gap brand today, 68 stores across 21 cities. We've got outlets, 15 stores across 12 cities. So a little over 80 stores, 22 cities. We've entered into Hong Kong, a really, really powerful market for us in 2011.
We entered into Taiwan about 3, 4 weeks ago. And I'll pause for a minute and talk about a little bit adding on to Art's conversation. In China, 600,000,000 Internet users, half of which purchased last year. 2011 to 2012, a 50% increase in purchases in the e commerce space. It's massive and it's growing very, very quickly.
There are some people who are reporting that 20 12 into 2013 is 100% increase.
There are others that say
it's not that big. But the one thing that's for sure, it's growing rapidly. Customers are willing to engage online more here than anywhere. They spend more time online. They spend more time socially.
95% of our target customer base has a social account. If you take Facebook, Twitter and everything else you know here, load it all on the one platform, you have WeChat in China. So they are moving very, very quickly in the social and digital space. Last year, one day, you might have read today in the USA Today about Alibaba. Last year, 11.11, they've worked over the course of 3 or 4 years to create their own version of the Black Friday.
11.11 is considered Singles Day in China. One day, dollars 5,700,000,000 of revenue. It's getting bigger and bigger. We have a site on Tmall. So Internet for us, we have gap.
Cn, gap. Hongkong. We opened up Taiwan first day, gap. Taiwan and we also participate with Tmall because they are a very, very powerful player. Between Taobao and Tmall, which is under the Alibaba Group, 70 plus percent of all e commerce retail is done under that platform.
So it gives us incredible exposure and through that platform many of our first time users of Gap. Cn or Hong Kong or Taiwan is funneled from that platform onto our own sites. And the good thing about Tmall is it's an open system, so we totally control our branding. So they don't control any of how we show up to a customer, just a portal into our website.
So it's a this is
a very big competitive advantage for us. So that's e commerce, but social and digital. So all of these are social platforms in China and they're all in heavy competition and players are changing. So I'll just give you one kind of example of that. WeChat is a social platform, kind of like a Facebook.
Tmall is the king of e commerce. WeChat wants to get into the e commerce business. They came up with an idea. They thought it was a good idea if I could get a whole bunch of payment information from my customers, I could lay the foundation to move into the e commerce space. So during CNY, they took a cultural relevant situation that happens in China, which is the handing of what they call Hong Bao, which is the red envelopes to signify a gift during Chinese New Year.
And they did an electronic version for the first time. And what they did is they basically gave a value to this Hongbao and they let people come on and get it for free and then work within their social network and everyone was able to give small gifts to each other in a social exchange. The trick was that to get that value you had to give your payment information and everyone around you in your social network had to give the payment information, 7 days 20,000,000 users. So now they've got a 20,000,000 person platform that if they decide to go to e commerce, they can move. The point of the story is that if you have a competitive advantage in the social and digital space and you can be creative enough, you can blow by your competition.
So it's a very, very, very dynamic space for us. So this is just a little bit of an illustration on us. So again, gap. Taiwan, gap. Hongkong, gap.
Cn, participating on Tmall and integrating all of our technology the day that we open up our brands. We launched mobile about a year ago. It's about 30% of all of our traffic and businesses on the mobile platform. So in less than a year, we've already really, really penetrated in the mobile space. Kids and baby.
So in the market, I mentioned 20,000,000 babies, but in the market, basically the competition for kids and baby is on a foundational level. So what they do is there's an immense amount of competition in the service business for kids and baby. And then there's a little bit of luxury, but there's no aspirational affordable luxury players out there that have any type of share that have the quality and the awareness levels that we do. So in a short period of time, three and a half years, we're one of the most dominant players in kids and baby in this space for affordable, but aspirational product. What they care about most is they care about quality and aspiration and they find it with us so far.
And obviously, we were just introducing Old Navy into the equation. So what I think my role is in China, what our role is, is a couple of things. One is, we know that we have to provide revenue. What's important to know though is we have a very strong comp performance and we have a we've established a history of a strong comp performance in China and our comp base is getting bigger and it's getting meaningful to the corporation. So as we continue to grow and our comp base continues to grow and if we can continue our trend, which I have promised to the corporation, then we're going to continue to add back advantage in comp.
And we're also responsible for spread. So as Glenn mentioned, this is an opportunity for us to grow quickly with new brands, new businesses, new channels and new geographies. So comp is becoming more important. Spread was our biggest priority a couple of years ago. And we're prepared.
So in 3.5 years, I got there 3.5 years ago, we had 4 stores, 2 cities. The team there did a fantastic job getting us set up. But over the last 3.5 years, we've learned a lot. We've made a few mistakes. We've learned a really lot about the geographies.
We learned how to do business in this country. We've learned how to expand beyond China into Greater China and Hong Kong and Taiwan. We've built a very strong team locally boots on the ground and we figured out how to work here centrally through San Francisco and New York and take advantage of all of the hard work that's being done here to grow quickly. So over 80 stores, 22 cities, we'll be in 29 cities by the end of the year. We'll have over 100 stores.
We've expanded across geographies and now we're prepared to grow quickly. We've just launched Old Navy and we can take all of those learnings to grow that brand very, very quickly. So what's ahead? More store and channel growth, new brands, continued rapid expansion in the e commerce space, geographic expansion and $1,000,000,000 in revenue in the next 3 years. So with that, I'll take some questions.
Great. So I think we have time for a couple of questions for Jeff. We have Brian.
Thanks. Brian Tunaick, JPMorgan. Are these all company owned stores? What's the franchise philosophy? And then $1,000,000,000 in revenue, where would the operating margin contribution be versus the overall company?
So the right now, they're all wholly owned. We our current plan is that they're going to stay wholly owned in Greater China. We've seen in some of our competitors where they've gone franchise very, very quickly. They've lost control of their brand a bit in my opinion. So we're staying wholly owned and we're going to grow in those markets wholly owned.
As far as operating profit, we don't report that by region.
Okay. Another question. Sorry, Richard in the back.
Thanks very much. Richard Jaffe, it's Stifel. Can you talk about the online business developing versus the bricks and mortar and how that is paced perhaps as a percent of sales? And how it compares to the U. S?
Is the Internet business growing more quickly, a greater percentage of the total? And do you think that cadence will continue?
Sure. I think the market is growing quicker. Our brand as an e commerce platform is growing faster. And we plan on investing a lot of time, energy and resources to continue that growth rate. We anticipate the e commerce space to be one of our largest growth channels that we have.
So that's I'd say it's relative to the United States, it's faster and growing more quickly.
Great. One more question. Yes.
Yes. I guess you opened up the 33 or 34 stores the last 2 years in China. This year only 35. If the opportunity is so attractive, why only 35 stores this year? We wanted to make sure that we gave time and effort into some of our launches.
So we're setting a foundation. So we spent some time making sure that we effectively opened up Taiwan. We spent a lot of time making sure that the new entry
of Old Navy was going to be successful
and how we planned that out. And now that we have the foundation for Gap Old Navy outlet and new geographies, I think that now enables us to move really quickly. So we spent a lot of time making sure we launched our brands in new geographies appropriately.
Great. Thank you so much, Jeff. Appreciate it. With that, I'm going to welcome Glenn back to the stage.
Please, please, you're making me blush. Twice in a row. Anyway, so let me take you through and bring that all back together on one slide. So on the far left hand side is give or take where the company's operating margin is today 13%. Now we need to do better product.
So I'm coming to this side of the stage. We need to have better compelling marketing. We need to make sure we're doing all the right things from an execution perspective in the brands. And if we did that every single day, can we get a better operating margin than 13%? We could.
But to get to the North Star, which this chart shows a high watermark at 20%, even with Steve and Jack and Stephane and Art with Athleta and pipeline with our mix, even on their best day, we have to get to a model where we depended on perfection. I've been doing this long enough, not just retail, but definitely fashion apparel retail long enough. No, perfection is elusive and it's a dream and it's just not reality. So in order to get to an operating profit trajectory that we believe a company that has a goal and a mission to become number 1, we have to inject these 4 strategic initiatives that you heard about today. So just on global growth, just quickly just to touch on it.
What we're looking on global growth is we're seeing very good accretive revenue. So for the followers of Gap brand from the past, sometimes when we had growth, it wasn't necessarily accretive growth, it was cannibalizing growth. So you're thinking of our global outlet push and we have a lot of opportunities still on global outlet physical locations. That's accretive revenue. It's our highest return on sales business.
So it's going to add not only initially day 1, but a business to our base that will be accretive, same with our franchise business. We didn't touch on today. Steve continues to add 65, 70 stores to the franchise business, being in 45 plus countries. He'll touch on that. I keep talking to Steve about density per country.
If you look at the countries we're in right now, we're just on a trip together. It's amazing how much density opportunity we have. Who would ever thought that we'd have 40 stores in Turkey by now with a chance to put a lot more in. So the accretive revenue of franchise is very strong and then here comes Old Navy with 6 stores in the Philippines this year alone, already deals done in other countries because we have a franchise base that Steve has pioneered for us. So we can just do plug and play with Old Navy and same with Banana Republic.
The second part of this is these are more productive stores. You think of Athleta and you think of Old Navy International so far. Athleta is a super productive business, highly profitable. We feel very good about it. I'm not going to touch on it today.
Maybe a little bit at the end, I'll touch on Athleta. But it's obviously showed today because as we said at the latest call with investors after our Q4 results, we saw something from Athleta in 2013 that leads us to believe we've now found our 4th brand. We have 6 brands, no offense to Pipe, Aliment or MIXARD. We have 6 brands that Athleta is moving up now and clearly can be one of those iconic brands. I mean Jeff flashed it on the screen today, but from his perspective, you look at something like China, Athleta is one of those brands that has a product trend and a following and is striking a nerve with consumers around the world, not just in the U.
S. So that could be a business we could see elevating even further and it's highly productive. And so, so far is Old Navy International, right, Stephane, highly productive on sales per foot. And lastly, we want to dominate online. I think this is right.
You'll tell me if I'm wrong, of course. The 16% we flashed of penetration in North America of our online business in that base includes outlet. I think that's right. So really our penetration is a lot higher because we don't have outlet online today. So it's a lot higher.
So our penetration we have a business that has a strong base to grow from and to add more and more what productive growth to the business. Responsive supply chain, Sonia, I think touched on a lot of good points there. Just next slide. The big part for me is when I look at all of these, what we're trying to do is create opportunities for the business to become number 1 to drive a higher operating margin to the high watermark, but also we're dealing with weaknesses in the company. One of the biggest weaknesses in the company and in spite of my 7 years here, I've barely made a dent on it is how much product as a percentage of the total units we buy every year we sell at ticket price.
And we've done all the research. It's not a ticket price issue. We keep saying actually we should be priced proud. Ticket pricing at Gap is very strong. Ticket pricing at BR, we know Old Navy has a mixed model of selling at REG and selling on promo.
Responsive supply chain, bringing some of the tools that Sonia talked about today will really drive REG sell pricing because our number today inside of that 13% is anemic. The second part is AUC, which again Sonia touched on. Now whether it's battling headwinds that can come from wages or whether it's just dealing with lower costs, what I talked about that quality comment outside, but getting to a disciplined approach from the brands and getting Sonya's new team, we can continue to work the AUC inside the business. And we're seeing evidence today of some of the work in the early part of responsive supply chain by adopting a new way adapting to a new way of doing things, you're really seeing a change. So I think that those are 2 big drivers of operating profit going forward.
Omnichannel, I thought Art's presentation was really compelling. I know Matt had that question. To me, if I was to rank them, I know Art was trying to sort of hit the middle with it, store conversion is number 1 and that's through order in store. Because the traffic in store is still huge traffic. Order in store, give or take, if our conversion in our 3 brands is 30%, that's 70% that doesn't buy.
We know how much of that 70% doesn't buy. Why? Because it wasn't there or available. We know that number. Order in store is a marketing opportunity and Jack was talking about this yesterday in our meeting.
It's a marketing opportunity to change people's psychological belief when they come into a store, which is not finding what you want or not finding the size. I wish I could say 31, 32, Art, so I can't say that. Not finding a 34, 32. If he says that one more time, 7 miles, 31, 32, I know. Not we can't find the 34, 32, but it should be there.
We need to put into your head, we have it. Do not leave. We cannot walk a sale. We have that product. It's in another store, which is our mistake.
It's in the distribution center and any distribution center because seamless inventory is any distribution center. It's opening up our inventory to everybody. Order in store, it's a different service model we talked about yesterday for the stores. Even for Stephane, it's a different service model. It leads us to the strategic debate rather internally, what's the role of the store going forward?
What's the role of the store? Doing windows, check, mannequins, check, open up the door, check, interfacing with customers. That's why we made our changes on wages. It all squares it for us. We got to get better people in our store because order in store needs a high caliber individual in our stores to close the deal.
Higher click through, which I think is personalization. The personalization like when Art threw that out, but imagine a home page because we do 9 or 10 different versions of an email. Imagine a home page that has this is what big data is, 10 different versions. Click through is the magic of driving incremental gross margin dollars online is getting higher click through. That's personalization and mobile traffic.
That first chart Art showed, which is amazing, our traffic is actually way up. It's just not up in the stores. But converting mobile traffic to store traffic is reserved in store. You're on your device, it's traffic. You're under 150 times a day as Art took you through converting that traffic to store traffic by reserving it is how you get to that number.
And lastly, seamless inventory you heard from Tom, another weakness in the company inside that 13%, the bane of my existence stranded inventory. Because when inventory gets to a store today that's its last resting place. That's it. It's in that store until we get rid of it. And the last tail of that inventory, I've told this to other investors in meetings, it's a very that was an eye opening moment when I joined this company.
We went to a thing called units below cost. I even know that existed in my past life. Units below cost because of stranded inventories that can't go. Now that inventory is seamless, it's flexible, it's transportable because what Tom is going to build is an algorithm that says ship it because the $3.75 a cost to ship it is worth it. It's worth every single dollar to drive an operating profit and getting to a better markdown margin.
So hopefully the morning was productive for you. We wanted to, as I said, cut down on some of my time introducing the new members of management. I thought they did a great job making the case that these are the 4 big strategic initiatives. Break till when?
5 minute break till 12:40. And we hope that everyone will go out and see what's out there.
Everything else side, break for 25 minutes and then the brand presidents will see you after lunch. Thank you, everybody.
Ladies and gentlemen, please take your seats. The presentations are about to begin. Great. I'd like to welcome you guys all back from lunch. I hope you enjoyed the morning session.
For our afternoon session, we have a little bit of a different format. I'm going to invite each of the brand presidents up on stage to talk briefly about their brand strategies. And then we will do a group Q and A with the brand presidents. We're also sensitive. We know some of you guys need to get right out of here.
So we're going to try and end promptly at 2. We'll take a very quick break at that point in time. And then those of you that are able to stay, we'll have Q and A with Glenn and Sabrina. But with that, I'd like to start by introducing Steve Sonnax, who's our Gap Global Brand President.
Thanks, Katrina. Good afternoon, everybody. I hope you enjoyed your lunch. As you know, 2013, our priority was to drive profitable sales through product consistency, building brand relevance and multichannel growth. We delivered a positive 3 sales comp and GAAP is now at €6,400,000,000 business in its own right.
We have around 1700 stores in 48 countries, having opened with our franchise partners in 5 new countries last year: Brazil, Costa Rica, Hungary, Paraguay and Peru. And our reach extends much further through our online channels to about 70 countries around the world. We delivered 2013 whilst driving enormous structural change within our business. We further centralized the creative team into New York, so that we now have a global merchandising team sitting right alongside their colleagues in production and design. The team comprises global experience from the U.
S, Europe and Asia to ensure we continue to cater for local and seasonal needs wherever we need to. We've put a top creative leadership team in place, which started with Seth Feldman, our Chief Marketing Officer Rebecca Bay, our Creative Director and they have more recently been joined by Michel Di Martini, our new Head of Global Merchandising. I really hope you had a chance to meet with Michel earlier today. And finally, we've done the work required to roll out global product assortment labeling and fit, which is foundational to enable the seamless inventory and supply chain initiatives Tom and Sonia talked about earlier today. Now all of these combined deliver 3 important benefits.
First, it takes out enormous complexity that was in the business spread across our regional functions and our disciplines. 2nd, it means we can operate faster and with fewer people within a lower cost structure. And third, it means the product will show up to the customer more consistently around the world, strengthening brand value and making it easier for us to hero key products through our marketing. Because Gap was the 1st and most international of our brands, it has also been the most complex to restructure into the global brand model. But much of that work is now complete and I'm really excited about the benefits it will deliver against our long term strategy.
2014 is about a continued focus on our 4 major themes shaping apparel retailing and which drive our long term growth strategy. First, we see product trends becoming ever more global. Bestsellers in New York are bestsellers in Paris, Tokyo, Shanghai. 2nd, we need to reach the growing millennial and build brand relevance with that customer. The third theme is the growth of the value customer.
Our outlook division continues to grow as a percentage of our business as does online, which is why omni channel is such an important area of focus and our final priority. I want to show you some of the work we are doing in each of these areas. But before I do that, I want to quickly touch on the start of the year. Glenn and Sabrina have talked to you about some of the factors impacting the last couple of months. And while we're not happy with our spring performance, we've taken the learnings from this period and we're really focused on 2 things.
Firstly, our assortment architecture, achieving the right balance of wear now and wear forward products. We were 2 wear forward this spring, particularly here in the U. S. And secondly, on having big product ideas in both stores and online. We have some great plans for the rest of the year.
So let's start with our first theme, consistent global product. Under Rebecca's creative direction, this is how we plan to win in our space. What we know is the key drivers for our business, the foundation of our brands are the Gap icons. The white tee, khakis, the Oxford shirt, 5 pocket denim. And to create seasonal excitement, we overlay fashion into these icons and build big ideas around them.
You saw our white collection this morning, a summer trend that we've built across men's, women's, kids and baby. That's what we mean by a big idea. At the heart of our brand and the most important of our icons is denim. Denim is the one category where we constantly look to innovate in fit, wash and fabric. This year, we've had success with our destructive washes and our high rise fits.
And looking forward, we're excited about the Summer White campaign and the introduction of performance denim with 2 way stretch for this fall. Quality is next. Quality in fabric fit and design. A great example of how we're doing this is in outerwear. For fall and holiday, we will offer a wider, more versatile range of transitional to warmer outerwear that will be both functional and fashionable.
And finally, as I talked about last year, we continue to focus on the right assortment architecture for the customer, so that we have the right mix of icons, key items and fashion relevant pieces as well as good, better and best price points. Let me give you a sneak peek of what's coming. Our theme for summer this year is summer loves. And we will have a big push behind 3 big trend ideas: shorts, dresses and whites, which I mentioned earlier. And these will be phased to ensure a consistent flow of newness over the summer months.
We know that when we stand for trend right big ideas particularly in women's we can win. And shorts and dresses in particular are always great categories for Gap. For November, I'm really excited that we have a new collaboration in kids with Kate and Jack Spade. The New York fashion brand known for its use of bright and bold colors and prints, a great match for Gap and a continuation of the successful collaborations we've run for kids and baby in the past. I'm really excited about all these product developments that I told you about today and I know that our customers will be too.
This brings me on to our second theme, the rise of the millennial. You can see here the increase in the 25 to 44 population in the U. S. Over the next few years. The millennial customer is the customer of the future.
They're coming into their own financially and shop frequently on apparel. They take an optimistic view of the world as does Gap. And they share the same values as we do caring about authenticity, loyalty and personal connections. And our values are very important. With our CSR initiatives such as the hourly wages announcement striking a real chord with this group.
Finally, of course, they are highly digitally connected. The millennial is in fact just a great customer for Gap. Now to reach this group, we are putting digital media front and center. In the 1990s, national TV campaigns were our dominant form of advertising. And today, we're taking the same approach to digital media.
Everything we do is being designed for a digital first approach using video assets. You can see here our Back to Blue campaign, which we ran this fall. It featured Alexa Ray Joel, daughter of Billy Joel and was the broadest reaching campaign in Gap's history. We created video content that could be shared across Facebook, YouTube, Instagram and Tumblr. And we tested it in combination with TV.
This drove a significant increase in social media engagement in our younger millennials and increased competitive share of voice during the campaign. We had another really positive response during holiday after one of our subway posters featuring Waris, a Sikh actor was defaced with racist messages. We immediately replaced the graffiti poster with a clean version, which we sparked a Twitter and Facebook campaign in support of GAAP and generated the highest spike in positive sentiment online that we have seen in recent years. The topic went viral over social media and 30,000 articles were shared across publications from Huffington Post and Buzzfeed to Vogue and CNN. This award winning campaign shows that our cultural relevance and moral values, which are deeply rooted in our brands are resonating with the mindset and values of our target customers and continue to drive both our competitive share of voice and sentiment across social media.
And if we look forward to this summer, you can see here on the left how we are reinforcing the product messages through our brand marketing using up and coming musicians like Wardell in our summer loves campaign. And for this fall, we have appointed a new agency, Weidman and Kennedy to take our brands right to the next level. Weidman and Kennedy are a very well respected agency having worked over the years with iconic American brands such as Nike and Coca Cola. And we think that they're a great fit for us at Gap. That brings me on to our 3rd major theme, the rise of the value customer.
Our outlet business satisfies this customer group and is growing as
a percentage of our business. We are very pleased
to have opened a new format for outlet, urban stores. These are factory stores in more densely populated areas like in Harlem in New York, which you can see here and Wembley in London. They increase the frequency with which the traditional outlet customer will visit because they can shop with us locally between their trips to the outlet malls. In cities like Tokyo, we're also opening a neighborhood centers, which are usually anchored by the co location of a supermarket. Our research tells us that we can further broaden our reach in outlets by targeting the value customer who is also looking for fashion and who potentially spends more on clothing than our other outlet customers.
We launched a new campaign last month that featured celebrity George Kociopoulos, the co host of eFashion Police. George will be the Gap outlet exclusive stylist alongside models such as Dylan Penn, daughter of Sean Penn and Robin Wright. This campaign has already generated a lot of buzz in recent weeks. And so on to my final theme, omnichannel. As Art talked about earlier today, the customer journey is becoming ever more seamless in terms of how they move between the physical store experience and the convenience of shopping online.
And customers want the same brand experience regardless of that channel. At the center of our strategy are brand building flagship stores like this one in Tokyo. Flagships provide the aspiration and the inspiration for the brand. They have a larger and more aspirational product assortment in the cities we believe are key growth markets. From Shanghai to L.
A, Istanbul to Tokyo, London to New York amongst others. Our latest flagship on Lincoln Road in Miami will open this summer. Flagships support our core store portfolio in mall and street locations all around the world. But perhaps our most important flagship is our online store, which houses our broadest expression and reach of the brand. The penetration of online at Gap is already a meaningful percentage of sales and we anticipate it will be a significant driver of growth going forward.
One of the most exciting developments for us is in mobile, which will be the biggest link for omni channel between stores and online. You can see here the work we're doing to ensure consistency across all our online channels from web to email, tablets and mobile. And finally for online, I'm pleased to confirm that we are rolling out reserve in store to all our U. S. Stores by the end of quarter 2.
So pulling all of this together, let's take a look at our long term growth plans. In our owned markets, we will continue to target store comp growth. In franchise, we will target sales growth and we will continue to open more stores in key markets where we already have a presence. We see countries such as South Korea, Russia, Brazil, Australia and Mexico as important markets for growth this year. There are of course new countries where we have the opportunity to open stores with franchise partners.
For example, we are taking a look at India, but it's early days. That's all I can say for now. The GAAP outlet, we see growth through store launches in new countries and we will test online before the end of the fiscal year. And for online, we're growing fast in Europe and Japan and we also see growth in the U. S.
Through initiatives such as our reserve in store. This is a strategy for the long term and we are clear on our direction and on the opportunity. Thanks very much.
Thank you, Steve. And with that, I'd like to welcome Jack Calhoun, our Global Brand President for Banana Republic.
All right. I agree with Glenn. The applause is a little deafening. You're still awake. It's after lunch.
Come on, like focus. I'm here. It's good to see a lot of you that I've gotten to know over all of these years. So welcome to San Francisco. So I'm going to start off and acknowledge that 2013 for Banana Republic was not the year that we wanted to have.
We didn't deliver what we had expected or needed to deliver. But we didn't move backward, but we didn't move forward. And I know we're a lot better than those numbers that we delivered. I'm going to talk to you some of the changes I'm making to make sure that we do deliver going forward. I believe our versatile work focus took us to a place that was a little too narrow and a little bit too conservative for our target customers specifically in our women's product and in that market.
And you're starting to see that we're changing that. So we started changing that last fall. So I'm not saying we just started today. We started last fall and you're starting to see that product, trying to see it hit the market now. You saw it outside.
If you looked at our product out here, you're seeing it start to show up. I feel like it's a big move forward for our brand and very much right. You saw the announcement hopefully yesterday that we've hired a new Creative Director for Banana Republic, Marissa Webb. I think she's going to come in and do some great things. She's going to take this modern contemporary aesthetic that we're moving into specifically in our women's product and really turbocharge that and help us take it forward.
So I'll talk a little bit more about her in just a minute. So before I get into product, because I can get very distracted there, I want to talk a little bit about marketing, all right? So let me start with the target customer and talk for a second about that. We are very clear on who our demographic is. It has been the same the whole time I've been here.
It's really 25 to 44 year old. That is very much our target. That is not changing. But the makeup of that target is changing quite a bit. So if you just think about it, right now that target customer is 50% millennials.
I want to talk about millennials, but it's a big change. So it's not our target is changing, the makeup of our target is changing. You just play that forward for a couple of years in 2020, it's going to be 90% of our target audience. So we really need to understand that target, whether they want from product, how they want to interact with brands, that's probably the bigger change. So we've been spending a lot of time.
We're going to continue to spend a lot of time here, but that's a really important difference. So not a change in our target, but a change in the makeup of our target. So starting in spring, we made a shift in both our look and feel. You started seeing this out in the marketplace and in our media mix of how we're going to resonate with this target because they are interacting with brands pretty differently. You started seeing this in early March.
You saw it out in the lobby. You're seeing it here behind me. And we started to approach very differently. We launched this spring campaign in a new way. We did a 100% takeover on YouTube and we were also on people.com during the Oscars.
So a new way that we wanted to take this message not just to get in front of our target audience, but get in the place where they we know that they're interacting with brands, making sure that we are in a new way and a new social way of how we introduce our brand. We chose this social approach because we know that the Oscars is a place that's not just about the movies, it's about fashion and we know it's a place that our target customer is spending their time and is interacting. And we felt some really nice traction. Let me give you a couple of metrics. That evening, we leveraged, we were able to leverage Jared Leto's exception speech to communicate that we stand behind marriage equality and anybody that ever felt injustice.
So we took our image of Nate Berkus and his partner Jeremiah tweeted that out to get that message there. That tweet of that marketing image was the 2nd most retweeted branded message of the night. That's pretty big. So we really jumped into the conversation with a very relevant message that worked for our target and really the population. Since that event, our spring campaign video that we do went out.
We've seen 1,000,000 people interact with that video and view the video. I mean, back in my past life when I was before this company, to get those kind of things, you had to buy cable TV, maybe even broadcast. So we're really communicating in a whole new way. So this whole video out there, viral on our site is a new way to communicate and we're really leaning into that. And just these past couple of months, we've really seen our social media take off with things across Facebook, Instagram, Twitter significantly increasing and likes, follows, comments, retweets.
So any way that we measure social media, I know this campaign is resonating and feels new. We've just started. This is just rolled out. We're seeing some really good traction. What I feel good is we're seeing customers engage and it's a new way for us to think about engaging versus kind of the traditional media mix, which we've been employing.
We're also continuing to evolve the look and feel of Banana Republic of Banana Republic online, a very important place for us, right? We know that our customer sees the brand, not the channel. Channel doesn't matter to them. And we know a huge percentage of our customer sees our brand, interacts with our brand before they ever step in the store. So our online presence like you're seeing up here has to be the best expression of our brand because that's where they're going to really interact with us.
So starting in January, we really took a new look at how are we going to evolve this to be more aspirational, more contemporary. We looked at things like photography, the styling that you're seeing up here, the messaging to make sure that it's cutting through in a digital space online so that we can tell those stories. Art mentioned that we all know about this mobile thing is big. Making sure that we're designing with this mobile first seems like a small thing. It's pretty big.
You got to be really clear with your message. You got to have the right level of photography. You got to clean things up to make sure that it shows up really well in a mobile environment. And again, we're seeing really good traction in that. In our mobile emails, we're seeing since we've done that a 17% increase in our open rate and a 10% increase in our click through.
So again, most of the metrics I'm seeing on these, we're seeing good traction with our messages, how we're delivering them and where we're delivering them. I'm pretty proud of how we're showing up, how we're adjusting this media mix, but I think we're just scratching the surface. I think we've got to continue to push on this. The whole thing of how marketing is evolving is happening by the day, but I think the teams are on. I think we've got the right messages.
It's resonating. We want to keep pushing into how we're going to interact with our customer. All right. Let's dive into product, what I know we all want to talk about. As I said, I believe our versatile kind of point of view and versatile work got us to be a little bit too narrow, a little too conservative, especially in our women's product.
We started making changes. We started making changes to be more contemporary, more modern. I think that's very much true to our brand. It's not a change of who we are, but we got a little too conservative and too narrow. It's right for today's market.
I know it will ultimately drive sales. You guys all know that last fall, I made the decision to part ways with Simon Mead, our Creative Director. And just yesterday, I was able to announce that Marissa Webb is going to join us. I think she's going to be a great addition to the team. I think this contemporary modern edge that we have at Banana Republic, she's just going to turbocharge it.
The best part is she knows our space. She worked at J. Crew for 11 years. I think some of the best part of J. Crew women's products was when she was there.
So she knows our target. She knows our space, but we get the benefit as she has her own line. So we want to know we know what Marissa's aesthetic is about. I think it's very fresh, it's very contemporary, it's modern. I think she does women's beautifully.
She has a kind of a fun playful masculine edge if you know her work. I think she's going to do great across women's, across men's and certainly across all this communication that I've talked about. She's in the mix on that stuff. She knows how it works. I feel really confident with her joining us that she's really going to help us do what we're doing, the products that you've seen outside and really move that forward.
But I want to be clear, I'm super excited that Marissa is coming, but her product, I'm not going to be able to stand up and say this is all Marissa is until about this time next year. It takes a while for a new designer to come in and totally get their point of view out there. So we haven't been sitting still. We've been making changes. We're not waiting.
Last fall, after we made the change, I promoted Melanie Burkett to our Head of Women's, our VP of Women's. I also was able to ask Adrienne Lazarus to come in and work with Melanie and work with Julie because of her experience at Intermex in that contemporary market. How do we push our women's product forward? And you're seeing some of it appear, you saw it out there. Melanie's stuff is coming out in the market now and will really be there by summer and into fall.
What I love is I think we really move forward. I think it's much more fresh. It's more contemporary. It's modern. You're seeing us take things like our Sloan fabrication, it was out there, but taking a Sloan with leather front, I think new proportions and top still very different, very fresh.
This goes a little bit further into fall. But I just wanted to show you, I think the women's team has not been sitting still. We have we didn't just realize that we were a bit off. They have been making the changes and I think it was good. I think they're in the right level of fashion, the things that people want to wear today.
It looks really good. I know I talked to a lot of you outside. I feel good that we're not sitting and waiting. We're making these changes. When Marissa comes, she's going to be able to step on the gas and help us move it forward.
It's not a big repositioning of the brand, but let's take this stuff and really turbo charge it. I do want to mention NEMS. NEMS is important for us. It's been doing well. Michael Anderson, our VP of Design, he's been with me since 2003.
He knows our stuff. He delivers well. You got to keep pushing. I don't want to take the men's business for granted. We got to keep pushing, moving it forward.
I believe he's going to do it. Here's a little bit of fall. There's some new stuff I think happening in men's. But he'll keep it moving. Team is really solid and really good, but I still feel very confident in our men's business.
At the same time that we're making all these changes, I want to make sure that you guys realize that I'm not changing everything. There's things that we know that we stand for that do really well at Banana Republic. Like I said, we had a fine year. We just didn't move forward like we wanted to. So I promise that we're not going to scare people away.
We're not running away from the things that we know are great about us. In women's, it's stuff like our Sloan fabrication, proprietary. We're known for it. Our customer loves it. We do it in dresses.
We do it in pants. We do it in skirts. It's a big thing for us. You think about that with Roland Marais, who's going to collaborate with us for fall. He used this product, this fabric exclusively to design the line.
It's going to be gorgeous. So we took him with our fabric, put them together, it's going to be great. So we're not running away from the things that we know. Our woven top business, our non iron, there's a lot of stuff that will stay the same with the new things that you're seeing. In men's, things that we stand for and our customers love are things like our chinos, our non iron shirts, obviously, our non iron pants that we launched last year, soft wash shirts, our suiting, all really good.
In 2013, we were able to gain market share in men's and men's woven shirts and our suiting. We continue to be the number one player especially in men's pants. So I feel confident that we are not changing everything, but we're changing the things that we need to change in our business to make sure that we're moving forward. All right. Let me move on to product.
I'll talk a little bit about international. So it's a small piece of the business for us at Banana Republic. However, I'm really confident that we have growth opportunities here. Outside of North America, we have the ability to grow this business. With a shift in our operating model to be a global brand, I've taken the time to just kind of rethink the structure and our leadership structure and add specific focus to our international business and how we are going to grow that.
For the first time, I've added a Senior Vice President to my leadership team solely focused on this. Fabrice Cretron is that person. He joins my team and he's got some really great background in international operations, business development, product, like he's really going to help us focus on this, take it forward, and I feel very confident in that. Looking ahead, you're mostly going to see us focus on our franchise business, big opportunity for us. We ended last year, the end of 2013 with 66 stores, so pretty good sized number in 20 different countries.
We see a lot more opportunity here. So I'd say the most significant opportunity is our franchise. Additionally, we'll modestly grow an already strong and healthy Japan business. We'll keep moving in that area. And we're looking for a plan right now.
We're working on it for our European business. It's small. We ended 13 with 11 stores in the European market. We see some growth there, but that's kind of the 3rd on my list. So, Bruce and I have traveled in the market.
We look at this business of international. See a lot of opportunity. There's a lot of white space for Banana Republic. We are relevant on an international market. So we see an opportunity for us to grow outside of North America.
There is growth opportunity for us. Lastly, I'm going to talk about omni channel. We're all talking about it a lot today. I want to make sure that we're really clear from an omni channel perspective, I believe that there's still continued opportunity for Banana Republic across the board. The customer does.
They see the brands. They don't see the channel. They want to buy Banana Republic however they want to get it. So our ultimate goal is how are we going to provide that seamless brand experience no matter where they are. That's how we maximize the customer benefit for our customer.
That's what they care about. As you know, when you think about those customer facing tools we've talked about, hopefully you've seen some of them out there. I know a lot of you have tried them in our store on your mobile device with find in store, reserve in store. These are great and really significant benefits for Banana Republic. Our goal this year is about how are we going to drive awareness and trial.
It is a lot about the marketing, how we're going to be innovative in that marketing, how are we going to get people aware that this is available. Once they try it, we hear people talk about it. It's a great thing. It's the best thing to go to a store, know there's something you want and know you're going to get it. So we just got to make sure that we keep pushing on that lever because it's a huge benefit for our customer and ultimately a benefit for our business.
So we will keep focusing on that and I feel good about it. In closing, I'm very energized and really inspired by what's on at Banana Republic. I think we've got a lot of good things coming. I think we're making the right level of changes. Very excited to have Marissa join us.
I think she's going to be able to come in, turbocharge some of the things we're doing. She's going to add her own special magic. That's why we have a creative director. But it's really good about her joining the team. I think she's going to be a really great addition.
We have a solid business and a really solid business model at Banana Republic. I'm confident in that. We've got a good foundation to continue to build on. So that part feels good. I'm confident we're making the right changes in our business.
We're focusing on that right work. Look, most of the industry was discounting. We all talked about it, had questions about it today and this morning. With our product misses, we had to discount more than I want. But right now, I think we're making those changes in products and in marketing.
I look at things like seamless inventory. I look at things like responses to supply chain, omnichannel. Those things are only going to turbocharge and add cost into what we do. That is going to allow us to change the conversation to make sure that we're focused on product and marketing and messages our customer wants from us. We know that they want to engage.
That allows us to then kind of take back our rightful place within the Gap Inc. Portfolio as really the leader in our part of the industry of affordable luxury. So I feel confident of our plans, the changes we're making and where we're going. So I'll hand it back to Katrina.
Great. Thank you, Jack. And next up, we have Stephane Larson, our Old Navy Global Brand President.
Go to final spot. I don't know if that's good or bad. Did I get the final spot last year too? I think
I did. All right. Good afternoon. It's great to
be back. Last time we met like this, I just spent 6 months in my role. I started to form the growth strategy. I just started that. Now I've had 12 months to start to execute on that strategy.
And I must start off saying that the more I get to know of Old Navy and the more I get to know of our competitors, the more excited I get about our growth potential. So the presentation today is going to be about the biggest growth drivers that I see that we have for 2014 and beyond. But let's start to have a quick look at 2013 and what we achieved. So for me 2013 was the year where we built the foundation. We created better products.
We made the marketing more effective. We had a strong store execution and a strong online performance. And all those together drove positive comps. And that was a positive comp on a strong positive comp the year prior. So we drove a comp on a comp.
And parallel to that, we successfully launched our international expansion. So let's look at 2014. For me 2014 is when we start to go after our full potential as the Old Navy brand. And that connects into what Glenn started off today speaking about is that the customer has changed. So when we look at the customer's expectation, we see that customers want to be more entertained than ever before.
Customers want to be shopping more convenient than ever before. And of course, they want both of those as the biggest possible saving. And that puts us in a uniquely good position as the Old Navy brand to deliver on those new expectations, because there are people out there who expect the old customer behavior to come back. I'm convinced that these new customer behaviors are was going to stay and it's just going to be stronger from the customer's expectation point of view. And why do I believe that we are uniquely positioned to deliver on that?
I believe that because we are the only aspirational American family brand out there in the value space. And when I look at the value space, I see Target and J. C. Penney struggling. I see companies like Ross and TJ Maxx do well.
But none of them provide a product driven exciting fun brand experience the way we do and the way we will continue to do and strengthen. And when we do that, we will continue to take market share in North America and we will also be able to successfully scale up our international expansion. So tapping into our full potential starts for me it always starts with product. So we are going after better and better products in 2 ways. The first way is to strengthen our core.
When I speak with customers and when I tap into our consumer insights, our customers say that we love you guys for our basic teas, basic tanks, denim, flip flops. That's Old Navy for us. And we also love you for providing the best value in the market space across the board. But when it comes to the type of products that are more versatile, basics versatile, casual versatility, we have historically been ranked lower than our best competitors. So what we have successfully done over the last year is to strengthen our core and then build out our offering.
Give you a couple of examples. So you see the model on the screen here. She wears our pixie pant. So that's a two way stretch pant that's super versatile that you can wear off work, at work, after work. And it has become one of our biggest selling products in the whole store.
And right now we're selling it at full price for €34.94 You also see a different kind of top in the middle of the expanding our choice section. It's more versatile top. So again, going back to what the customers appreciate from us is the basic tees and tags. But they told us, why don't you also do tops that I can wear for more occasions? So we started doing that and also performing really well.
We also have expanded categories like that we have historically been underpenetrated in. So we are expanding into categories like dresses. We are expanding into categories like accessories. And we're expanding into categories like active. Active is a really good example of illustrating what our product vision is all about.
Because in Active, you can clearly see that we can offer the same look and feel as the best brand names out there to a fraction of their price. And the customers love it and we grow that business really fast. So that's product. But the underlying component to succeeding with better and better product for our brand and in our business is to reinforce our value proposition. So for 2014, we will have more products than ever before with an unbeatable value.
So we have the $1 flip flop. We have $2 tanks. We have $8 dresses. And as you see here we have $10 chambray shirts. And what we do with these I can't believe price products is that we also want to create a sense of urgency.
So as a customer when you see that you have a really nice chambray shirt for $10 you better go to the store now because we might sell out. So working with better and better products, creating better and better products reinforcing our value proposition then the next piece in our strategy is to refine our brand voice, because it ties back to how I opened this presentation. No one else in the value space is a brand. We are an iconic American aspirational brand and we should show up like that in every piece of communication every touch points with the customer. What we see is happening now when we do this more and more is that customers who choose to shop us for their basics or customers who use to shop us for their kits are increasingly coming into our stores and saying, I can't believe I found this great dress at Old Navy.
I can't believe I found this great pants that I can wear to work, off work and so on, the pixie pants. I can't believe I found that at Old Navy. So it all connects together, delivering better and better products, reinforcing the value proposition and showing up as the aspirational American brand that we are. And it also ties to the next opportunity we have and that is to tell more product stories. So now when we have an expanded offering, we have more products, more relevant products for our customers.
It's really important that we start to tell more product and value stories. And what I mean with that is historically we have behaved like traditional apparel retailers. We have had one campaign going for 2 weeks one theme. This is an example here that I'm going to walk you through for this summer. So the image on the right is an image from our 4th July main traffic driving campaign.
It's for the family. It's going to be unbeatable prices and beautiful products. Parallel to that, we have a black and white story that you see to the very left. It's also to the family. Next to that we have a MAC address story.
So we have these three stories. And when we historically told one story we are now telling 3 stories. The way we are doing that is that we are utilizing our online and mobile advantages. So we are able to tell multiple stories at the same time and thereby telling our customers of how many great products at a great price that we actually have. And what we're doing tying into what Aart spoke about this morning, what we're increasingly doing is targeting these stories and personalizing these stories and we see great effect of that.
We also create unique events. So I've been speaking a lot today about that we are a brand, the only brand in the value space. A good example of that is that we're able to around the product and value stores create entertaining events. Started off with Overnight Millionaire for Thanksgiving and Black Friday. We saw huge interest and big response to that.
We gave away $1,000,000 to one of our customers that queued up for our Thanksgiving Black Friday sale. It was a really, really good and well deserved winner Scott Rowe. So the winner turned out to be Scott, Afghan veteran, father to 2 daughters, just about to go back to Afghanistan. He trained bomb sniffing dogs. But he was by himself as the father raising these 2 kids and his mother was supporting him.
So his mother was supposed to take care of the kids and he was going back to Afghanistan. But his dream was always to become a police officer, but he didn't have the money to fund the studies. So when we called him and said that you have won $1,000,000 it completely changed his life. So I just heard from my Head of PR that Scott is now in the police academy and realizing his dream and his daughters are having their fathers at home. So yes, it's an emotional story.
But that's what we can do as a brand that we are so tightly connected with the community. So yes, it's about great product at a great price, but it's also about creating events like that. And some of those events will change people's lives. We have Smile with Santa during the holiday. You can bring your kids in and your family in and you can take pictures with Santa.
It was very well received. And for those of you who plan to shop maybe during Easter, I can let you know that we have an event called Show Me the Bunny. And I'll give you the details. So every store will have a hidden bunny. And the first family that finds that bunny gets their purchase for free.
And for those of you who are taking notes now, yes, it's this Saturday. So show me the bunny this Saturday, but one bunny only per store. Okay. Tying into what my colleagues have been speaking a lot about is multichannel advantage and taking advantage of that. I'll give you a concrete example.
We have the dress sale right now going on and we use our multichannel advantage in 2 ways. One way is to create impact and cut through and then we use one message all channels like you see here. But then we also use each individual channel's unique capabilities. One example is that during the dress sale, I just changed the mobile phone application. So during the dress sale, we utilized mobile and e mail to for 2 days drive a $10 Cardigan sale for in store only.
So we just used mobile to drive in store only. And during the dress sale, we also have online only, digital only sales. So we have the Sunday stay. We know that the customers respond really well to a very short timed sale online. So under the umbrella of dresses, we use the different channels to reinforce the dress sale, but also tell the other stories and drive cross functionally between digital and stores and stores and digital.
So when most of our competitors speak about omni channel as being something that might create value in the future, we are driving it strategically and tactically here and now to create value. Internationally. So for those of you who heard me speak last year, out of all the things that I'm excited about, I was the most excited about our international possibilities. And I must say the same this year, because now I've had 12 months in the role and in the brand to see how well we have been received in Japan, in China and most recently when we opened our first two stores in the Philippines. So starting with Japan, just taking the country step by step.
Starting with Japan, we opened 20 stores last year. We are on the way to open the next 25, Very well received, very good business there. Looking at China. Jeff mentioned that he has $1,000,000,000 sales goal and Old Navy will be a significant contributor to realizing that goal. We have opened our flagship store also very well received in China.
We have a goal of having roughly 5 stores by the end of this year. Looking at franchise, we have opened 2 first stores in the Philippines. Our franchise takers said that that was the first time he's running a lot of brands. He said the first time that he had huge lines outside when we opened. It's the first brand that that happened.
And we have had a really good business since we opened there. So we see that the demand is high for Old Navy in franchise. We are looking at building franchise out as Sabrina mentioned in Southeast Asia. We're looking into the Middle East. So franchise is a real opportunity.
We're going after it now. But before we dig too much into franchise, I would like to move the focus back to company owned expansion, because in my former life that's how we drove the biggest value. And that's how I believe that Old Navy will drive the biggest value going forward as well. So I would like to share that we're looking into Mexico as a potential next market. And Mexico excites me.
2 big reasons. One is that Mexico is the country where Old Navy has the biggest following outside North America. Our brand recognition is big already before we have started up our business there. Secondly, it's a big country. It's a big potential, potential to grow for many years to come.
But when you look at Japan, China franchise potential next country Mexico just there is a big untapped potential to grow. And all the signs that we are seeing so far is that we are being extremely well received and that the only constraint that we have is the available real estate because we want to we are determined to grow with quality. So wrapping up, sharing the biggest growth drivers for you, better and better products, reinforced value proposition, clarifying our brand voice, telling more stories, utilizing our multichannel advantage and going into our full potential as the aspirational American brand in the value space makes me say with confidence that we have more things still to be done. So most of our potential is untapped. And then I'm speaking about both taking market shares continue to take market shares in North America and to successfully scale up our international expansion.
Okay. Thanks.
Great. Thank you.
We'll stay there. We're going to invite the Presidents back up on stage and we're going to do a group Q and A. So Jack and Steve, if you'd like to come up and take the stage. Just let them get situated for a quick second.
Thank you. Hi, Jack. Hi, Steve.
Great. Thank you, guys. So with that, we're going to open it up to questions. Kimberly, yes. Thanks.
My question is for Stephane. I'm wondering if Old Navy over indexes online relative to the other brands. And as you think about the next 3 to 5 years, would you expect that penetration to increase? And if so, is there anything that you feel like you need to do differently with your real estate as a result of that growing online business?
So starting with your question about the penetration online, we definitely see it growing. We see a big potential to grow. And then you have to ask my colleagues how it penetrates to us then. But I think the most important for us here is that we are ready to grow online. We are ready to follow where the customers are going as we saw Art presenting this morning.
And we have been actively rightsizing our fleet over the last couple of years and we are ready to continue to do that. But as of now we feel that we have a good store fleet and we have the readiness and the capability to grow online. And we see connecting back to what Glenn said, we see our role to create what the customer wants and that is that seamless experience between physical and digital. So I feel good when it comes to both channels.
Laura Champine with Canaccorden. And I've got a cross brand question about your franchise stores. If I'm reading the disclosures right, your sales to the franchisees are growing faster than sales through the franchisees. So I'm just wondering why that would be? And is that do they order from you?
Is it demand driven? Or is it GAAP corporate deciding what they get
and when they get it? I don't
know which one of you wants to start with that.
I don't mind talking about franchise. We've got
the most developed franchise business, I think of the 3 of us. And the way the model works is out of New York is our creative center. And we put together an assortment which our own stores obviously get distributed to and then our franchise partners come to New York usually a week to 2 weeks later than our own stores. And they come with their budgets. And we I call it a directed purchase.
So we put together an assortment from our experience with them. We have franchise planning teams who work with them directly. So that you've got hot stores and you've got cold stores. Clearly you've got from the Middle East through to Moscow and so on. So we then put together 2 sort of directed assortments for them and that's how we work with them.
And then they go back and obviously run the stores and market the product.
Yes. And that's very similar across the brands. I mean we don't direct exactly what they buy. We certainly present an assortment, but we're very cognizant of working with them to make sure they're getting assortment that's right for their market, because we have everything from Turkey to Dubai. We've got seasonal differences.
For us, we've actually been doing quite well in the franchise markets in their sales. So I don't I have not seen the big disalignment between the 2, but we are directive because we know how we'd like our brand to show up. We certainly work with each of our franchise partners in concert to make sure they get the right assortment into their stores.
Yes, in the back there. Rebecca Duvall from Bluefin. My question is for you, Steve. In your recent shift to your assortment architecture to more core, core fashion that lives longer on the floor, do you feel that you're creating enough excitement in the assortment right now, especially in the current environment of faster fashion?
Yes. That's a great question. I think those of you who managed to speak to out in the vignette, I hope you see that although icons have always been at the heart of Gap, that's what we're famous for, great denim, great white tees as we said. Fashion we know or fashion as we build out the icons is critically important to drive traffic and conversion. So we always look at that balance very carefully.
And I think if you cast a moment back to the last couple of months, which I talked to many of you about this morning, we probably went just a little bit narrow. So I think that's one of the big learnings now is just to widen ourselves a bit and make sure we do have the right balance of icons and fashion related icon products. That's a good question. Thanks.
Thank you. Next question. Yes, John.
Thanks. John Morris with BMO Capital. Thank you all very much. My question is for Steve. The factory format stores that are going to be in urban locations, how
many of those are you looking to open over the course of this year? And what do you think the potential is for those particular locations? And second follow-up question would be the advertising agency change. Just wondering if you can give us a little bit more color about the strategy shift that maybe the previous firm or agency and where it's headed towards, but sort of kind of why that shift? Thanks.
Sure. Yes, I don't think we disclose our outlets in total. But I think one of the things I can tell you is that the number that we've opened so far have been very successful, very excited about this urban customer, because it's a lot of travel business to go from most people's homes to an outlet more. So this is a way of bringing value to the value customer in some of those places we talked about Harlem and Wembley in London. So we are excited early days, but doing very well.
In terms of the shift, we've been working over the last couple of years to really rebrand Gap to the millennial customers we talked about. We've always been a baby boomer brand. I remember the first time that Gap came to Europe many, many years ago. And now as the millennials start to come into our target market as we said very exciting demographic for us. We just felt that Weidner and Kennedy offered something with the heritage in Nike and Coke and other brands that could really help us target those customers in a way that perhaps before we hadn't.
I think we've probably been a little bit stayed in our marketing and campaign. So they're very exciting agency. We're looking to do something with them in September. And actually it could be more I don't want to reveal too much, but
I couldn't be more excited about some of the
work they're doing. It's very new, very thought provoking. And I think we'll really begin to attract that customer into our stores.
Roxanne Meyer from UBS. My question is for Steve and Stephan. Just wanted you to comment on the athletic businesses that you have for GapFit and only the active. How much growth have you seen in those businesses? And how big of businesses can they be?
And then as it relates back to denim, which is obviously a cornerstone of your businesses, knowing that the general trend is starting to go to athletic as mainstream, how do you feel about the size of your denim businesses and the growth? And if they're right sized, just given the propelling growth in athletic? Thanks.
Yes. I mean our body business, it's a super exciting business. I'm sure if you've been into our stores recently, I think the design team led by Murray in New York really is starting to find its feet. And we don't disclose divisional comps, but what I can tell you is it's up there, not top, top 1 or 2, but certainly near the top. So we're putting a lot of investments into that.
And I think as it relates to denim, I think that really plays to our strengths. There's some great denim trends out there. Skinny then went into the legging, which was sort of one way stretch now. As I said, we're looking at some two way stretch, which sort of takes inside athletic fashion trend that you're talking about. In terms of the bottoms, that's also going into the soft pants, which also sort of plays into that.
So I think we're pretty excited about both the body business and the fact that this is going into a more athletic trend. And for 4, we've got some really exciting developments that are in motion. So hopefully, we'll have to talk to you about that next year.
Yes. We are it's
the same for us with Active. We are excited and it's still to be seen how big that trend grows. But it's also seeing how the trend grows in terms of active used to be active in performance. And then we started to see the active and street trend. So those 2 kind of merging the casual fashion and active together.
So I think that's an additional opportunity going forward. When it comes to denim, I have two thoughts in my mind to in terms of your question about denim. One being that we can definitely see a trend going into more of a non denim pant. We see the active as you mentioned. We see skirts coming back as a trend.
But then there is also so even if we see the relative trend of denim not going up and these other categories going up, there is still a big denim demand. So our business is to make democratize style and make great products accessible for every family out there. And I was just in Las Vegas and I just walked the Strip in between meetings. It's really good to get a good eye for how the average American dress. And I would say that there's a lot of denim.
It's a lot of denim, a lot of denim. So one thing is where the trends are going and we trend right with the denim, but there is still going to be a big part of our business that's going to be rooted and going back to denim. I wasn't in Las Vegas with a Vegas. You want to announce your Vegas collection?
I thought Sparkle was out.
We're optimistic, but not that often.
So Jennifer, I think you had a question. Yes. So this is going to kind of tailwind on the denim a little bit, but it might be more for Glenn and kind of supply chain. We're in a
In the back.
In
a kind of a printed rayon kind of or that's an emerging trend right now. And it seems like you guys maybe have a little bit of it. Is there a way I know with the test and respond and the rapid response you're going to be able to do more of that. But at this point is there a way you can chase trends and maybe source domestically to get product in the stores faster? Or I guess what how quickly can your lead times be and how quickly can you chase into product eventually?
Kevin,
I think the idea I think the big part of the response is supply chain. I mean, when we're platformed on a fabric, we can get into those very quickly. I mean, get all the way down, especially in our outlet business in 6, 8 weeks to react to a trend. I think that's the best part of having fabrics that we know, we love. I talked about Sloan fabric for Banana Republic or non iron.
When there's something trending and we see that, a new thing or how to print on it. I mean, our Sloane fabrication, we got the ability to print on it and do a jacquard. We're able to test that, see that it worked and then rush back into it. So that is really where the benefit of response to supply chain comes out is when you get to see those things you have the ability to do it. We know the mills that we're working with and the factories we're working with.
We can jump on it and we've got good knowledge at that point. So that is truly that where the rubber meets the road
and the reality of it is. It's for us in Old Navy, we are definitely benefiting from all the supply chain initiatives. And when I knew internally that it was going to be a real value unlock and not just an internally essential initiative was that people internally my team internally started speaking about it in terms of the way you asked the question. I want to have I want to test this out and see if it's a trend that's going to go big instead of speaking about it as an isolated supply chain initiative.
I think that's the difference there about the cultural difference is now you've got merchants and designers saying like I see something I want to put it in and then they're excited that it that one we're going to now do more of it. Before it was more of a supply chain sort of a thing and maybe we could talk to it. But now I've got merchants that are kind of stoked that it works in their business. They see the results. I mean, merchants are driven by results.
They want to have winning businesses. So when they see those results, they just have more people wanting to sign up and do it. And the capability now is helping them do it more easily.
And I think the other sorry, so we all got
to say something on this.
Yes, it's because it's such
an important initiative for us. So we talked about test and respond, but the other part of what Sonya showed was rapid response. And that's where we platformed our fabrics as Sonya was saying and I'll give you an example. We had more than 70 Chino fabrics across our business and we're down to less than 10. So once you start getting to a platform fabric and then you work strategically with the mills, the mills can hold the fabric in grayish form.
You can then have your colors already lab dipped and you can then respond to what's selling. So you've got the 2 opportunities you've got, the fashion, which is what you are targeting at. Can you test things? And then you've also got the responsiveness to what's selling and changing color or changing shape, which is super important as well.
Well, let's let Richard ask a question in the back for a second.
Thank you. So questions for everyone about new categories within your stores. Active was one of them. Is beauty an opportunity fragrance? The footwear beyond the key item flip flop or something like that an opportunity?
Do you see a chance to expand the offerings to that target customer? That's a question for all brands. And then just a quick follow-up on the new Gap ad campaign. Will that include TV? That's the easy one first.
Okay. So any of our marketing campaigns, we look at what the right mix of media will be. And I think it's too early to say whether it will be TV or not. But as I said in my presentation, video assets are at the core of it. So it gives us the capability if we want to once we have worked through the sort of finer details of it.
In terms of the
new categories, yes. So new categories, we had a good Banana Republic. We are in the fragrance part of the beauty business. It's been quite good. I just saw yesterday we got nominated for a couple more FIFA awards, which we've won.
I mean, we have some industry recognition. I think there's a lot more opportunity. One of the things I'm excited about Marissa Webb coming on is she's done a lot in accessories. I think she'll add a lot to our accessories business for us, which is a good sized business. I think we have a lot more opportunity in that.
And then we actually have been able to participate a lot in the athleisure area. We have in our factory stores. So I think there's some opportunities there to grow some new categories within our box.
And for Old Navy, definitely category opportunities, new categories. It's we see really good response from our customers when we are creative in how we develop our assortment to fit with all their essential apparel needs. And it's just being more strategic and more focused and more creative to create an assortment that matches their needs. It doesn't sound very complicated, but there is still opportunity in terms of becoming that one stop shop for fashion apparel for the family.
I think the other part of this is obviously categories that we participate in where we have low market share. So we've talked about active as a huge opportunity. But I talked last time about categories such as dresses and wovens and you've seen out there some of the work we've done to start building some of our dress business. So I think there is the new opportunities, but there's also areas that we still need to develop in terms of low market share categories.
Yes. Over there.
Hi. Eli Halliwell, D. E. Shaw.
One of the things that was interesting in the last 3 to 6 months of watching business in the apparel world is that people who even had trend to write product felt like they needed to do massive discounts just to be relevant and get people in the store. How do you see with all these initiatives, even if you're getting the product better and the shorter lead times, how do you get people to pay attention and give your product a shot in a world where people are doing 40% off constantly?
I can start on that.
I mean, we've certainly had to do a lot with some of our product misses. That said, Art mentioned it this morning, when we put out messages with the right product and the right innovative message, the customer actually responds to it. New arrivals is like the newest thing. People want to see new exciting product. People still want to shop.
They still want great product. And those things work. So we know and that's why I'm so focused on the product and marketing part of what I'm changing at Banana is when we have the right product and the right message, it resonates for our current customer and the customers that we need to get back into our brand. So I'm not worried that we're I'm not happy about where the industry is or where I've been being too discounted, but it seems like a downward spiral of really jumping on. But I see glimmers of hope that when we do it with reg price stuff, new interesting message, even new just marketing messages, those things actually work.
So I'm optimistic that we can change that conversation because the whole industry has been way too promotional and we do have to kind of get out of that. Part of that does come back down to make sure we've got our inventories in line with the demand and things like that. But again, response to supply chain and things help us in that. But I do know that good product and clear messages do resonate with our customer.
I mean, I think you're also looking at in our business, we've almost got 2 different businesses. The international business is not nearly so promotional driven and all the things that Jeff was talking about the way we're building the brand and the awareness. In the U. S, it certainly is more promotional than it is in our international division. But one of the major targets we've got, if you look at discounting, there's 2 types actually promo to bring customers in.
And then as Glenn said, there's all the markdowns and the below cost selling that we do. So there is a way that we can expand our margins through better management of our inventory using some of the initiatives we talked about in response to supply chain to improve that even if it's a promotional environment. And then of course, we're our outlet division, which really thrives and is growing fast in that sort of world.
Definitely just connecting to what Stephen said coming from Europe and a European based business and seeing even how my European friends who have moved to the U. S. Have changed their behavior. I mean we can't go off on a family vacation with our European friends without them saying, let's see where we get the best discounts. And if I combine these two deals, we can and if you were to in Europe, it's not even close to be that promotional.
But representing the value brand, there is a part of the value that is exciting and part of the promotion that is exciting. So I want to keep that. I want to play that to our advantage, but the only way to do that is to show up as a brand every day in the value space and do that with great products.
Did you want sorry, it's going to come.
No, it's just a very big difference between Europe and the U. S. There is something exciting as well. But I want to work away from the discounts that are not the exciting part through the initiatives that we spoke about this morning.
We have time for one more question. How about in the back step? A question for all three of you. I think Art made a really interesting statement this morning around the millennial mindset and this notion of co creation of content. So can you talk about the feedback loop at the leadership level, how you're looking at customer data and data feedback and any customer profiling that you've done to help inform your decision so that your real time decision making is just as important as the broader strategic decision making?
Yes. One is just the underlying the product strategy and the underlying consumer insights that are driving our product strategy behind Old Navy in terms of reinforcing the core, but also building out the choice. And that comes out of staying really close to what the customer is telling us that they like and what they would like to see more of. Yes. I think the
good part in our business is we get product feedback all day long. We get product reviews online on our site. We can read that. I always make the joke of the millennials are not somebody out there. They're in our building.
We actually have them here working in merchandising and design. They're in our stores. So it's not this elusive thing. We know them. They're in the building.
We just need to listen what they want. But I'll also say is while the money was super important, a lot of what they want at least from Banana Republic from our product, from our brand is not that different than what a Gen Xer wants from our product. They want very similar things. How they're interacting with us is different. And that's why I think some of this marketing and social stuff is more changing.
But we have plenty of millennials within our business that give us good product feedback. We're going to make sure that we're listening to it every day. It's not a quarterly roll up. You got to listen to it every day.
Yes. And for us, it's about, I think, being authentic. As I said in the presentation, when that billboard got defaced, we knew about it immediately because we have a team in New York who monitors social and digital media and we reacted immediately, but in a very authentic way. And that's really what I think appeals to millennials is, it takes time to build that authenticity and everything you do. And Gap's always had that and we're just trying to reinforce and grow it.
Great. Well, I want to thank you guys very much. And with that, I'm going to invite Glenn back up onto the stage.
Okay. Just to close off and then as Katrina said, we're going to take a break. Some people have to leave and then Sabrina and I are happy to stay back and just answer a few remaining questions for those who didn't get a chance to ask them. So some key takeaways from the meeting today. I know we gave you a booklet, which was our attempt to sort of lead the witness on what we thought were some key takeaways, and I'm just going to add to that book.
So we believe there are 4 global apparel companies today, one in Spain, one in Sweden, one in Japan and ourselves. And what we're trying to convey today is that we have some natural advantages, which sometimes we take advantage of and sometimes I wish we took even better advantage of and one of them is American style, which seems to be a trend and a cultural following by customers that gets interpreted in the apparel business that transcends in one of these countries. And so for that reason and the fact that we have 3 for sure and soon to be 4 with Athleta, very strong brands whereas our 3 other global competitors rely very strongly on a single brand. And to get to number 1, we're going to need to have Gap, Old Navy, Banana Republic and a growing Athleta business fire in all cylinders to reach this goal. But I think that what we always say to ourselves internally in meetings like this is we have a very good hand to play relative to our 3 other global competitors, it's going to come down to how well we play it.
And I think so far we're playing it well. We wanted to explain to you today other opportunities for the business to reach this goal. The second thing is we've identified today, which we've been talking about internally for the better part of a year, but then we explained to our investors and current shareholders and possibly future shareholders today, we have a path to break beyond the 13% operating profit. There's a little bit of a ceiling for any North American apparel company. As I said earlier, whether and that's for the ceilings 14% or 14.5% to how we operate today.
So the changes we talked about, we're going to have to make. We're going to have to make them. And this management team that sat back and said like, what do we want to be? Do we want to be a dominant domestic player or do we want to be a true global player? We've given this message before.
Sometimes it falls on deaf ears. I know with Sabrina, I frustrate her when I get frustrated that we don't we take everybody seriously. Anybody who competes against us is a potential target for market share and it's a chance for us to learn, but it's also a chance for us to put somebody down. So we take everybody seriously. But when we look at our business, we are clearly the only North American based business that has a global network and global potential to rise to that first point.
Now the only thing I'm a little disappointed in to be honest with you, we were hoping that responsive supply chain would have had more traction inside the business in the first half of twenty fourteen. That's a personal disappointment to me because the way we set this up was omni channel getting traction. So 1 year, 2 year, 3 year infinity, global growth, 250 to 300 new stores per year inside of that is our franchise business, 1 year, 2 year, 3 year. So those two tracks are moving very well. The idea was the response of supply chain would kick in and begin the path towards getting above 13% in the first half of twenty fourteen and then seamless inventory would come in at 15.
So now responsive supply chain is really going to start providing value to the company in the second half of twenty fourteen and seamless inventory needed a spread between it and between it and responsive will give value to the company in the second half of twenty 2015. So that's the one thing I'm disappointed as Sabrina's. I've been touting the road map we have and one of my jobs and Sabrina's job is where's the next $100,000,000 Where's the next $200,000,000 of value to be created in the business? And I said the first two, I think, give value for us every single fiscal year. Responsive has a one time big benefit and then an ongoing benefit and seamless, a one time big benefit in value and then ongoing benefit.
So do we have a path beyond 13%, we do. But it's going to start a little later than we originally planned in the second half of twenty fourteen. This is a non debatable point internally. We will be the 1st company to build excuse me, the bridge between digital and physical. That's a non debatable point internally.
We're going to be the 1st company to do it. And that's not Art building a bridge to the physical island. That's Art building spans of
the bridge and the
physical team building spans to spans of the bridge and the physical team building
spans to meet him halfway. Because this is never
going to work if we just take the growth, innovation and digital team and say that's all your work. That's how we used to operate when we had a different structure. Now with the new structure, it needs for the physical team, the field leaders, the store managers, the merchants, everybody to realize the world has completely shifted. It's a massive paradigm shift. Stop operating the old world and recognize the stores are going to make this next move happen.
Order in store only works with stores. Reserve in store only works with Art can build it all day long. He's super smart. You saw him today. He's got a team of 100 people just as smart as he is, who are building all these tools for us.
They're going to get it done. But without the embracing from the stores, we're never going to be number 1. But I think we look at it and say, well, our global competitors don't have the don't have either maybe being a little unfair, I know it's being webcast. Some combination of don't have either the will or the ability to build the bridge we have to build. We have a head start.
So we have a natural head start over them. We have a category that lends itself to a physical to a digital business, especially with the changes that are happening inside the brands. It lends itself to that business because it's rooted in bottoms and bottoms are dependable. And if you know your size, you're more comfortable buying digitally than a business whose fits are changing on a regular basis. But we are so committed to building this bridge.
We know where the future is and the future has to be not on one part of the digital part of our business or the physical part. It's going to have to be in the middle. And I think Art and the team are moving at a very fast rate, but it's going to take Stephane, Jack and Steve to make this happen. Lastly, the new brands for us are key. And this is all led by Athleta, Another 35 stores this year, it will get to 100 stores.
Jeff said today and it's just his opinion that when he looks at China and I completely agree with you. You look at China, you look at Japan, you look at Europe. I mean, I meet with the franchisees not as often as Steve does or Jack, but I do see our franchise owners and they're asking about Athleta. And that's always a good sign because they're not owners and businesses that just carry a single brand. A lot of them carry 10, 15, 20 other brands and they're asking it because they know where the customer is and they know that Athleta is not 1 dimensional.
Athleta is multi dimensional brand. Some of our competitors in this business are 1 dimensional and the 800 pound gorilla in this category is Nike. We're not chasing other people who have businesses, who have certain growth rates, who may not have them forever. We're focused on Nike. Nike is the 800 pound gorilla in this business.
So we understand that and that's where Athleta is going to go. We're not giving up on pipeline. We have one store today. We have new leadership there. Art's leading it.
It is the perfect digital physical business eventually. And Intermix is already there. We added 6 stores last year. We have 38. It allows us to participate in the other end of value to luxury and Intermix and Piperline are more positioned on the right hand side.
It's a $30,000,000,000 amount of volume out of $300,000,000,000 in North America apparel sales in which we have no share. So that's why Intermix is important and getting Piperline right is important. Four brands we can take public and 2 up and coming brands with the key being as I said here Athleta. And lastly, I've been doing retail for a long time and I've seen this happen in a previous industry, the grocery business. I've seen this happen in another industry called the drugstore business.
There's a clear separation that's taking place now between winners and losers. And this is the speech we give internally to ourselves to motivate the team. It's pretty clear what side of the equation you want to be on. And we see people slipping down the slope and we're working really hard with the brand work in particular. This all starts with product, supported by marketing, supported by innovation and creativity.
That's a very good question you asked on 40% off. That's a super good question, because that's exactly the kind of stuff the brands have to be leading through. Nobody wants to work in a business that's grounded in that kind of value proposition. That's the airline business. Nobody wants to work in that business and it's up to the brand presidents by using some of the tools we talked about today for us to break through to the winning side of the equation.
And I'm on top of winning, I'm talking about the stuff we talked about at the beginning, getting to the top echelon of the people we compete against, not domestically, globally. And that's going to take us recognizing that it's good for us. This is like hygiene. It's good for us when people fall down, have to close stores, give up share, negative comp. That's where the business is going.
And I've never seen I mean, as I've seen it to other industries, I haven't seen it here yet, but there's a clear bifurcation that's taking place. And if I ran a business that is a go green light to me to become offensive. Somebody has a credit card issue, that's a green light to me to become offensive. And this is how the business has to work. You've got to take market share from people.
There's an aggressiveness that comes by doing this. This is what our brands know, they support and they're putting together now, they're targeting people because the losers are going to give up share and the only way the winners can survive is for them to give up share. There's not enough growth for all of us. And lastly, I think I gave this slide before. Here's the advantage we think we have.
We have disadvantages. We're not going to show that slide today, if you don't mind. We're just going to show the that's a long slide. I was writing it last night. I had a hand cramp.
But these are the advantages we have as a business. It's American brands. I think we have the best collection of American brands. And that's important for us to get we want to get to. It can't be a single brand.
It's going to be the collection of all of them, all performing at a very, very high rate. We're only as good as our worst brand and I think all our brands have to deliver. It can't just be one brand. It's going to be all 6 of them. These guys know that and Art knows that.
2nd point is we have a very strong financial track record. I mean, I'm sure you saw that $21 price of share buyback on the 630,000,000 shares we've bought back over the last number of years. Sabrina has that framed in her office with a little note from the Board. But the financial work that Her and the team have done is amazing. Not under the best of circumstances, in fairness, the business hasn't always been strong financially.
In the last 10 years, the work we've done on cash management and the work we're going to continue to do on cash management, I think is an advantage we have. The runway globally is huge. I'm not to single anything out. We hired a young man who spent 15 years at H and M. He was there when they had 5 countries.
He left in there in 44 countries. That was a $4,000,000,000 business when he started 15, 17 years ago now. And then it went to a $17,000,000,000 business. And I'm telling you right now Old Navy is a better brand than H and M. It's more potential, more broad than H and M for a lot of reasons.
So the global runway in Steve's business, Jack's business, in Stephane's business and what Art talked about today with sorry, I didn't talk about today, but could have if we had more time, but Athleta, big global runway for us. We're not in 90 countries. We're in 54 with Steve. We think we can be in 85 or 90 countries across all our business, but we're only in 54 with 1 of our brands and underpenetrated in a lot of those countries. We have a seasoned management team.
I was trying to think today on the way in. Tom, 4 years ago, we hired Tom. I've been here 7. Stephane's 2 years, 10 years, 10 years, 12 years, 10 years, 8 years. We have a very seasoned management team.
Art has been here 11 years. We've been working together very well. We're growing together. We're learning together. We're failing together.
But the team has been supportive of one another. We see the future of the business.
That's why we're here,
right? We're all here because we see the future of where the company is going. And this next phase of unlocking value has got us pretty excited. 1st phase was a little strange the 1st 5 years. When we start all working together, the global recession hit in the 3rd month I was here.
So I felt I brought a little bit of bad luck to the company, felt like the schlep rock of apparel retail. But since then, we got through 8 better than anybody else. We got through 9 better than anybody else. We had a huge year in 10. We hit the cotton crisis that we felt unlucky again.
We stood up big year in 2012, big year in 2013 and we're going to have a good year again in 2014 as I said earlier. We're going to have another good year in 2014 and that's part of it is the management team and the other part is that we're looking at this next 5 year tranche and we're seeing more value opportunities than the 1st 5 years because a lot of the 1st 5 years we played defense with a reset the company, with a hold on to talent, with a get people in the business who weren't part of the long term plan out of the company, we brought new talent in, There was a lot of reworking the business. We didn't know how long the global tsunami was going to last. So we just popped our head out and started feeling more comfortable in 2012. And that's when these big four global initiatives and this focus that these brand presidents are putting in place and Nancy Green Athleta to look at our business going forward.
So I think there's a lot of opportunity in the company. It's not the perfect business. The consumer is still a challenge. There's still this issue of discounting we're dealing with. This is not if this was easy, anybody would do it.
I think we're taking this on because it's hard. This is really hard work, as hard as I've taken on. So we're taking on this hard work. We're running into it. We're not running away from it.
And I think those 4 big initiatives plus the talent we have, hopefully, will produce the results the company has shown it can in 2010. I have this great chart I show with 2011 taken out in 2010, 2012, 2013 and soon 2014. It's an awesome chart when you take 11 out. Anyway, thanks for your time. We really appreciate it.
Take a little bit of a quick break for those who have to go to the restroom. I know a lot of you have to leave. Sabrina and I are just going to stay back just the 2 of us and answer any remaining questions. Thank you very much.
Ladies and gentlemen, we'll get started shortly. But if you would like to move to the front for the Q and A, please do so. Please feel free to move to the front for Q and A. We'll get started shortly. Thank you.
All right. Go ahead and take your seats. We're going to get started shortly with Q and A. Please take your seats.
I'm Mike. There's a microphone.
Starting over here.
We've got lots of hands. Maybe you can move up a little bit. Sit right here at the mic. Sabrina, you choose.
Okay. So we'll start with Matt.
Sabrina, you talked you highlighted a lot of the potential margin impact or today in the presentations there is a
lot of discussion about the
margin impact from your seamless inventory from mix shift etcetera. It seemed like a lot of those buckets that were displayed in that chart to get above 13% were more gross margin or more supply chain initiatives than anything else. And there really wasn't much discussion about expense leverage. And so I'd just like for you to maybe talk a little bit more in-depth of how we should think about expense leverage for the next several years as the business grows?
Yes. Yes. So, I definitely did say we have a big goal to make sure that we're always and continue as we have been leveraging our expenses as we move forward. So with regard to our operating expenses, again, if we're growing sales, it stands to reason that on a dollar basis, they would increase, but of course, we'd look to leverage them as a percent of sales. And then I made the point about rod, which is an important one because we're still looking to leverage rod on positive comps.
But our leverage going forward is going to look a little bit different than our leverage in the past years for the two reasons I said. Our threshold is going to be a little bit higher than it has been. And the two reasons are that our mix of sales is shifting to countries like China that just have a higher absolute rod level. So when you mix into that, it makes it a little harder to leverage rod. That's number 1.
And then number 2 is, we benefited a lot from all of that U. S. Fleet optimization, where we reduced 6,000,000 square feet. And with that big leg behind us, again, we're going to continue to evolve the fleet. But with that big leg behind us, it just makes it more difficult to leverage rod to the same degree we have over the last few years, but still looking to do it with a higher threshold.
I'd add sorry, let me just add 2 things to that, Matt. One is we've never given up on trying to find cost real dollar cost as opposed to just leverage. Leverage is key, but getting real dollars out of the business. Steve, what he didn't touch on today, but we put together an international division, this division, online division into Global Brands. And I think over time, sooner rather than later, there's phenomenal synergies in that for the business.
If you want to run simpler, you want to run faster, sometimes you just got to do it in an org model that's a lot less than you currently operate in. The other thing I'd say is Arts Chart that flashed on the screen, the traffic change, even if you added up the bar of pure traffic, non social engagement, and then the one that has store traffic with social engagement, this traffic trend reminds me of 2,008 when the recession hit. And our real estate team knows as leases come up, no matter what people want to do, we are because of our size, because of our experience in this in 2000 and eight-two thousand and nine by shedding square footage and lowering rent per foot, we are taking a super aggressive stand on that because what we thought were malls that may be invincible from a decline in traffic are showing right now that nothing is invincible from any decline on traffic. So we're making sure we're using our size to get in there first as we renegotiate these leases to get our again real cost dollars down. Leverage, I agree, is free and we have to get, but we have to work both sides of the street.
Sabrina, in your I guess in your presentation earlier, you talked about maintaining healthy gross margin. So can we define what maintaining healthy gross margins I mean, are you expecting gross profit margin expansion over the next couple of years?
Yes. Well, the bottom line goal is we want to expand operating margin, right? And so we want to do that in a balanced fashion. And by balance, you really just have 3 big levers to get there. You have your merchandise margin, you have your rent and occupancy leverage and you have your operating expense leverage.
So what we don't want to do is overuse any one lever. We want to get there in a balanced way. So we definitely are looking to expand our merchandise margin. We're looking to continue to leverage rent and occupancy, albeit at a potentially more modest level than in the past. And then certainly leverage our operating expenses.
So all three of those, we want hitting to help meet our goal of expanding our operating margin.
I think it's good to look at that chart I put up on responsive, seamless, omni and global growth and their contribution to different levers in operating margin. I mean 2 of them are clearly targeted at merch margin. And what I said earlier in my closing was intended for you and intended for people who sit in the front row, this responsive supply chain initiative was supposed to kick off in Q1 2014. And whatever our merch margin is going to be at the end of the quarter, I can guarantee you sitting here would have been better if what's going to happen in Q3 2014 would have happened in Q1 2014 through the response to the supply chain. And I can guarantee you that.
Whatever the number we report would have been better. And I think now we've got the team, the cultural issue took us a little bit of time to get over. And I think now we've got people focused on it. That seamless and a little bit of omni are intended to help merge margins. And that question we had earlier about the discounting, I think we've got to find a way to continue to talk about our product, talk about what we stand for better than anybody else and execute at a higher level because the companies that do that or the companies don't rely on that as a tool or rely on it so infrequently, it doesn't even matter.
So I think that it's sort of denominator and numerator, we got to work on both, but it's definitely part of our plan. And one particular quarter like Q4 and the fact they were down doesn't deter us. We really do believe we have the ideas here and the ammunition, the team to get them done.
Glenn, so the lack of traction on responsive supply chain in the first half, is that related to some issues with execution, implementation, the environment overshadowing? What's the issue there? What do you mean?
Well, okay. I tried to sort of tiptoe around it today when I put up my culturetalent. I don't tiptoe around when you guys aren't in the room. I think Sonya laid out fabric platforming and fabric consolidation 2013 beautifully for the brands. And it was up to them then to take advantage.
So it wasn't that, that's the foundation of responsive supply chain is consolidating fabrics. Here, Sonia say that some of our global competitors operate with 300 fabrics. I won't even tell you the number of fabrics Ben Republic had. I heard Steve say today, 70 women's woven fabrics down to 10. The actual number is 4, that he went down from 70 from 4.
So that's getting consolidation and then you platform it. So that was that kind of work, I would say, was half done. There's another half coming this year laid out for the brands in 2013 to take advantage in Q1. So it was all cultural. It was all cultural.
I was telling somebody earlier that I tell you, I will for me it's so important for the company to know that just thinking what you saw in the lobby, there's probably a few people in merchandise and marketing still tonight upstairs popping champagne going, we've nailed it on product. And I've been here long enough to know that just does not exist. And I think this combination of no matter how good you feel starts with that, no matter how good Marissa Webb is and Julie Gruber and everybody else sorry, Julie Gruber. Julie Rose, she's in legal. No, I have legal on my mind.
All the lawyers in the back of the room watching what I'm saying. Julie Rosen, even on their best day, this responsive supply chain, seamless inventory and everything else is so critical to us getting to this North Star of 20 percent. So it's a timing issue. I take it as a personal affront to be honest with you. I'm disappointed because the corporate team laid the groundwork for it to be done.
It's one half of the year and I think it's a missed opportunity. I would have jumped all over by brand new brand. And I think now everybody understands that and I think you'll see a lot of benefit coming in the second half. Paul?
Thanks. Glenn, you talked about being first to build the bridge between physical and digital. And a lot of the things that Art talked about when he was speaking were a lot of the same terms that we hear thrown out by a lot of retailers. So I'm trying to kind of put together in my mind how much of that is actually eventually going to be the price to play, right, the ante that everybody is going to have to get there versus to what extent do you think that's really a sustainable competitive advantage or maybe a temporary competitive advantage because you have a head start and you think you have better talent? I'm just trying to frame that in my mind.
Well, I look at it
this way. I'd say there's no different than CRM years ago. I've been around these terminologies my whole life, right, omnichannel. If you're in retail long enough, they all circle themselves around. All I would say is naming one other specialty retail apparel company that has find in store, 0.
And the reason behind that is you guys spend a ton of money to go from most specialty retail apparel companies, refresh their inventory once a week. We've gone from years ago once a week to once a day to every 15 minutes. You can't do find in store without it. If it's not refresh, if it's not real time inventory, then the whole tool, the whole throwing it out is useless. People talk about ship from store.
We've had 2,000 stores on ship from store now for 18 months. And Terry, who I have a lot of respect for at Macy's, I mean they'll say they'll have their 1,000 store on sometime in Q3. So I think there's a lot of talk and not as much action that backs it up. And I think personally, this is I was just answering the question earlier, personally, I think there's huge first mover advantage here. I really think there is.
And I also think that Art opened up the kimono today to you 1 quarter of the ideas that are coming out from his team on really trying to get ahead of it. Hopefully, it picked up on that on average when you do get an email, some of it granted with discounting, there's 10 different versions of that to grow up that day, 10 different versions of that email. I think it's going to it's a huge investment to serve up 10, 20, 30 different homepages instantaneously on big data, like a massive investment. So I think people are some are not talking about it all in fairness. I've not heard a peep.
Some are talking about it. I'm trying to understand it. I think just like I said, like CRM, you have to say it. Otherwise, you sound like you don't your head's in the sand. But I do believe and we're not there today.
I got a lot of respect for what's going on with our friends in Seattle at Nordstrom. I think they're a high class company. They're doing some phenomenal work. They're actually ahead of us in some of the things they're doing. We admit that order in store they've had for a while and kudos to them.
But I think it's a few amount of companies in North America. We are so committed to being 1st and building a bridge and globally it's nobody. And that's an important point to note.
Just one follow-up if I can. I think this kind of ties into it. From a payroll perspective, you took minimum wages up. How much of what you do from a store payroll perspective is going to be you proactively actually switching people out? What kind of turnover are you looking for?
Is that going to be more of something that you just kind of allow people to leave when
they would normally leave?
Or is it something you're going to be a little bit more proactive in doing to get the right people in the store?
That's a good question. Now we our turnover at our associate level, which is let's call part time associates, is down by 25% or 30% in the last couple of years. The turnover number is still pretty high. It just sort of naturally churns and burns. But look, our stores are going to have to reassess, let's say hypothetically, that the number one criteria of a great talented person in our business has been the ability to set up merchandising displays and set up mannequins and do windows.
Another criteria might be your pure ability to work in a productive way. Now it's going to be your ability to engage customers. I mean, Banana Republic has an engagement model. Gap is half self-service. Old Navy is 80% self-service.
And for these guys, they're going to have to reconsider what their store operating model is in order for them to deliver on what Art's talking about. That's the speech I gave at the end is Art's just one person and his team as much as Sabrina and I admire them for how smart they are and the work they're doing. If the stores don't get engaged behind and supported none of this stuff is going to be worth anything. And personally, again, if I ran a brand, I'd make reserve and store the number one priority in my business, the number one priority. How do I get 15 reservations a day, 20 reservations a day, 30 reservations a day?
People complain about traffic, Largest built them, built them a problem, nobody has reserve in store, but us. And you saw the ranking, pickup in store by the way finished number 30 out of an option, 50 options, reserve in store that ranking that Art showed you finished 8th. So we know we're on the right issue. That's what people in the apparel business want is the ability to reserve it, not pick it up, not a toaster, it's a dress and they want to reserve it. And if I was Steve and Stephane and Jack, that's all I would talk about.
That's all my focus is. But that's the big shift that the company has to make and including the people in the stores have to make is that that's what they're talking about is do you know about this reserve in store? Why did you not reserve it? And if you're reserving it, it's all about that. Because foundationally, if we can't receive goods, if we can't style them, we can't put them in the window, it's like what I tell the stores, it's like breathing.
I mean, we know how to do that. This is
the next step. Anybody can breathe. So we need a higher quality of people across all of our business. We have great people today in order to get to that next step. Allie?
So you've talked about taking volatility out of the business pretty much from the moment you've gotten to the company. And I'm just wondering when you compare yourself to the big three global guys, there's obviously a big supply chain difference that accounts for a lot of the difference in volatility. But the other big difference is that they don't have big U. S. Businesses than you do.
Do you still believe in the new environment that we're in with this promotional and let's just assume it stays this way, it's possible to have an apparel business that's largely U. S. Based at least for now until the international kicks in that has less volatility structurally? I think
even if they had a business that was as U. S. Dependent as ours, our 2 European competitors, they just have less volatility. I mean, they run a business with more dependability, less volatility and especially the one in Spain, we never made bones about this. We are absolutely envious of their operating model.
Our seamless inventory operating model Tom is going to build for us is going to be ours, but we'd be crazy because we're certainly not that proud to not have studied it inside and out to understand every little bit of it. We've done that our way to understand it. And we've got to figure out what works for us and what doesn't work for us. Some of the moves we've made, which I think is adding some new brands was intended to reduce volatility, moving more to the outlet business was intended to be reducing volatility, closing 550 Gap Specialty Stores was to reduce volatility. Now we've done things to reduce it, but it's clear to me if you were to ask me that question in 2,008, I think the list we had back then at investor meeting I thought would have been enough to bring it down to what would be for me a comfortable level of volatility.
And the answer to that now is it wasn't. And we now have to I think we would have embraced these even more for the operating profit opportunity, but for my emotional well-being, I think these will also reduce some of the volatility in the business that is just necessary. There's a natural part of fashion that's always going to be like that, but we can be so much better by embracing a lot of what you heard today. One of the outcomes beyond the P and L is just this feeling that we are that the business becomes more predictable. And I've been in businesses like that.
It's much more enjoyable.
Susan Anderson, FBR. So back to the store rationalization. So I think you guys were kind of first to go in that direction and now talking about how much e commerce is growing and you're talking about reducing volatility. Do you think there's more stores that you need to close in the U. S?
And then just a question on the Gap assortments maybe more for C. But his comment on the product being too narrow early on, like what's the timeline in terms of getting more fashion in the mix there?
I'd say we have two things on you can fill in the other part. The first part on the store piece and I'll come back to the assortment with Steve. We likely publicly did ourselves a disservice by putting the stake in the ground in 2,008 said by 2013, we will blah, blah, blah, get all number of stores in 6,000,000 square feet. In retrospect, what we meant to say was that's going to be a big moment in time, but we haven't given up on the fact that our fleet is fluid. And we have, I should know the number, but 300 leases that come up every year for renewal.
We work ahead of time too. So we really felt that it was a missed opportunity to not have less doors. We could open that up to 600 like this, especially with landlords also looking at some similar traffic trends that we're looking at. So those are easy things to do. So we've never stopped analyzing it.
But I think we're coming to a bit of a conclusion.
Yes. So I would tell you it's important to note that our fleet actually is healthy in terms of contribution. So the stores now that are left in North America have very solid positive contribution on a four wall basis. So decisions on closures are not easy because you have to believe a lot about sales transfer and reverse cannibalization to get comfortable that you want to be closing stores, right? I think the question and the bigger opportunity for us is, is there another great step forward we can take like we took with the Old Navy fleet to meaningfully downsize some of the stores?
Because that formula is powerful. When you can shed square footage, when you're smart enough to remodel the store in a manner that allows you to maintain most, if not all of the sales, and you have a lot lower rent, it returns all day long. So I think what we're going to be aggressively pursuing with every opportunity, whether we have an option in exploration or not, maybe just proactively going out to the landlord market and exploring where is there an opportunity to shed square footage, maintain sales in the same box. And there's probably a strength in the distribution point too that we don't want to let go of. But I think the next leg really is looking at where can we downsize more, more than any closures given the health of the fleet and the positive contribution we definitely don't want to lose.
Yes. The brand president really believes in reserve in store and capitalize on the mobile traffic that turned that into store traffic. The last thing they want to do is get rid of their coverage. I think we have very good coverage. We were over at over coverage before.
We have very good coverage today. Somebody asked a question to Stephane. I don't think he quite answered it on his stores. I think on 1050, that's still quite a bit of a healthy fleet in North America. So we're letting him take a look at that without us pushing him too hard.
But getting Steve down from 1175 down to 700, I think that was a good move. I think Jack's at about 450 specialty, that's a healthy fleet. And if I were them, I would we've done it strategically to make sure we have we've never vacated a market. That's for sure. Any market that has 200,000 people, we try to keep presence in because we did believe this omni train coming down the track should provide value of the bridge between physical and digital.
On the assortment, Steve is coming from so many different levels of assortment between our businesses. I don't know, I'm just going to guess, let's say Steve was dealing with like 15 different assortments. He cut it down to 3 and you're going to see that in September. And I think what Steve, I think even though we were too spring forward as he said, I think I didn't how far do you want to swan dive onto a sword. I think that he was trying to also say it was a little too narrow, but he has done a phenomenal job bringing that down to 3 assortments and making sure the bottom assortment, I know exactly how many CCs are in it, but the bottom assortment is not just basics, that it has the right balance that I think Stephane was showing a slide today, which is more important to him, but Steve has gone through that exact same work.
And I think it's the August flow. You'll see exactly the future global assortment from 1, 2 and 3 tiers.
Thanks. Glenn, curious on your 3 global players now opening up stores in your backyard. So it feels like the fast fashion retailers have stopped opening up stores, Abercrombie, American Eagle, etcetera, they're closing stores. But now your global competitors that you're going after in their backyard are coming here. So how does that shape your view of what you think market share opportunities are?
And how do you think this ends long term with all their capital now coming here?
It's a really
good question. I think the number one global competitor, because we know them well, I think they're still trying to figure out the market. And the issue for them is really fit. And they won't change their global fit. It's just that's like a nonstarter.
So I think they're still trying to figure it out. I think our other the number 2 competitor, I think is doing a nice job. They've been adding stores. They've tried to figure out Southern Hemisphere product and I think they no, it's not that complicated, it's not rocket science. I think they've figured out and they've done a better job.
They're forced to be to take seriously. There's very little intersection surprisingly between them and our business. The number one global competitor, them and us tend to be very complementary to one another. In other countries where we're beside each other like China that works really well for us. So we're watching the number 2 carefully.
And the number 3, too many people, too many audiences listening. I just better just be bummed just suffice to say that there's a lot of talk.
We have time for one last question. So Jennifer, you want to ask a question? So I'm going to ask for clarification and a question, if that's okay. Clarification on, Glenn, you said that kind of the reasoning behind the supply chain, the rapid response, not seeing the benefits of it in the first half, that's kind of cultural. Is that people or I guess some of the merchants wanting too much inventory upfront?
Is that kind of is that the mentality around how much inventory you order upfront? So that's my clarification. I think
somebody on the stage today said something that was profound. I'm trying to think who it was,
said that I was
at the back deck basically chewing on my pen. Steve said that because it was a corporate initiative that the brands didn't embrace it until they truly understand understood the gross margin benefit. I think it was Jack who said it. He's back there. So I could throw myself into something I would have.
That's unfortunate, but I think there was a little bit of that and you could see when I get up here and talk to you. There's a natural level of passion I have towards certain initiatives in the business and maybe just to the 2 of us, these just became so obvious and such no brainers. It took a while for people who've been working the same way for a long time to understand that we're not second guessing their God given ability. We're trying to provide a net that everybody in this business should have. Also, I think we're struggling a little bit culturally with the previous management team brought so much consumer insights to the business that the designers felt they couldn't do anything until it was checked through some kind of consumer filter and they may have, which is again a shame, misunderstood this is not what this is at all.
This is clearly designed and we're not messing with design, we're just messing with quantities. And we're not telling anybody when a test and respond comes back, it doesn't say change the gold button. All it says is you thought the gold button cardigan was 500,000 units. The test clearly says it's 400,000 units. So we don't change any of the design, we just change quantities because the money is in the quantity.
I mean, we all love our designers that do a phenomenal job, but the difference between this stripe, this distance and this distance is good and that's the aesthetic of the brand. The real money is in whether it's 50,000, 60,000 or 70,000 units. And that's what response is all about. Question
is around the seamless inventory. From Tom's slide and I might have not quite understood that.
They were complicated. Okay.
It looks like right now you have separate DCs at least for your North American business for online and stores. And I thought from his second slide, it looked like maybe the DCs would be combined. And so I guess what's the how long does that take and what needs to be done to do that? And if that's if I'm interpreting that right? You're right.
That's what his slide said.
What I think he was trying to say before he got to that slide is that China runs off of the words I use an integrated distribution center. Ultimately, the money in seamless inventory is anybody who understands the grocery business or the drugstore business is same shelf inside the distribution center. So in China, they're in the same building, not same shelf. In Japan, we just put them in the same building. In Europe, we're going to go from 2 separate buildings to co located, which is same building, but not same shelf.
And Athleta run that way. So he was trying to say that when people who are current investors or potential investors hear people talk about changing an operating model of a business and you get a little scared, which is understandable, even I think we're doing the right thing, that we're going to have 4 areas of the business that have low risk that are going to run on this model before we ever get to our core business. But he's right that we believe to get the seamless inventory would mean that we have in North America 3 online distribution points today and we have 4 store distribution points today. And then by combining the inventory into 1 and building a brain that the brain would basically say when an order comes in, how do you maximize yield? Does it go directly to a customer or does it go to that store?
Even if the store has that inventory targeted to go to them, I'm thinking mostly our business works. You bring 100,000 units and you send 65,000 out and you hold 35,000 back. It's on that 35,000 if it was exposed to all of our demand that may mean that 100 stores don't get what was initially promised to them as their portion of the 35,000 because I've got it today online a customer who's going to pay $45 for that. And we know because the brain will tell you, if you ship that out to that store, it's going out at $32 because that's the AUR history of that store. So I'd say, Tom, to do that, you have to have all of your inventory housed in the same distribution centers.
That's what Tom was pointing to. How difficult? Surprisingly, I don't think it's going to be that difficult. We have to figure out, we've got great distribution centers today. Will there be some capital?
Absolutely. We have to spend some CapEx to get this done. Some capital to build the brain as I just talked about the system? Absolutely. I think what Tom is shooting for is he's trying to pick up value all the way along because he's trying to take components of seamless inventory and get them into the business and not wait for the big move from this model to this model.
But what he presented today is he wants to stand the brand up by Q3 of 2015, have one brand go fully on this model, everything built. So he's working his way at it. I mean, the guy understands IT and understands change. And Sonia runs the move we made is Sonia now runs all our distribution centers. We used to have them separately owned, so now she runs everything.
So we're making structural changes. Now we're going to make the operating model change to fit the structure. Thank you for your time. We very much appreciate. Enjoy your Easter.
Enjoy Passover, whatever celebration you had was previously Passover. If not, it's Easter. And thank you for your time. We appreciate it.