Sonia Syngal
Chief Executive Officer at GAP
Good afternoon, everyone, and thank you for joining us.
Our Q1 results and updated fiscal 2022 outlook primarily reflect industry-wide headwinds, as well as challenges at Old Navy that are impacting our near-term performance. While we're disappointed to deliver results below expectations, we are confident in our ability to navigate the headwinds and restabilize the Old Navy business in order to deliver on our long-term strategy. This current period of acute disruption has clarified the urgency of improvements necessary to put us back on track towards delivering growth, margin expansion and value for our shareholders over the long term.
We have updated our full-year outlook to reflect the following factors that are impacting near-term performance. First, the majority of the sales and earnings reduction from our prior guidance stems from Old Navy, primarily assortment imbalances and lower-than-anticipated demand in key categories like active, fleece and kids and baby; secondarily, product acceptance issues; and thirdly, challenges related to the launch of BODEQUALITY, Old Navy's extended-size initiative.
We expect the issues at Old Navy, which we estimate are negatively impacting fiscal 2022 diluted EPS by approximately $0.90 to $1, to largely resolve by the end of the fiscal year as we take necessary actions to right-size the assortment and reengage responsive supply chain capabilities. And I will address this in more detail shortly. While the primary impact of soft demand in active, fleece and kids and baby is being felt at Old Navy, our Gap and Athleta brands are not immune to this customer shift.
Second, we are keeping a conservative posture as it relates to the impact of inflation on our cost and on our customer. Our revised fiscal 2022 outlook contemplates modest incremental fuel costs and hourly labor headwinds, consistent with many others in our industry. We entered the first quarter anticipating a slowdown as we lap the impact of the stimulus of the prior year.
However, we began to experience a more profound weakness during the quarter at Old Navy and, to a lesser degree, at Gap North America as those brands were most exposed to the rising inflationary environment impacting our lower-income customer. Accordingly, we have taken a more cautious consumer outlook and are moderating our top line growth expectations as reflected in our revised guidance.
And third, Gap brand is experiencing a slowdown in Asia largely as a result of the COVID-related forced lockdown and slowed overall demand in China, which began in late March. While we believe that these are transitory factors impacting our business in Asia, we are anticipating that the demand environment remains muted.
Let me now spend some time on the factors impacting Old Navy. As we shared last quarter, we expected tough first half compares driven by moderate product delays due to supply chain disruptions last year, as well as lapping the brand's disproportionate benefit from last year's stimulus. In addition, we also expected continued assortment imbalances given the numerous pivots to fashion, such as dresses, pants and tops, which were underrepresented in Old Navy's women's product mix.
Old Navy was especially disadvantaged given their leadership in fleece, active and kids and baby, categories that grew significantly during the height of the pandemic and experienced lower-than-expected demand during the first quarter. But as the quarter progressed, we identified additional factors that I will walk you through now. When spring product finally began to arrive in March, and it will maybe continue to experience softness, we conducted a deep diagnostic of the business and it became apparent we also had product acceptance issues.
Old Navy's women's assortment and inventory mix continues to be out of sync with the change in consumer category preference, and the fashion choices we did have did not resonate with her. Historically, speed and agility have been strong levers at the brand. However, supply chain challenges and persistent delays significantly limited the brand's responsive abilities.
12-week pipelines for core categories have been critical to the success of Old Navy over the years. Reverting to a longer inventory push model not only diluted economic value, but meant we were defining customer trends too early in the process and were unable to chase into the right fashion choices closer in. This resulted in excess inventory and less relevant styles that will pressure sales in the short term while we rebalance the assortment going forward. As a family brand, this has a compound halo effect. When we aren't delivering for moms, she's less likely to come to Old Navy for her kids.
An additional factor impacting Old Navy's performance is that we lean too heavily on the brand's inclusive sizing launch product quality. While pleased with some of the early indicators, such as the new customer acquisition and increased brand health, we overestimated demand in stores. While we believe that product quality is right for today's consumer and delivers on Old Navy's mission to democratize styles, we launched too broadly and too quickly. We overplanned larger sizes with customer demand underpacing supply, leading to an excessive inventory across stores. This issue was exacerbated by the out-of-stock in core sizes due to the continued supply chain disruption and inventory delays.
The brand also dedicated a significant amount of full funnel marketing to buy [Phonetic] [07:33] quality, including stores and site experience, starting in the third quarter of last year, shifting focus away from its expansive brand DNA. This has resulted in a negative impact on demand and traffic from our core customers as the product they were looking for wasn't available.
And finally, as previously mentioned, while we entered the first quarter anticipating a slowdown as we lapped the impact of stimulus in the prior year, we experienced more pronounced weakness than expected through the quarter primarily impacting Old Navy. While trends in May have improved, we are taking a more conservative view as it relates to the lower-income consumer given the ongoing effects of rising inflation. This is reflected in our revised fiscal 2022 outlook.
The Old Navy brand is better than this, and we know what we need to do to correct the things we can control. Let me walk you through some recent changes. While we search for a new leader, our strong Old Navy leadership team has reinstituted a focus on our value equation, offering style, fit, quality and cultural relevance at jaw-dropping prices. This is particularly important to capture not only the current pressure for income consumers but all consumers in an inflationary environment.
Next, we are adding balance and relevance to the assortment with broader end use and what we believe are the right fashion choices, which we expect will improve in fall and even more in holidays while still maintaining leadership positions in categories we are known for, like denim, active and kids and baby. We are rightsizing our extended-size offering in stores to better match demand, starting in Q3 by optimizing the size range to service the customers we acquired with the launch.
We'll continue to offer the full-size range online and maintain price parity across sizes in all women styles. The team has canceled a significant portion of extended sizes from Q3, is optimizing replenishment and will monitor demand and refine as necessary. And we're confident that our core sizes will be back in stock for fall. Finally, we have updated the marketing mix across channels to better reflect extended sizing as a percent of the total business and are using informational creatives to bring back our core marketing messages of fun, fashion, family and value to the Old Navy customer.
While we're clearly disappointed in the near-term headwinds and transitory factors impacting our business in the short term, we are confident in our strategy for the long term. We have made tremendous progress on our Power Plan already and do not want the near-term dynamics to cloud the great work that our teams have executed against our long-term plan. We have undertaken significant restructuring necessary to become a more nimble and focused company through our North American fleet rationalization, which we expect to be approximately 85% complete by the end of 2022, as well as through the capital-efficient partnering of our European business and by shedding unprofitable brands.
We use this time of disruption to grow brand awareness through investments in marketing and digital capabilities and to create greater brand differentiation and balance across the portfolio. And we launched our loyalty program to unlock personalization for our 55 million loyalty customers which, alongside our Barclays' credit card transition happening in June, will create even deeper engagement with our customers.
Fundamentally, Old Navy has strong core assets that have long-term value. With a stronghold for a wide range of shoppers, the brand wins by staying true to its value equation, which has proven successful since day one. Old Navy's spring campaign written by the Internet invites our loyal customers to help shape the brand's marketing throughout the year, giving them unprecedented access to collaborate at the highest level. And our new price unlock initiative is a commitment to freezing the current price tag despite the rising prices across the industry on a selection of kids everyday fashion essentials labeled Everyday Magic.
Athleta's position and appeal to empower active women and girls is as relevant as ever. The brand has delivered approximately 60% growth versus 2019 pre-pandemic level. We believe Athleta has multi-year tailwinds as athleisure and wellness are two big trends that aren't going anywhere. And we see a path towards delivering mid-double-digit revenue CAGR over the next several years, positioning the brand as one of the fastest-growing women's athleisure brands in North America.
Athleta's focus on both active and lifestyle positions it well to capitalize on the evolving shopping trends. And with this consumer shift, we're keeping a close eye on balancing the right assortment mix for the remainder of the year. The brand's newly launched Transcend Tight, featuring smooth, buttery soft fabrics and minimal themes, makes this Athleta's most versatile performance type ever, meant to perform in the studio and beyond.
At Gap, our partner to amplify strategy continues to ignite brand relevance and drive category and channel diversification. The brand is focused on scaling the big partnerships this year, like Gap Home at Walmart and YEEZY Gap, to drive sales. The YEEZY Gap Engineered by Balenciaga launch drove urgency with customers and generated brand buzz in Q1 with 6.6 billion media impressions. Additionally, you can expect the brand to expand across wholesale and marketplaces later this year.
Banana Republic is reclaiming its position in the accessible luxury market through the return to trend-right styles; quality of fabrics like leather, cashmere, silk and linen, an experience that's commanded a healthy premium consumer. Banana Republic is capitalizing on the current customer shift to occasion wear, with women's suiting, dresses and skirts growing 62% and men's suit sales nearly doubling versus last year.
With a record number of weddings set for 2022, the brand is highlighting its best look and elevated product in a new online wedding and events shop, suited in bright, optimistic color, seasonal neutrals and lush fabrics. And Banana Republic expanded into the baby market with the recent launch of BR Baby, drawing upon the brand's legacy of safari-inspired styles crafted from premium fabrics and textiles made to last the journey ahead.
Before I hand it to Katrina, I'll leave you with this. While there are industry-wide macro factors and execution challenges impacting our performance in the near term, we are confident in our ability to restabilize Old Navy. We are taking aggressive actions to clear goods, fix our assortment relevance and imbalance and focus our marketing efforts on the brand's core consumer value proposition and leverage our responsive capabilities as we approach future buys. What remains true is that we have four great purpose-led brands that people steadfastly love. We have made considerable progress on our Power Plan strategy to date and are focused on completing the work necessary to come out of this period of near-term headwinds in an even better position to deliver shareholder value over the long term.
With that, I'll pass it to Katrina.
