Katrina O'Connell
Chief Financial Officer at GAP
Thank you, Richard, and thanks, everyone, for joining us this afternoon. We're pleased to report fourth quarter and full year 2023 results, ahead of our expectations with market share gains. We remain focused on the discipline we've created around margin recovery, expense actions, inventory management, and maintaining a strong balance sheet. As Richard noted, our financial and operational rigor continues to be foundational as we turn our attention to the reinvigoration of our brands in 2024.
Before we begin, I'll note that all results reported today are inclusive of the 53rd week, except for comparable sales metrics. Some of the key highlights from fourth quarter and fiscal 2023 include the following. Fourth quarter comparable sales were flat and net sales were up 1%, ahead of our expectations driven by Old Navy and Gap brand sales results during the important holiday season. And while full year 2023 comparable sales were down 2% and net sales declined 5% year-over-year, this performance was in line with the outlook we provided at the beginning of the year as our financial and operational rigor begins to deliver more consistent performance. Old Navy drove a positive 2% comparable sales in the quarter, building increased confidence in consistent delivery of net sales growth.
For the year, Old Navy comparable sales were down 1%, with positive comp performance in the second half of the year and market share gains in all four quarters. Gap brand drove 4% quarterly comparable sales growth with a positive 1% comp for the year, outpacing the market. We delivered 530 basis points of gross margin expansion in Q4 and 380 basis points of expansion for the year versus last year's adjusted gross margin, resulting from trend-right product, which when combined with well-managed inventories led to improved promotional activity. Margins also benefited from lower commodity costs. We reduced fiscal 2023 SG&A by over $300 million year-over-year on an adjusted basis as a result of our commitment to financial discipline. All of which resulted in an operating margin of 5% for Q4 and an adjusted operating margin of 4.1% for the year, a 410 basis point improvement versus last year's adjusted operating margin, demonstrating meaningful progress on our path towards profitable sales growth.
Inventories ended down 16% year-over-year and remained well-controlled, driving better profitability and working capital, and we ended the year with $1.9 billion of cash on the balance sheet, delivering $1.1 billion of free cash flow for the year. While we enter fiscal 2024 encouraged by the financial progress we've made, we're taking a balanced view of 2024 while we shore up the foundation of our brands. I will discuss our outlook in more detail in a moment. Let me start with fourth quarter results. Net sales for the quarter were up 1% to last year at $4.3 billion, exceeding our previously communicated guidance range and comparable sales were flat. The 53rd week added approximately four percentage points of sales growth in the quarter. Also, the sale of Gap China last year had an estimated two point negative impact to Gap Inc.'s total net sales growth.
Now let me provide fourth quarter sales results by brand. Starting with Old Navy, net sales were $2.3 billion, up 6% versus last year, with comparable sales up 2%. This represented the second consecutive quarter of positive comps at the brand. Turning to Gap brand. Gap brand net sales of $1 billion were down 5% versus last year. Excluding the estimated negative impact to sales of eight percentage points related to the sale of Gap China, net sales would have been up 3% versus last year. Comparable sales inflected positively, increasing 4%, driven by continued strength in women's, which gained market share for the fifth quarter in a row. Banana Republic net sales of $567 million declined 2% year-over-year, with comparable sales down 4%.
Reestablishing Banana Republic will take time and we know there is work to be done to better execute many of the fundamentals in 2024. Athleta net sales of $419 million declined 4% versus last year. Comparable sales were down 10%. While the sales trend improved versus the prior quarter, net sales performance was still challenged due to tougher comparisons as we anniversary a period of elevated discounting, a dynamic which we expect will continue through the first half of fiscal 2024. While Athleta sales remain negative from the headwinds related to lapping last year's significant promotions, we're encouraged by the positive customer reaction to our new assortments, cleaner store presentations, improved online experiences, better marketing execution, and innovative new customer activations, which gives us confidence that the brand's efforts are driving underlying benefits.
Now turning to gross margin in the quarter. Gross margin of 38.9% expanded 530 basis points versus last year. Merchandise margin increased 500 basis points in the quarter compared to last year, driven by an estimated 300 basis points of leverage from lower commodity and air freight costs. With the remaining leverage primarily driven by improved promotional activity ahead of expectations, as strong holiday assortments and well-controlled inventory enabled lower discounting during the season. Rent, occupancy, and depreciation modestly declined on a nominal dollar basis versus last year. As a percentage of sales, ROD leveraged 30 basis points.
Now let me turn to SG&A. SG&A was $1.46 billion in the quarter, largely in line with our prior outlook. As a percentage of sales, SG&A of 33.9% leveraged 40 basis points versus last year. Operating income was $214 million, up $244 million versus last year. Fourth quarter operating margin of 5% improved 570 basis points versus last year, driven primarily by gross margin expansion. Fourth quarter net interest income was $4 million, as higher interest earned on cash balances offset interest expense. Our fourth quarter tax rate was 15.1% and benefited from the release of certain reserves. Earnings per share in the quarter were $0.49. Now turning to full year fiscal 2023 results. Net sales were down 5% to last year at $14.9 billion and comparable sales were down 2%.
The addition of the 53rd week contributed approximately one point of sales growth to the full year. And the sale of Gap China in fiscal 2022 had an estimated two point negative impact to Gap Inc.'s total net sales growth. Gross margin was 38.8%, expanding 450 basis points versus last year's reported gross margin and 380 basis points versus last year's adjusted gross margin. Merchandise margin increased 420 basis points versus last year on an adjusted basis, driven by 200 basis points of benefit from lower air freight expense, with the remaining expansion primarily driven by improved promotional activity. Inflationary impacts from commodity costs were relatively neutral for the year. And ROD as a percentage of sales deleveraged 40 basis points versus last year. Reported SG&A was $5.22 billion for the year or 35% of sales.
Excluding restructuring costs and a gain related to the sale of an office building, adjusted SG&A was $5.17 billion, down 6% versus last year, primarily driven by cost savings as a result of strategic actions. Reported operating margin was 3.8%. Excluding $93 million in restructuring costs and $47 million related to the gain on sale of an office building, adjusted operating margin of 4.1% expanded 410 basis points versus last year. Fiscal year 2023 net interest expense was $4 million as interest expense was largely offset by interest earned on cash balances. The reported effective tax rate was 9.7% for the year and the adjusted effective tax rate was 11%.
During the year, we received discrete tax benefits from the impact of foreign operations, a transfer pricing settlement related to sourcing activities, and the release of certain reserves. Share count ended at 372 million. Reported earnings per share was $1.34. Excluding the impact of restructuring and the gain on sale of the office building, adjusted earnings per share was $1.43. Adjusted earnings per share includes $0.29 of discrete tax benefits and a $0.05 benefit related to the 53rd week.
Now turning to the balance sheet and cash flow. Inventory levels were meaningfully below last year in all quarters, with fiscal 2023 ending inventory declining 16% year-over-year. We ended the year with cash and equivalents of $1.9 billion, an increase of 54% from last year. Full year net cash from operating activities was $1.5 billion as a result of our improved operating profit and lower inventory buys. Free cash flow was an inflow of $1.1 billion. We remain committed to delivering an attractive quarterly dividend as a core component of total shareholder returns. During the year, we returned $222 million to shareholders in the form of dividends, representing annual dividends of $0.60 per share. On February 27, our Board approved maintaining a dividend of $0.15 per share for the first quarter of fiscal 2024.
In summary, as I reflect on 2023, I'm proud of the discipline and rigor we've brought back into our foundation, which has resulted in meaningful recovery and profits, as well as strong free cash flow. I'm also encouraged by the progress we made in the second half of the year with sales stabilizing in the fourth quarter led by progress at Old Navy and Gap, early proof points of brand reinvigoration. We remain committed in 2024 to delivering continued improved performance through maintaining our financial and operational rigor.
Now let me turn to our 2024 Outlook. Our attention in 2024 remains on controlling the controllables, gross margin recovery, expense discipline, inventory management, and maintaining a strong balance sheet, while we continue the foundational work related to our brands as we aspire to drive relevance and revenue. We expect this rigor to deliver roughly flat sales excluding the 53rd week while delivering low-to-mid-teens operating income growth. Let me provide some details on our outlook, starting with the full year 2024. Our outlook of flat net sales year-over-year excluding the 53rd week assumes continued performance at Old Navy and Gap, offset by challenging comparisons for Athleta in the first half of the year as the brand laps elevated discounting from 2023 and a longer recovery timeline at Banana Republic.
This net sales outlook also contemplates the following unique dynamics. First, as a reminder, 2024 is a 52-week year, but will be compared in total to a 53-week year in 2023. The loss of the 53rd week results in a detrimental impact of approximately $160 million to fiscal 2024 net sales. It's worth noting that the timing shifts associated with the 53rd week are expected to be impactful to both Q1 and Q4 in 2024. In the first quarter, we expect to benefit from the timing shifts as we lose a low volume week in February and add a modestly larger week in May. Additionally, the fourth quarter is expected to be negatively impacted by the loss of the 53rd week.
Second, we have embedded multiple scenarios that contemplate modest headwinds in the first half of the year related to late deliveries as a result of geopolitical issues in the Red Sea. We currently expect that impact will moderate in the second half of 2024, but we will monitor the situation closely as we move through the year. And third, we're not anticipating major changes to consumer dynamics and macroeconomic pressures in 2024. In addition, I'd like to comment on the potential impact of the recent CFPB ruling on late fees for credit card holders. Our outlook assumes a mid-year implementation of the ruling, which we expect to be largely offset in 2024 by other levers within our credit card program.
Now moving to gross margin. We anticipate gross margin expansion of at least 50 basis points for the full year compared to fiscal 2023's gross margin of 38.8%. Our gross margin outlook is driven by the following factors. We expect commodity cost tailwinds in the first half of the year, which we anticipate will become largely neutral in the second half of the year. We expect ROD to deleverage modestly on the lower sales volume resulting from the loss of the 53rd week. And we continue to take a measured view of the consumer environment in fiscal 2024, particularly as we lap significant improvements we delivered in promotional activity during 2023.
Regarding SG&A. SG&A of $5.1 billion is expected to decline year-over-year as we benefit from $150 million in reductions related to last year's strategic actions and lower costs from the loss of the 53rd week, which are partially offset by wage inflation. We are committed to strong financial discipline and we will continue to identify and pursue efficiencies as we drive our strategic plan. Considering the above dynamics regarding sales, gross margin, and SG&A, we see a clear path towards delivering low-to-mid-teens operating income growth in fiscal 2024 versus the $606 million of adjusted operating income in 2023.
We expect full year net interest expense to be similar to fiscal 2023 with interest expense being largely offset by interest on cash balances. However, we will be watching Fed actions to determine if lower interest rates over time might impact this dynamic in the year. We are planning for a more normalized tax rate of 28% in 2024. This compares to 9.7% in fiscal 2023 as we benefited from several discrete tax items, which as previously noted, added approximately $0.29 to fiscal 2023 earnings per share. We are planning capital expenditures of about $500 million for the year.
Now let me share some color on our outlook for the first quarter of fiscal 2024. We're pleased with the trends quarter-to-date and are planning for net sales in Q1 to be roughly flat versus Q1 2023. Consistent with our full year view, our first quarter outlook assumes continued performance at Old Navy and Gap, offset by challenging comparisons for Athleta and a longer recovery timeline at Banana Republic. As it relates to first quarter gross margin, we expect at least 100 basis points of expansion compared to the adjusted gross margin of 37.2% in the first quarter of fiscal 2023, driven by commodity cost tailwinds. We continue to take a prudent approach in relation to the promotional environment in the first quarter, and we're planning SG&A of approximately $1.2 billion in the first quarter of fiscal 2024.
In closing, we're pleased to deliver strong financial results during both the fourth quarter and the full year demonstrated through gross margin expansion, expense discipline, lean inventory, and strong cash generation. The financial and operational rigor that we've worked to develop and will continue to pursue is enabling us to focus on reinvigorating our brands with the goal of generating sustainable profitable growth and delivering value for our shareholders over the long-term.
With that, we'll open up the line for questions. Operator?
