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Gap Inc  (NYSE:GPS)
Q4 2018 Earnings Conference Call
Feb. 28, 2019, 5:00 p.m. ET

Contents:

Prepared Remarks:

Operator

Good afternoon, ladies and gentlemen. My name is Melissa, and I will be your conference operator today. At this time, I would like to welcome everyone to The Gap, Inc. Fourth Quarter 2018 Conference Call. At this time, all participants are in a listen-only mode. (Operator Instructions)

I would now like to introduce your host, Tina Romani, Senior Director of Investor Relations. Please go ahead.

Tina Romani -- Senior Director of Investor Relations

Good afternoon, everyone, welcome to Gap Inc. Fourth Quarter 2018 Earnings Conference Call. Before we begin, I'd like to remind you that the information made available on this webcast and conference call contains forward-looking statements. For information on factors that could cause our actual results to differ materially from the forward-looking statements, as well as the description and reconciliation of the non-GAAP financial measures, as noted on Page 2 of the slides supplementing today's remarks, please refer to our earnings -- today's earnings press release as well as our most recent annual report on Form 10-K and our subsequent filings with the SEC, all of which are available on gapinc.com. These forward-looking statements are based on information as of February 28, 2019, and we assume no obligation to publicly update or revise our forward-looking statements.

Joining me on the call today are President and CEO, Art Peck; and Executive Vice President and CFO, Teri List-Stoll.

With that, I'll turn it over to Art.

Arthur Peck -- President and Chief Executive Officer

Hi, everybody, and thanks for joining us today. I'm going to start by discussing the announcement we made this afternoon to separate Gap Inc. into two independent publicly traded companies. Cleverly named NewCo and Old Navy. I'll then get into specifics around the quarterly results.

Our announcement today is an acceleration of our balanced growth strategy and an indication of my commitment to position all of our brands for success. With this plan, we will stand up two independent companies creating a unique and differentiated portfolio of specialty brands in NewCo and stand-alone Old Navy, both well positioned to lead in the evolving retail landscape. NewCo will bring Gap brand Athleta, Banana Republic, Intermix and Hill City into one operating model.

I feel strongly that this combination of brands will be powerful by bringing them together, we can better leverage capabilities and investments across the brands, share best practices and drive efficiencies to create value for all stakeholders. NewCo will have approximately $9 billion in annual revenue, a strong balance sheet and a significant opportunity to innovate explore new ways to serve the customer and quite frankly, what's on my mind is to write the next chapter for specialty retail. I also believe NewCo will be positioned to take a global leadership role in sustainability. It's the ethos of this company and the ethos of these brands.

In Old Navy, we have one of the fastest growing apparel retailers in the United States with the winning business model and an impressive runway for future growth, including capitalizing on opportunities like opening new stores and expanding into new product categories.

The stand-alone company will have approximately $8 billion in annual revenue, and we'll be able to capitalize on this scale, broad consumer awareness and unique positioning to drive growth. So why are we doing this, and why now.

Our customers' preferences and shopping habits continue to evolve, which is challenging the traditional retail model. We've responded to this with our balanced growth strategy, which has positioned us well with investments in our global supply chain, our digital capabilities, and an enhanced and evolving omni-channel customer experience. While at the same time improving operational efficiencies across the company.

But over time, Old Navy's value creation levers, business model and customers have increasingly diverged from our Specialty Brands. That divergence to me is now clear, and we think the best way for each company to grow and meet the evolving needs of our customers is to allow them to pursue tailored strategies separately.

The separation presents us with a unique and catalyzing moment to simplify what we're doing and how we're doing it. With more focused companies decision making can be accelerated, and I'm confident that we'll be able to move quickly and with agility to serve our customers. Let me describe what each of these companies is going to look like in a bit more detail. Starting with NewCo.

Following the separation, I will become the CEO of NewCo. I'm excited to lead and continue to lead these great brands under a different structure that will create clear focus on what is necessary to deliver improved profitability in our mature brands.

Gap, Banana and Intermix were capitalizing on the momentum and the newly launched Hill City. With approximately $9 billion in revenue, NewCo will continue to have scale, but we'll be better positioned to drive sustainable growth, improved profitability by leveraging scale operating platform to deliver distinctive products and experiences to an attractive and loyal customer that significantly overlaps.

In NewCo, we have the advantage of iconic brands, but we also have a business that needs to evolve and change. With our concurrent announcement on restructuring the Gap brand specialty fleet, we have a smaller, healthier, base of stores that provide a critical component of the Omni experience for -- in our customers' demand.

In addition, we will continue to grow -- with the value trends in the industry in our outlet and factory business across the portfolio. And the thoughtfully evolve specialty access through locations and formats that serve our customers shifting shopping patterns. The NewCo challenge and the NewCo opportunity is to provide truly frictionless access across stores in digital to continue to harness the power of data from cross brand shoppers and to become what I call radically more responsive to our customers.

As I mentioned earlier, NewCo will be uniquely positioned to grow its leadership, also in sustainability and social responsibility. It can build off the B Corp certification recently earned by Athleta to potentially become the largest publicly traded B Corp positively impacting the environment, our employees, our vendors and our customers. Responsibility has been a foundational element of Gap's history, and we have the opportunity and obligation to lead the industry going forward.

Turning to Old Navy, which I am quite honestly equally excited about. As the number two apparel brand in the US with approximately $8 billion in annual revenue, Old Navy will be able to capitalize on its scale, broad customer awareness and unique positioning to extend its category leadership, maximize revenue growth and deliver a profitable growth as an independent company.

Sonia Syngal who has lead Old Navy since 2016 will continue as the CEO of the stand-alone company. She has a proven track record of results leading Old Navy's most recent transformation and driving product to market innovations that serve all of our brands. She also has deep experience managing and optimizing supply chain and manufacturing both of Gap Inc. and in other industries.

With its US store footprint under penetrated versus the value peers, Old Navy will have improved focus and operating discipline that will enable it to increase customer access to new stores, including infill locations and smaller markets where our test indicate substantial opportunity. Old Navy will continue to evolve its omni-channel model and we'll have the opportunity to expand its product categories and market presence to continue to successfully resonate with value focused consumers.

I look forward to seeing what Sonia and the team take Old Navy. I and all Gap Inc shareholders have a vested interest in that success.

Teri will discuss some specifics of the transaction in more detail, but before I hand it over to her. Let me switch gears and hit some highlights of our Q4 and fiscal year results.

Overall, the quarter did not live up to what I know our brands can deliver. And we did not finish the year as strongly as expected, as others have pointed out in the industry, the macro environment played a role, but we know we can do better, and we are committed to doing better in the areas of the business that we control.

That said, as we look back on the year, there's many things to be pleased with. We made good progress on our productivity goals and discipline choices to deliver our guidance. We saw the continued renewal of Banana Republic with positive trends and a stronger foundation. We continue to see market share gains at Athleta and Old Navy, and we made meaningful investments in technology to drive future growth and efficiency.

Before I dig into our fourth quarter performance of Old Navy, I think it's important to put into context, the health of the brand, which remains strong and a market leader in the value space. And I just really want to start this conversation by saying I have 100% confidence in the Old Navy business and the Old Navy business model.

2018 was a record year for the brand delivering comp growth of 3% or 9% on the two-year stack, 9% on a two-year stack. And the brand continues to operate at very healthy margin rates, leading the Gap Inc portfolio.

Underlying the success with a large and healthy active file of high value multichannel customers that grew double-digits in 2018. The brand also nicely grew its high value, multi-channel shopper base. Old Navy has successfully introduced new products the assortment that will be quickly become must have staples, such as fleece, puffers and fashion outerwear. These add to the continued strength in tees and jeans for your entire family. Old Navy continues to play and win across a wide range of merchandise categories with continued room to grow.

Looking after the quarter -- sorry, looking at the strong after a strong start in November and through the Black Friday weekend, Old Navy like other concepts experienced deceleration in traffic in the middle of December and we quickly began hind sighting the trend. While there may have been some macro issues at work, we also recognize we could have done more to engage our customers to drive traffic during this typical low in the season. We also acknowledge that our assortment in our -- provide enough newness or excitement and that our investments in products we're more heavily skewed to repeated winners leaving less room to flex into better performing items.

While we are generally not satisfied with our execution for the holiday and should have been able to drive a better Q4 results. We know and I know the pants momentum remains solidly positive. Old Navy is still an incredibly exciting growth story, and I remain very confident in the brand health and the leadership teams continued focus on delivering exceptional product, fresh marketing, superior customer experiences and continuously pursuing operational excellence to drive growth.

Turning to Banana. Overall, 2018 was a year progress that strengthens our confidence in the relevance and potential for Banana Republic. With the brand achieving a positive comp coupled with a 120 basis points, a product margin expansion in 2018. On the product side, Banana Republic grew market share across pillar categories including sweaters, suiting and dresses and skirts. On the customer side, our connection with the customers at BR is getting even stronger and our customer base continues to grow as product acceptance ticks up.

Acquisition and reactivation rates improved over the last year, reflecting marketing that now has a more consistent and brand appropriate aesthetic. On the operations front, the team is now working more productively and efficiently from their single headquarters location in San Francisco.

In Q4, BR delivered margin expansion which was a continuation of their trend underscoring the team's commitment to reducing the intensity of promotions, used in the commercial plan. In line with the strategy, the brand pull back on promotional levels during the quarter, which was a detriment to traffic and ultimately comp during the highly competitive holiday season. The team is continuing to assess the effectiveness of utilizing varying degrees of promotional messaging, particularly during event driven periods such as holidays, as they continue to focus on providing value and experience our customers expect while continuing to drive margin expansion.

Overall, the BR team is determined to capitalize on the momentum seen throughout this year and will incorporate key learnings from holiday as they continue to focus on building strength to customer reengagement and acquisition, all the time, while reducing promotional intensity to drive further margin expansion.

Athleta, zooming out for the year, there's a lot for us to be proud about their performance. Another market share gaining year, we opened 13 stores, ending the year with 161 stores. The Girls business remained spectacular, delivering an over 60 comp for the year. The entire Company received B Corp's certification, which is really resonating with customers and employees, the active customer file grew 20% exceeding their goals, and we launched our men's performance lifestyle business Hill City.

In Q4, Athleta experienced similar traffic softness in December that we've spoken about. Although sales less traffic, a key indicator of product acceptance remained positive and held to year-to-date trends. We continue to see tremendous market share opportunity and runway for growth in 2019 and beyond by leveraging the brand's differentiated positioning and purpose driven mission, our unique range of product offering and growing our capabilities and performance fabric innovation.

Moving on to Gap. As I committed last quarter, we have taken thoughtful and decisive action to radically restructure our fleet to address stores that are underperforming or do not represent the best of Gap brand. Teri will get into more detail. But looking ahead, we intend to close approximately 50% of our specialty stores. The majority of the closures will be concentrated in North America leaving with -- leaving us with a smaller, but healthier specialty fleet.

While there's work to do on the remaining fleets, including continuing to reduce square footage and bringing stores to brand standards. We're confident these closures will play an important role in revitalizing the brand. After the closures we expect to see significant improvement in channel mix with our profitable online and outlet businesses representing approximately two-thirds of the business and especially the other third down from about half today.

As I mentioned last quarter, our market research strongly supports the view the Gap remains a relevant brand with strong emotional equities. As challenging as 2018 was logo sales which to me on an indication of the equity of the brand were up 11% globally. To me this is a clear sign that the relevance of the brand and even more importantly, the strong emotional connection within pride in the brand like Gap. It's clear the potential for future growth and penetration is there. We just need to give our customers the quality, fit and style they want and to address those issues we've been focusing on improving the product engine the business on three fronts.

Process improvement, as you know, we're adopting best practices from across the company while driving a culture of continuous improvement, talent and structure, super important and critical to me, Neil has been in the building now for about six months, and he has been investing in the right talent and structure for Gap brand. Clear lines of accountability for our channels and regions, dedicated teams to get North American specialty and outlet. We recently announced the appointment of Alegra O'Hare, Chief Marketing Officer, formally with Adidas. Alegra is a marketing innovator with extensive experience leading a major brand through creative turnaround and frankly a major brand through our revitalization and we're thrilled to have her skills and her perspective on board.

And lastly, category strategy. Denim is the core of Gap brand, and we are and we will be leading with denim. We recognize the competition in the market for denim, but the market is large and the market is -- is attractive and is the essence of Gap brand. World we live in is devices. This really gets to the core of Gap brand's equities in the heart of the brand. We believe and our customers tell us there's something really special about what Gap brand can do to bridge the gap.

By leveraging the strength of our iconic brands to offer products and an experienced celebrates individuality, drives inclusion and brings us together. We have our work cut out for us this we acknowledge, but we know what we need to do to win and we are committed to restructuring the fleet and revitalizing Gap brand to unlock shareholder value and drive profitable growth. As we've already outlined in this call there are many opportunities to drive profitable growth in our amazing brands. I intend to continue to pursue those tirelessly and aggressively, both strengthen the results of Gap Inc to 2019 and to said both NewCo and Old Navy up for success as independent companies.

This is somewhat of a historic moment for the company. One, where we begin to chart the course in our 50th year for the next 50 years, we're creating two compelling companies that will have the ability to drive growth and value for customers, employees, shareholders for many years to come.

We have a lot of work to do before the separation. We're just beginning the detailed planning to support the execution, and I will not allow this to distract us from delivering on the current business, so that our brands enter their next phase, healthy, strong and poised for growth.

With that, Teri, I'll turn it over to you.

Teri List-Stoll -- Executive Vice President and Chief Financial Officer

Thanks, Art, and good afternoon, everyone. In the interested time, I'll be quite brief in my comments to leave time for Q&A of which I suspect there are few. Let me start with some additional information on the separation announcement. We expect that the separation will be effected through a spin-off to Gap Inc. shareholders, that is intended to generally be tax free for US federal income tax purposes. Once the separation is complete, Gap Inc. shareholders will receive a pro-rata distribution of the shares of NewCo and Old Navy stock. The ratio of shares that will be distributed will be determined prior to the actual separation.

We currently expect the transaction to be completed in 2020, subject to certain conditions, including final approval by Gap Inc's Board of Directors received a tax opinion from council, the filing and effectiveness of a registration statement with the US Securities and Exchange Commission, and certain other customary conditions. After the separation NewCo and Old Navy are expected to be appropriately capitalized with sufficient liquidity to support both planned operating and investment plans, as well as capital allocation philosophies.

It's early days in the execution planning process. So I'm sure you'll have a number of questions that we are not prepared to answer, definitively at this point. As we move through the process toward separation, we're committed to full and transparent disclosure to ensure a complete understanding of the transaction and its implications. This is an important and transformational step for Gap Inc. One that affects our employees, our investors, partners, vendors, other stakeholders, and one that we certainly haven't taken lightly, it has become increasingly clear that our balanced growth strategy, while successful in building necessary capabilities in areas like supply chain and digital capability, that are important to a scaled operating platform, no longer effectively supports the diverging needs of Old Navy versus our traditional specialty brands. Now is the right time for us to take the next step on our journey to both ensure the competitiveness of our brands and to deliver shareholder value.

Next, let me just share a bit more detail regarding the Gap specialty fleet rationalization we announced today. The Gap brand, as Art mentioned, it is an important component of both Gap Inc. and the proposed NewCo portfolio. And this is an important step to improve the profitability of the specialty channel.

So we started the year 2018 with 725 global specialty stores, excluding China, which continues to be a growth market for us. Between the 68 specialty stores that we closed this year, and the 230 additional specialty closures that we announced today. This represents closure of nearly half the fleet, and there will be additional natural expirations in closures beyond 2020.

To identify the stores for closure, we focused on those that were not delivering appropriate levels of contribution. We're in the wrong locations or otherwise we're not a strategic fit in the fleet. Our objective is to ensure the remaining fleet is located and sized appropriately, and can generate sufficient returns to warrant the investment to remain brand appropriate and provide a positive customer experience.

To accomplish these closures, we're balancing the need to move aggressively, but economically. There are approximately 150 closures that will take place as leases naturally expire over the next two years. And at same timeframe, we also are actively pursuing more rapid closures of about 75 and up to maybe 100 stores that do not meet our criteria for retention. We expect the stores with the most significant losses will be closed by the end of fiscal year '19.

In total, we expect these decisions to result in annualized pre-tax savings of about $90 million. It's important to note that we expect in the annualized sales loss of about $625 million from the closure of these stores. And we estimate restructuring costs of about $250 million to $300 million with majority expected to be cash expenditures. Through this work, we will have a smaller, healthier base stores to play an important role in the omni experiences our customers' demand. In addition, we'll continue to focus on growth in our online channel, which we expect to evolve to over 40% of our business, as we restructured the specialty fleet. We believe Gap brand will be well positioned to compete effectively with an omni-model that offers locations, formats and experiences that serve our customers shifting shopping patterns.

Let me now briefly summarize our fourth quarter and full year results. While 2018 presented some challenges, we're pleased to have delivered fiscal year earnings per share within the original guidance we set at the beginning of the year. As a reminder, both fourth quarter and full-year results are negatively impacted by the loss of the 53rd week, which amounted to about $0.06 of EPS for the year and $0.16 for the fourth quarter.

Additionally, I reported 2018 results include the presentation changes from the adoption of the new rev rec standards, the impact of which is presented on our website. So to the details, the net sales for the quarter were $4.6 billion with comp sales down 1%. For the full year, net sales were $16.6 billion, up slightly over last year, when excluding the presentation changes from the adoption of the new rev rec standards.

Comp sales for the year were flat compared with a positive three last year. At Old Navy, Q4 comp sales were flat against last year's 9%. For the year, Old Navy's comp sales were up 3%, as we continue to grow share. As Art mentioned, while the Old Navy brand remains fundamentally strong, the fourth quarter was disappointing particularly in stores. Our online trends remain very strong with double-digit increases in traffic and conversion during the quarter. That said, in both channels, there certainly were met growth factors at work. But we also missed opportunities around both newness in product and effectiveness of commercial plans. We've hindsight this some of the execution misses that are within our control to incorporate learnings into next year's plan. The leadership team is also diving into better understand and quickly correct some product softness we continue to see around women's wovens and dresses.

At Gap, the Q4 comp sales were down 5% against a flat comp last year. As expected, a more balanced assortment helps drive an improvement in margin trends versus last quarter. At Banana Republic, Q4 comp sales were down 1%, against a positive one comp last year. The Q4 comp results reflect the team's continued focus on reducing promotional levels, which delivered margin expansion in the quarter, but negatively impacted traffic during the competitive holiday season.

We continue to be pleased with the brand's progress and look forward to the team continuing to refine and build upon strategies that have driven performance improvement in recent performance.

Athleta delivered another good quarter on top of last year's remarkable trends, resulting in a two-year comp of nearly 30% positive. While Athleta's performance remained strong, we also have a little room to do better there.

Lastly, our online channel had another strong year, exceeding our goal with over $3.6 billion in sales, representing a mid-teens growth rate over the last year.

Moving to gross margin. On a reported basis, Q4 gross margin was 35.6%, $123 million or about 140 basis points of expansion was driven by the presentation changes from rev rec adoption. Excluding that impact, the fourth quarter gross margin declined 260 basis points, driven by the merchandise margin decline of 150 basis points and 110 basis points of rent and occupancy deleverage resulting from the loss of the 53rd week. Merch margin deleverage was primarily driven by Old Navy and Gap, with the strength of our online business during the quarter, we did experience some deleverage related to shipping expense. As I mentioned last quarter, we continue to have opportunities to optimize our shipping costs going forward.

Deleverage in rent and occupancy was primarily driven by the loss of the 53rd week. For the full year on a reported basis, gross margin was 38.1%, $443 million or about 130 basis points of expansion was driven by the presentation changes from rev rec. Excluding that impact, fiscal 2018 gross margin declined 150 basis points, driven by a merch margin decline of 140 basis points and 10 basis points of rent and occupancy deleverage.

On SG&A, on a reported basis, fourth quarter total operating expenses were $1.3 billion. The presentation changes from rev rec resulted in a $123 million increase in operating expenses and accounted for 170 basis points of operating expense deleverage. Excluding that impact, fourth quarter SG&A as a percentage of sales leveraged 270 basis points. This leverage in the quarter was largely driven by a decrease in bonus payments. In the face of a challenging holiday performance and in line with our priority of driving a performance culture, we made the difficult but appropriate and necessary decision to decrease our bonus payout for the year.

For the full year, total operating expenses were $5 billion. The presentation changes from rev rec resulted in a $443 million increase in operating expenses and accounted for a 160 basis points of operating expense deleverage. Excluding that impact, full year SG&A as a percentage of sales leveraged 100 basis points, exceeding our previous guidance and underscoring with our commitment to delivering results in a disciplined manner and executing against our productivity initiatives. I'm very pleased to report that we exceeded our internal productivity goal by identifying and actioning against about $300 million of productivity savings this year.

As a reminder, prior to 2018, we had been deleveraging SG&A by about 170 basis points as we ramped up investments. With the help of our productivity efforts, we were able to increase our investment in technology and digital capabilities while also leveraging SG&A.

During the fourth quarter, we finalize our provisional amounts related to the enactment of the TCJA resulting in a fourth quarter effective rate of 24.4% and of fiscal 2018 effective tax rate of 24.1%.

Turning to earnings our fourth quarter 2018 earnings per share were $0.72 compared with reported earnings per share of $0.52 last year, and adjusted earnings per share of $0.61. Excluding the net impact of tax reform in 2017. Full year 2018 earnings per share including the benefits of a lower tax rate were $2.59, compared with reported earnings per share of $2.14 last year and adjusted earnings per share of $2.13 excluding the net impact related to tax reform in 2017 and the second quarter gain from insurance proceeds related to fixed assets.

Our fiscal 2018 free cash flow was $676 million compared with $715 million last year, which included $66 million of insurance proceeds related to property and equipment. We ended the quarter with $1.4 billion of cash, cash equivalents and restricted cash as well as $288 million of short-term investments.

Regarding capital and store count, fiscal 2018 capital expenditures were $705 million below our previous guidance of $750 million, as we reduced capital expenditures in response to more challenging operating performance.

And now moving to 2019, on a reported basis, we expected earnings (ph) per share to be in the range of $2.11 to $2.26. Excluding costs associated with our restructuring plans, we expect earnings per share to be in the range of $2.40 to $2.55. The guidance range does not incorporate any costs associated with preparing for and executing the separation we announced today. We will provide visibility to those as the plans developed and as the costs are incurred.

As I mentioned, we made the difficult but necessary decision to reduce bonus payout. As we look to 2019, we expect reinvestments in our bonus plan that will better reflect the performance culture, aligning employee and shareholder interests while enabling us to attract and incent talent that is motivated to fuel our path forward.

As we reset our bonus payout and lapped the minimal payout this year this may cause our expense to deleverage next year.

With that in mind, let me take you through some expectations for the first half. We do expect the first half to be more challenging, as it has been widely published February has been unseasonably cool, the historically cold start to the year has impacted all of our businesses, particularly Old Navy, which tends to be the most weather sensitive.

While we're seeing double-digit comps and seasonal cold weather products such as denim, fleece, sweaters. We're also seeing softness across spring seasonal categories. Secondly, as I previously mentioned the Old Navy leadership team is diagnosing some of the product acceptance softness around women's wovens and dresses, which we expect to improve in the back half. Our margin for the first half will be more challenged, in addition to the reasons just mentioned the Gap brand continues to work through its brand revitalization and fleet restructuring. As a result, we expect an improvement in second half comp and margin trends for Gap brand compared to the first half of the year. Based on this, we currently expect adjusted first half earnings per share to decrease relative to EPS for the same period last year. We currently expect high-teens percentage decrease.

Regarding capital expenditures we expect fiscal 2019 capital expenditures of about $750 million, which includes about $100 million of expansion costs related to one of our headquarters building in a build out of our Ohio distribution center. Additionally, at the start of the year, we entered into a transaction to purchase our Old Navy headquarters building in anticipation of deferring the gain on sale of another building. The net cash outflow of the exchange is expected to be approximately $100 million to $150 million.

Regarding company-operated stores, including closures related to the Gap brand fleet restructuring, we expect to close about 50 company-operated stores net of openings and repositioning. Openings will continue to be focused on Old Navy and Athleta.

Our cash priorities have not changed, we are maintaining our current dividend rate which currently provides a 4% yield. However, given the restructuring efforts this year and the spend related to the purchase of the Old Navy headquarters and expansion of our Ohio DC, we intend to reduce our share repurchase levels in 2019. Our current thinking is to repurchase at least sufficient shares to cover the dilution from our option exercises or approximately $50 million per quarter. A few other relevant metrics, we currently expect fiscal 2019 comp sales to be flat to up slightly. We currently do not expect a meaningful impact from foreign exchange to EPS in 2019. And we expect the full-year effective tax rate of about 26%.

Also in fiscal 2019, will be adopting the new FASB lease accounting standards, the adoption is not expected to have a significant impact on our income statement, but it will result in a substantial gross up on our balance sheet to recognize a lease liability and right-of-use assets for our leases. We're applying the standard prospectively in Q1 with a cumulative adjustment to retained earnings.

So just to close out, this is an exciting time as we position our brands to once again play a leadership role in reinventing the retail experience. For the upcoming year we have two priorities to continue to strengthen the performance of our brands with improved execution and to prepare for the separation that will create two new stand-alone public companies that are uniquely positioned to win with customers and for shareholders.

So with that, we'll open it up to questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question will come from Randy Konik with Jefferies.

Randy Konik -- Jefferies & Co. -- Analyst

Yeah. Thanks a lot. Hi, guys. Congratulations on the strategic direction. It's a great move by the company. I guess, Art or Teri, I wanted to ask, last time we got disclosure around margins by division, Old Navy was around the mid teens marks. Obviously, the weather is going to impact that a little bit because of markdowns, et cetera. But I was just curious -- just the people will be interested on the call here to get some sense of how to value Old Navy properly now that's being split off. Do you see Old Navy as more of that kind of stable mid teen type of operating margin business. Just curious on your thoughts there how we should be thinking about that over time given such very stable type business model.

And then second, as it relates to Gap division you gave some great color last quarter that showed the various -- almost profit differences, margin differences between GAAP specialty versus Gap outlet versus Gap online. Any kind of update to that and how we should be thinking about how the store closures of the Gap specialty side help get to a normalized profit margin rate for the entire Gap division. Because I think that will be helpful to people as well and how we should be thinking about what could Gap divisional segment margins kind of look like going forward on a normalized basis once these stores are closed? Thanks, guys.

Teri List-Stoll -- Executive Vice President and Chief Financial Officer

Sure. Thanks, Randy. So, you will over time get a great deal of transparency on both of the questions you asked. We will, of course, as we move forward toward separation have audited financial statements for Old Navy, that will have a great deal of detail and the same for NewCo. The -- where we see Old Navy is having tremendous growth prospects, both in terms of the topline growth levers that Art mentioned, but also in terms of margin expansion over time. There's no question that in 2018 Old Navy margins did take a bit of a hit particularly from the fourth quarter trends that we talked about today, such a big part of the year, that it's difficult to recover from that and as we often do, because Old Navy is such a units business, the most responsible thing for us to do when traffic flows is to move through that inventory take the necessary markdowns in the margin impact and move forward, so that we can continue to start clean and so we saw that the facts, but that is not what we believe is the long-term trajectory of the brand, very much the Old Navy is having growth opportunity in both the top and the bottom line going forward.

With respect to Gap, we talked about the magnitude of the impact of the closures in specialty as we look forward in terms of their contribution to total company. So obviously, dramatically changing the complexion of the specialty channel and changing the mix of the business across the channels for the Gap brand. We're not going to get into specific margin rates for the Gap brand or the specific channels other than to say that as we continue to drive forward with not just the fleet restructuring, but with the overall brand revitalization. We see again opportunity for tremendous margin progress there over time, and we'll certainly continue to paint that picture with the additional specific necessary to understand the progress and timeline as we move through and prepare for the separation.

Randy Konik -- Jefferies & Co. -- Analyst

Understood. Thank you.

Operator

Our next question will come from Dana Telsey with Telsey Advisory Group.

Dana Telsey -- Telsey Advisory Group -- Analyst

Good afternoon, everyone. Congratulations on moving forward to extract greater value. Art and Teri, as you think about the puts and takes of separating the businesses, we've talked in the past about supply chain, manufacturing system. How do you see that separate businesses, and it's still big, but what expense changes that you envision from having separate businesses. Thank you.

Arthur Peck -- President and Chief Executive Officer

Thanks, Dana. It's Art, and I'll let -- obviously Teri chime in on this one as well. And you put your finger on a big part of the work that we've been doing, because the benefit of scale and size is a real benefit. To your point, these are still going to be frankly, substantially larger than the average apparel companies. And so we feel in a number of places, we're far enough down the scale curve that we can actually hold on to that and continue to move forward. We have done some work on looking at what the potential dis-synergies would be. We're continuing to work on our technology stack and some opportunities that we have there. We're certainly doing the work to the back-end from a supply chain standpoint.

There is a -- I guess, I would point out here and we'll talk more about this I'm sure, but the -- probably what really got me there frankly, and what -- and why I want to move with urgency on this, and I'm so committed to the belief it's the path forward, is it there has been an accelerating divergence between the businesses with the path for Old Navy and the path for the other businesses and that's also true on the back-end with our vendors where there is more alignment with Old Navy and less overlap with the other brands. The other brands overlap each other, but overlap maybe less.

The other side of it is -- I continue to believe and I know Teri feels the same way, that we are -- we're a long way from done with the product offered -- productivity opportunity in the company. And we've made progress in my mind not enough progress and not progress fast enough. And I am very acutely aware and focused on the fact today, catalytic event like this can help us potentially accelerate that.

So I'm not going to give you specifics right now. I know you'd really like those. We will continue to work those and I'll just reiterate Teri's commitment in her remarks, which is a lot of questions we can't answer right now. We are quite confident that we have done the work to get us to this point. Informing the fact that we believe this is a very significant and important step and it does unlock significant value creation potential as we continue to do the work and learn things, we're going to be as transparent as we possibly can to really show you what these two new companies look like and what the puts and takes are associated with this. But we're confident it's the right thing to do. Absolutely confident.

Dana Telsey -- Telsey Advisory Group -- Analyst

Thank you.

Operator

Thank you. Our next question will come from Mark Altschwager with Baird.

Mark Altschwager -- Robert W. Baird & Co. -- Analyst

Good afternoon. Thanks. Art, I don't know if you'd be able to answer this at this point. But what strategies do you have in mind for Gap brand that you think will be better executed as a stand-alone company versus part of Old Navy. And do you see major changes on tap to the makeup of the assortment, the target customer, the pricing architecture. I guess, big picture, where do you see gaps sweet spot in the next chapter of specialty retail?

Arthur Peck -- President and Chief Executive Officer

Well, I mean, the first thing we've done obviously is with the step on store closures this to pretty radically remix the channel exposure. And that's important. Yeah, this is a -- the remixing of the channel exposure is something that every retailer that has been dominant in the higher end of the specialty apparel segment is going to need to do. And I frankly see Gap leading the way and informing some of the things we need to do. We are going to close some stores inside the Banana Republic, overall Banana has a much healthier fleet, but we are going to take this opportunity to close some stores that we don't think in the same way have attractive economics are right for the brand. And we've been pretty purposeful and intentional about frankly not repeat -- not building Athleta as a business in the past, but rather a business for the future.

So it's less about the specifics of Gap brand, then the divergence between the needs and opportunities in Old Navy and the needs of the Specialty Brands. And that divergence is fleet, the Specialty Brands have more more like in their fleets and not, they will have outlet businesses Athleta does not. They have an international footprint Old Navy less sale, and then technology options as well. A simple example would be is that Old Navy's use and need for the mobile POS solution is quite different because of the in-store service model than in Athleta or Banana Republic. And what -- part of what got me here, frankly and why I really have a lot of energy about this is -- I found myself in the process of allocating capital and OpEx for investment decisions, increasingly negotiating compromises in the portfolio that frankly were the least bad solution versus highly optimized for the two different business models.

And so, I'm a big believer that least bad solutions aren't the best way to win, and therefore, a lot of this is just getting that focus, that focus around investments, that focus around alignment of incentives, the purity of what these two businesses need to do. And it's going to make the work a lot easier and a lot faster as well.

And then there just a couple of points of alignment, which is I am being on the sustainability thing. It's not that old Navy isn't there as well. But I think we can get there really fast with NewCo. And we know that matters to our customers. And I think we're going to see it matter to our customers at an accelerating rate, that's kind of a gift with purchase if you will, but it is an important one for me.

I don't know, Teri, if you want to say anything more?

Teri List-Stoll -- Executive Vice President and Chief Financial Officer

I think, I tackle that the focus point more and more often over the past year or so. In particular we have found ourselves having to debate internally what's right for Old Navy versus what's right for one of the other brands and often. Particularly you think about the needs of Old Navy versus and Athleta whether that's web, investments or data analytics investment or technology tools that as Art mentioned, more and more often you're coming quite different answers for Old Navy versus the other Specialty Brands. And then as Art said, you're forced with suboptimal choices. So, this feels like an absolutely right way to set Old Navy up to continue to exploit its growth opportunities, unencumbered by suboptimal compromises with the other brands and vice versa for the new co-brands to really be able to continue to focus on reinventing retail and being leaders in their spaces.

Mark Altschwager -- Robert W. Baird & Co. -- Analyst

Thank you.

Operator

Next, we'll take a question from Adrienne Yih with Wolfe Research.

Adrienne Yih Tennant -- Wolfe Research -- Analyst

Good afternoon. Teri, this is the question on the store closures. So the 230, how are they distributed globally and how many are flagships if any. And then, from the perspective of, I think you said 150 of them are going to come off of natural lease expiration or lease action. So the $250 million to $300 million of cash, is that just for the remaining $80 million. Although, if you can give us any color on that, that would be very helpful. Thank you.

Teri List-Stoll -- Executive Vice President and Chief Financial Officer

Sure, sure. So, the 230 stores are global, but they are largely located in the US. So that is where the majority of them are, and yes, there are flags included in that number. We are -- we've really -- Art mentioned this in the earlier calls, we've really challenged the old fashioned notion of what a flag should be? How big it should be and how much you're willing to invest in negative contribution for a flag? And we have been very selective in retaining a certain number of flags that are we believe necessary to drive customer engagement, customer acquisition in key geographies, but very thoughtful about how we want those to appear and how many of those who need.

So you're right that the 150 that I cited will be the natural expirations, which leaves us call it 80 million-ish -- or 80 million ...

Adrienne Yih Tennant -- Wolfe Research -- Analyst

80 stores?

Teri List-Stoll -- Executive Vice President and Chief Financial Officer

Not 80 million stores. And those 80 stores are largely what's making up the restructuring costs. There are things beyond closures included you have some severance and ...

Arthur Peck -- President and Chief Executive Officer

Inventory issues -- and yeah.

Teri List-Stoll -- Executive Vice President and Chief Financial Officer

Inventory and book value write-off, but that is largely related to those 80 or so stores. And part of the reason for the number is they tend to be longer lease terms and they tend to be flat. So there is a just no expense though, we're very much have looked at the projected future losses associated with those leases and come up with what we think is economic way to deal with it.

Dana Telsey -- Telsey Advisory Group -- Analyst

And then just in terms of inventory buys for this year for Gap, do they contemplate -- say, half of them are they -- at the end of this fiscal year? Are they weighted toward the end of Q1 of each of those years?

Teri List-Stoll -- Executive Vice President and Chief Financial Officer

Yeah, in closures -- I'm sorry.

Dana Telsey -- Telsey Advisory Group -- Analyst

No. Go ahead.

Teri List-Stoll -- Executive Vice President and Chief Financial Officer

Yep. So they are weighted toward the end of 2019, and we are planning our inventory appropriately to minimize the write-offs that would come with closure. And obviously, we're pretty aggressive -- unfortunately, we've been doing this for a while, we know how to close Gap specialty stores and minimize the inventory impact. This is a bit larger scale, but we're planning for it.

Arthur Peck -- President and Chief Executive Officer

We're not going to -- I'm not concerned about the inventory overhang which is unplanned here.

Dana Telsey -- Telsey Advisory Group -- Analyst

Perfect. Great. Great luck with the new strategy.

Teri List-Stoll -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

(Operator Instructions) Next question will come from Matthew Boss with JP Morgan.

Matthew Boss -- JP Morgan -- Analyst

Great. Thanks. So, at the Gap brand, maybe, Art, what categories do you see as fixable by (inaudible) versus areas you see taking more time. And then similarly, should we expect negative same-store sales at the Old Navy concept in the front half of the year, may be just the timeframe you see necessary to restabilize that concept?

Arthur Peck -- President and Chief Executive Officer

Well, I'm-Teri, and I were kind of looking at each other wondering where that came from -- yeah.

Teri List-Stoll -- Executive Vice President and Chief Financial Officer

I wonder (inaudible) maybe, if you could say, I think our -- we're not going to give you Old Navy comp guidance for the quarters. But, certainly we didn't mean to imply that that there is some tremendous overhang in Old Navy, quite the opposite, there are a lot of categories in Old Navy, they are doing very well. We have the weather, which is a factor for sure, we've -- you've seen that in a lot of companies is something we're dealing with, and we'll work through and then some -- I would characterize as relatively minor product opportunities that we're going to work through in the first half.

Arthur Peck -- President and Chief Executive Officer

Yeah, I don't -- no way shape or form just say it again. Do I view Old Navy as in sick in any way, shape or form brand, health is good, we're retooling our marketing on the right schedule, which is what we do every period to refresh that.

Teri List-Stoll -- Executive Vice President and Chief Financial Officer

Still growing share.

Arthur Peck -- President and Chief Executive Officer

Yes, still growing share impressive two year stack. I would love to have done better in the holiday. I think we have a pretty good handle on what we should have done to do better, but I don't even, I was going to save it's not sick. I'm not even sure it's a little cold quite honestly.

I've said for a long time that we're in a business where not every quarter is going to be perfect. And this quarter wasn't perfect, but that is way, way different than there being any fundamental issue with the business model, the health of the brand, the product offering, the capabilities on the team, all of that stuff. So I'm quite confident and quite -- quite honestly, I wouldn't have gone down this path of I felt like we had a repair job on our hands right now. I don't feel that way in any way shape or form.

Matthew Boss -- JP Morgan -- Analyst

That's great. And then just at the Gap brand?

Arthur Peck -- President and Chief Executive Officer

Well you see it fixed. As we know, fixed is a relative thing. We're -- I'm quite confident what we're seeing. We're seeing key category improvement period-over-period. We brought Pam Wallack now, a few months ago, Pam and I work together in the last significant successful turnaround of Gap brand. Denims at the core of the brand and there is a lot of attention focus there. We've made significant progress on the niche business both on reducing the number of CCs and styles and putting more depth behind and that's as well as improving the quality. And so, I -- to me there's core categories, the Gap has to stand for. It has to stand for denim.

And as we're getting into spring then in the summer and the fall we're absolutely on top of the high-rise trends, the super high-rise trend, the change in like shape silhouette with a straight with the cigarette et cetera. And then bringing in a place where we haven't, which is a little bit more wash range and some more novelty, which has been working. We've just been modestly invested in those areas. I am exceedingly pleased with what I've seen in men's -- men's development season-over-season. And then, kids and baby continues to be a very solid strong business for us.

So it's really about women's in those key categories, and denim and niche have been too with fleece on top of that. We're in a fleece moment. We're investing bigger in fleece as we get into spring, summer and fall. It should be a place where Gap should be able to dominate and really own that and we're putting the investment behind it to make it happen. So again, I've -- I'd call the turn before. And I have eaten my words, I'm not calling and turn again well I'm looking forward this period-over-period improvement, and I'm quite confident and comfortable with what I'm saying.

Matthew Boss -- JP Morgan -- Analyst

Great color. Thanks.

Operator

Next, we'll take a question from Paul Lejuez with Citi Research.

Paul Lejuez -- Citi -- Analyst

Thanks. Hey, guys. Can you give us a ballpark this synergy range that factor into the equation that help you to determine the separation made sense. And also curious about the website, all brands operate on the same platform is the plan for Old Navy to no longer be linked to the other brands online. I'm curious what kind of crossover shopping you have between Old Navy and other brands online? Thanks.

Arthur Peck -- President and Chief Executive Officer

Yes. So, I'm not going to give you the dis-synergy numbers right now frankly, because the really, really relevant number here is going to be, what's the net. And as you can imagine, and something as material as this, we've been working this with a very able group inside the Company, but it's a small group. We believe we've got the right people inside the tent. As I said before, to make sure that we were stage gating this and not going to get hung up on a structure issue or a cost issue or a tax issue or something like that.

So we are confident that number one -- it's the right thing to do. And number two, we can get it done. We have a lot of work to do on both really getting into the substance of the dis-synergies, and then the offset of the dis-synergies. And so, Teri and I go back and forth on this, but we both have -- I would say, very aggressive objectives when it comes to minimizing the dis-synergies and getting the maximum out of accelerated SG&A productivity. So from that standpoint.

On the website, to be determined quite honestly, how we shake that all around. We do have some overlap with Gap overlaps, so Navy the most. Banana and Athleta by far, the least Hill City, Intermix, certainly the least. But I'm not ruling anything out here. And obviously, the world is filled with a number of people attempting to stand up third-party marketplace is right now, third-party digital marketplaces. I have one right here in this Company. And so, I'm sure Sonia is going to -- want to as our the executives in NewCo going to want to preserve as much economic value as possible. We'll figure that one out.

So that is to be determined also, but I wouldn't jump to conclusions.

Paul Lejuez -- Citi -- Analyst

Thanks. How about on the distribution center side? How many distribution centers are shared between Old Navy and any other brands?

Arthur Peck -- President and Chief Executive Officer

Yeah. We're doing the work. We feel that the assets actually as physical units mapped pretty well, so the brands and so, and scale really is pretty much inside the four walls, all those facilities are operating at a highly efficient level of productivity. So we don't see -- we really don't see the distribution centers as being shared organs. We think it's going to be pretty clean when it comes to mapping to the brands.

Paul Lejuez -- Citi -- Analyst

Thank you. Good luck.

Arthur Peck -- President and Chief Executive Officer

Yes.

Operator

Alexandra Wallace (ph) from Goldman Sachs has our next question.

Alexandra Wallace -- Goldman Sachs -- Analyst

Hey, there. Thank you so much for taking the question here. Two questions from me. The first one was, as you went through this process, what other structural approaches you considered for this group of businesses and I suppose why this one came out top. And then second question is on Old Navy, you mentioned in the prepared comments that you think that this brand has an underpenetrated store base and where do you think that that store base can get to in the long term? Thank you.

Arthur Peck -- President and Chief Executive Officer

Yeah, I'm sorry, I was just -- Teri and I were talking very quietly. What was the first question again was? Sorry.

Alexandra Wallace -- Goldman Sachs -- Analyst

Yeah, the first question is you've laid out this plan for the two businesses. I'm just wondering what other -- for the business.

Arthur Peck -- President and Chief Executive Officer

Yeah, right. You can have confidence that we definitively boil the ocean and looking at all the combinations and pre-mutations here. We felt we wanted to be exhaustive and we felt we owed it to Board and the employees and our shareholders to look at those. And so we really looked across the whole thing. We settled on this largely due to business logic at the end of the day, and then obviously, how to manage the dis-synergies at the same time.

And I hope what this indicates without tempting in any way shape or form to preview more is that as we've said before, we are focused on value creation. And have no sort of the emotional attachment to a particular combination of these businesses. We believe this is the best way at this point in time to position both of these companies to create more value and more value consistently. But we did look at whether or not as an example Athleta should be in a different structure or something like that and we feel quite confident that these specialty businesses can significantly benefit by being bundled together right now with a much leaner operating model where they can move faster and also have focused investment priorities that really meet their needs. The same with Old Navy.

Teri List-Stoll -- Executive Vice President and Chief Financial Officer

I would just add to that, you can imagine in a -- when you take a significant stock like this the homework that you do and just to emphasize point of the range of options. We obviously looked at what do we think we can deliver by staying together and continuing to drive the balanced growth strategy with as much focus in the productivity efforts that are part of that, all the way to the other end of the spectrum of just sell off each of the brands for what you can get for the -- from them.

And we wouldn't want anyone to think that we just said, well, Old Navy is going to be great on a stand-alone basis which we definitely believe, and therefore, by default we have NewCo, not bad at all ...

Arthur Peck -- President and Chief Executive Officer

Not bad at all.

Teri List-Stoll -- Executive Vice President and Chief Financial Officer

With an intentional choice of how best to position each of the brands in a way that can create value and we really do believe the combination and the unique portfolio that's created by bringing these brands together ...

Arthur Peck -- President and Chief Executive Officer

And minimize with the synergies and maximize with the productivity opportunity. And then on Old Navy stores, I'm not going to really put a number out there right now. There's going to be ample opportunity to talk as we pulled the essentially the road show together for both of these businesses and tell the story. What we have been doing over the last couple of years, because I'm a big believer in this is placing stores in what would have traditionally been non-traditional markets are locations for Old Navy to validate the strategy.

And these might be infill locations where, like in the San Francisco Bay Area. You look at the trading patterns and you realize that we're missing stores in key places where consumers are living their lives. We know that there is an opportunity in markets that are smaller than the markets that we have traditionally put stores in and especially when you look at those markets and you realize that those are often markets that were served by very traditional legacy retailers, often general merchandise retailers when a Kmart closes stores or Sears does or a Penny as was announced today, etcetera. Those markets are oftentimes increasingly underserved and we've found great success with Old Navy and some of the smaller markets. The rents are oftentimes de minimis. The customers are super loyal. Many customers in those markets, because remember they -- we have a significant percentage of cash consumers at Old Navy, they actually don't have access to the brand through the digital expression of the brand.

And so what's -- what's really on our minds is here we have the number two apparel brand in the United States and a significant percentage of the population that doesn't have access to the brand. We think that's a real winning combination.

Alexandra Wallace -- Goldman Sachs -- Analyst

Thank you.

Operator

Our next question will come from Lorraine Hutchinson with Bank of America.

Lorraine Hutchinson -- Bank of America Merrill Lynch -- Analyst

Thank you. I just wanted to follow up on Old Navy. How -- if you feel like you fully diagnose the problem. I think there were a few fashion misses in 3Q as well. So, if you think that that is fixed for spring and how quickly could you get that margin back on track at Old Navy specifically?

Arthur Peck -- President and Chief Executive Officer

Yeah, there are always going to be a few fashion misses. And if you're going to hold, and I don't mean you for specifically, but if we're going to be held to the standard of perfection, that's a tough standard. There's a reason they call it fashion. The reason they call it trend and they're always going to be some of those. We don't -- if I could go back and compare to Q4 of 2015 and Old Navy just definitively snatched defeat from the jaws of victory in Q4, we had fashion misses. We were over-assorted. We had about wave of inventory that we are pushing forward from port backups, et cetera. And that was a mess and it took us two quarters to get out from under that mess really Q4 and then we started to see the business turn as we got into Q2 and that was a mess.

I will say this, again, I'm not going to predict the business turn. If I look at the business right now and I walked it with the team just a week ago, we looked at our product, I believe a little bit of warm weather would see a significant uptick in the business and a lot of the categories that are in there right now would start to fly out the door. So I don't -- this is not a wreck and redo by any stretch of the imagination. I'm -- yeah, I'm super solidly -- super solid about the business and about the health of the brand and about the product that we have in the box.

And as we said, there is -- there were a number of factors as we've done the hindsight into make sure that we are well positioned and certainly as we start the first quarter weather is probably number one, the marketing refresh that Art mentioned is going to be able to help us drive some traffic. And then these products fixes in these couple of categories are likely to be more second half benefit than first half, but again, you said, get the margin back on track. We actually -- Old Navy has probably industry leading margin and certainly our portfolio leading margin. So we feel -- we feel very good about the overall health. But we actually think it can do better.

Operator

Our last question will come from Oliver Chen with Cowen and Company.

Oliver Chen -- Cowen and Company -- Analyst

Hi. Regarding the separation, what are your thoughts in terms of the data piece and the digital side with both speed to the consumer and the data scientists that you're employing across the organization. And also supply chain, just curious on how that will manifest in the separation because there were benefits that you had and you also kind of how the customer through different parts of his or her life. So I'm would love your thoughts there. And I think you've helped articulate this, but why now in terms of the separation? Thank you.

Arthur Peck -- President and Chief Executive Officer

Yeah, the data piece, and again, I've talked about this. I'm sort of interested in this because I'm not sure we're getting a little bit of benefit. We're getting a lot of benefit as we talked about our strategy. So I hope we don't get a lot of penalty as we talk about the fact that we're separating. That all said, we've look very carefully at the data assets and we believe we have a relevant data life for both organizations that allows us to continue down the path of everything we're doing. Quite honestly the use of the data, again, this is a element of the divergence of the two businesses, the use of the data we see us having differentially -- differential benefits in the specialty businesses than in the Old Navy -- and the Old Navy business whether it's personalization, whether it's marketing, whether it's predictive analytics to inform the buying process. So I don't in no way shape or form do I believe that we have anything other than a significant opportunity. That was the same as what it was. And we continue to pursue it.

We do have customer overlap and that's something that we're going to manage. The file will be a property we think in both companies that's something we need to sort out. It's been a healthy and growing file. And again, there are different ways of working through this marketplace solutions and that kind of things. So it's an issue we're aware of it, we're focused on it. And again, as we know more, we'll certainly come back and talk about what the implications are. There was a second question then. I was focused on the first. Or was there? The second question which is ...

Oliver Chen -- Cowen and Company -- Analyst

(technical difficulty) I think as we've talked in the ...

Arthur Peck -- President and Chief Executive Officer

Sorry, go ahead.

Oliver Chen -- Cowen and Company -- Analyst

That's all. Just that's exactly. Thank you.

Arthur Peck -- President and Chief Executive Officer

Yes. Why now is, I think very straightforward. And it may not be the answer that you're expecting. Why now is that we've done this work as I've mentioned several times on an ongoing basis for as long as I've been in the company where we've looked at the portfolio in the parts of the company and where there other ways of operating the company that we believed led to better business outcomes. Why now was -- frankly, that we became convinced with the convergence of the business models and the needs of each business, the investment requirements of the business and our ability to manage the dis-synergies and get productivity, it was the right thing to do. And I believe very strongly that when you come to that point, beyond the reasonable probability of doubt then you move -- when you move quickly with urgency and with responsibility and that's where we are right now.

So, why now was I believe absolutely it's the right thing to do. I'm energized and excited about both of these companies, the most painful thing to me was having to choose between the two, because I love Old Navy and have an incredible affinity for its business model and the purity of what it does in the growth opportunity in front of it, but I'm also super excited about, frankly, the gift, the opportunity in imperative to reinvent specially apparel retailing, because we all know what needs to happen, and I believe we are and we can continue to lead the way in an accelerating rate to monetize these brands in a different business model and surprise a lot of people.

Oliver Chen -- Cowen and Company -- Analyst

Thank you. And best regards.

Operator

Thank you. And that does concludes our conference ...

Teri List-Stoll -- Executive Vice President and Chief Financial Officer

That concludes our remarks -- have a great day.

Operator

Thank you. And once again, that does conclude our conference for today. Thank you. You may now disconnect.

Duration: 72 minutes

Call participants:

Tina Romani -- Senior Director of Investor Relations

Arthur Peck -- President and Chief Executive Officer

Teri List-Stoll -- Executive Vice President and Chief Financial Officer

Randy Konik -- Jefferies & Co. -- Analyst

Dana Telsey -- Telsey Advisory Group -- Analyst

Mark Altschwager -- Robert W. Baird & Co. -- Analyst

Adrienne Yih Tennant -- Wolfe Research -- Analyst

Matthew Boss -- JP Morgan -- Analyst

Paul Lejuez -- Citi -- Analyst

Alexandra Wallace -- Goldman Sachs -- Analyst

Lorraine Hutchinson -- Bank of America Merrill Lynch -- Analyst

Oliver Chen -- Cowen and Company -- Analyst

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