When I think about our brands in the context of opportunity, brands that have the kind of strength that we do, brands that matter can be monetized. We need to make these brands matter more. And ultimately, that is going to be the pursuit. When I look at the strengths of the business, it is incredibly encouraging. That being said, we have work to do. We’ve started this transformation work under Bobby’s leadership, and the team has worked tirelessly to make extraordinary progress. But we will continue not only the transformation that we’ve begun, but we will start to build upon it and really unlock the value of these brands. We can all agree that there is greater value in the portfolio that is showing up in the stock today. And with the consistent performance that we expect, we’re going to get rewarded for that.
And ultimately, that’s going to start with really driving demand, exciting our consumers and mattering more. And we’ll be back very shortly to share how we’re going to reveal all of that and continue moving forward.
Paul Lejuez : Okay. Can you just talk about what changed in your gross margin assumption for the back half of the year, which pieces moved as a result of what you’ve seen first half to date and what you’re seeing thus far in the third quarter?
Katrina O’Connell : Yes, absolutely, Paul. So in second quarter, overall, the gross margin in total came in very close to, I think, the words we had used to get you guys close to the margin we just delivered. There was a little bit of a shift between the inflationary pressure, which was better, came in at about 140 basis points of headwind. We had thought it would be closer to 200. And that was really because we saw rates in the freight area get better through some negotiations we just finished with some of our big suppliers. And where we saw the margin get a little worse within ROD where we deleveraged more since we came in at the lower end of our sales range in the quarter. So that dynamic plays through to the year where, again, the overall guide on the full year margin is basically intact.
Air is still about 200 basis points of benefit, but we now see less impact from inflation, so only 10 basis points versus we had prior said 50 basis points of headwind and then the offset there is ROD where we now expect 70 basis points of deleverage, whereas we had said somewhere between zero and 50. So it’s really this inflationary benefit offset by ROD deleverage, but overall, the nominal guide is very similar.
Paul Lejuez : And a promotional level is different than what you expected?
Katrina O’Connell : We came in very close in the second quarter to what we expected on promotions. And overall, we’re holding the full year to about 100 basis points of overall leverage coming out of that promotional guide. And for the third quarter, what we said is we expect promotions to be about flat. So we’ll see. Obviously, we came in with inventories down 29%. And markdown inventory well under control. And the teams are excited to have chase capability back after the supply disruption that we experienced for so long. So we’ll aspire to do better. But right now, that’s what’s embedded in the guide.
Operator: [Operator Instructions] Your next question comes from Alex Straton with Morgan Stanley.
Alex Straton: Katrina, maybe this is just for you. It looks like Old Navy has yet to inflect though we are seeing some other value-oriented businesses, pulling that off, it seems in this quarter. So can you talk to you about what’s going on there? Are you seeing any green shoots outside of women? I feel like we’ve had that maybe for a couple of quarters now? And then how you think about the time line to improvement.
Katrina O’Connell : Yes, it’s a great question, Alex. So when I look at what’s been happening at Old Navy, I think what’s been consistent is what we’ve been calling out, which is they do have a low income consumer that remains pressured. And so that dynamic hasn’t necessarily changed. When I look at what happened in Q2, though, lapping last year’s significant clearance of active product, in particular, really weighed on the performance. If you remember last year in Old Navy, we were in the process of really rightsizing the assortment away from cozy-casual. We had a lot of the sizing issues. So lapping that has really weighed on the revenue side of things. As we move into the second half, we are seeing the active business improve modestly.
Women’s is getting better and kids is looking better as well. So we’ll see where that all lands us. But yes, we are seeing green shoots at Old Navy. I think all of those categories we aspire to have getting better. Again, the consumer pressure is most acute at Old Navy, and that’s the piece that I think we all remain cautious on is whether it’s the low income consumer starting to get real wage pressure from inflation or whether it’s the new student loan dynamic, we’ll see how that plays out for Old Navy.
Operator: Our next question comes from Lorraine Hutchinson with Bank of America.
Lorraine Hutchinson : Katrina, as you think about the mid-single-digit decline in sales guidance for the year, it does imply a nice improvement in fourth quarter, can you just talk about how you’ve been thinking about that improvement? What drives it outside of the 53rd week, of course, and how you’re getting comfortable with that level of improvement from here?
Katrina O’Connell : Yes. So Lorraine, you’re correct that the fourth quarter does have some benefit from the 53rd week. But in addition to that, I know we’re all tired of looking back at 2019, but I just sort of look at the run rate in the business from the first half to the back half versus 2019. And the quarters Q3 and Q4 are very similar to what we just sort of went through. So I think there’s a lot of quarterly variation that we have seen over the last couple of years. Fourth quarter when you look back to 2019, looks more similar to history.
Operator: Our next question comes from Jonna Kim with TD Cowen.
