Gap Inc (GAP) 2002 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to Gap, Inc.'s third quarter conference call. At this time all participants are in listen only mode. If anyone should require assistance during the call, please press the star key followed by the zero key on your touch tone phone. The conference call and web cast are being simultaneously recorded on behalf of Gap, Inc. and consist of copyrighted material.

They may not be rerecorded, reproduced, retransmitted, rebroadcast or down loaded without Gap Inc.'s expressed written permission. Your participation represents your consent to these terms and conditions which are governed under California law. Your participation on the call also constitutes your consent to having any contents or statements you make appear on any transcript or broadcast of this call. If you have questions regarding this policy contact Gap, Inc. investor relations at 650-874-4670. I would now like to introduce your host, Sabrina Simmons, Vice President of Investor relations and treasurer.

Good afternoon, everyone. I'd like to welcome you to Gap, Inc. third quarter 2002 conference call. Joining me on the call today is Paul Pressler our CEO, John Lillie our vice chairman, Heidi Kunz our CFO, Gary Muto, Maureen Shikay, President of Banana Republic and Jenny Ming President of Old Navy.

Before the call begins Gap, Inc. would like to remind you the information made available on this web cast and conference call contains certain forward-looking statements which reflect Gap, Inc.'s current view of future events and financial performance. Wherever used the words expect, plan, anticipate, believe, may and similar expressions identify forward-looking statements. Any such forward-looking statements are look subject to risks and uncertainties and the company's future results in operations could differ materially from historical results or current expectations.

For more detail on these risks please refer to the company's annual report on form 10-K and or other filings with the SEC. We will begin today's call with prepared remarks from Paul followed by Heidi and each of the brand presidents. Then open up the call for questions. Now it is my pleasure to introduce Gap, Inc.'s new Chief Executive Officer Paul Pressler. As many of you know Paul has been at The Gap for about a month and we are very excited to have him join us today on the call. With that I'll turn it over to Paul.

Thanks, Sabrina. I'm very pleased to join Heidi, John and our brand presidents on this conference call today. We're certainly pleased with our earnings for the quarter and the progress we're making in each of our divisions. Gary, Maureen and Jenny will update you on each brand in a moment. First I wanted to share some initial thoughts from my first month on the job.

I'll talk about three things. Why I joined Gap, how I am spending my time, and my priorities. Many people have asked why I came to Gap. I enjoyed my career at Disney immensely and wasn't looking to leave. But when I was approached by Don Fisher about the job I realized that becoming CEO of this company was too great an opportunity to turn down.

There were key three reasons. First, Gap, Old Navy, Banana Republic are premium brands that enjoy strong emotional relationships with our customers. The chance to strengthen these brands and further develop our relationship builds on my experience. Second, this company offers a compelling turn around challenge in how we manage our business and serve our customers. Third, becoming CEO is a terrific personal opportunity for me to lead all aspects of an incredible organization.

My Disney experience taught me many things that I'm confident will serve me well at Gap. How to listen to customers, how to effectively segment our marketing, how to best deliver our product, and how to balance the creativity necessary to grow our business with the financial discipline needed to ensure we consistently generate appropriate returns. So how have I been spending my time? Mostly listening and learning. I'm immersing myself in the business in addition to meeting with my direct reports I am speaking individually with the top 50 people in the company to review functional areas and core processes.

I'm also bringing my senior leadership group together for two days next week to talk about how managing the company as a team. In the next few weeks I am visiting all of our distribution centers and other corporate offices. I'll also be working in one or two stores probably over Thanksgiving weekend to interact and connect with our customers. After the first of the year I'll be traveling internationally to visit stores and operations. I'm going to be very consumer focused as we build a long term vision for our brand. I am evaluating core competencies to determine where we need to raise the bar.

My priorities currently fall in four buckets. First, product and product positioning. Our product design and merchandising capabilities are a competitive strength and recent improvements are moving in the right direction. We have more opportunities particularly in working to better understand our customers. Second, marketing. This is an area we can achieve significant improvement. We'll be working aggressively on how we speak to our customers, how we can effectively segment our messages and how we can use media more strategically to reach our customers. Third, sourcing and distribution. There is an infinite opportunity to be more efficient and improve flexibility in these areas. We'll be focusing on shortening our product development time line as well as improving the processes around how we flow goods to stores. Fourth, talent. I have been impressed with the talent, spirit and enthusiasm of our employees. Developing talent and bench strength in our organization will be an ongoing priority. Marketing and strategic planning are two areas we'll focus on initially.

In addition to these four areas, I also plan to instill greater emphasis on cost controls and how we look at capital investments to make sure we get the returns we expect. In the coming months I don't plan to unveil a comprehensive strategic plan. Instead I will communicate as we go along. In early 2003 you'll be hearing more about each of these areas of focus. Gap, Banana Republic, and Old Navy are each moving in the right direction. At the same time I believe we have many opportunities to elevate how we manage our business, strengthen our brands, serve our customers, and deliver long term shareholder value. Now I'd like to turn it over to Heidi for our financial review of the quarter.

Thank you, Paul. For those of you participating on the web cast please turn to the second slide on sales performance. In the third quarter sales were 3.6 billion representing an increase of 9% versus last year on a year-to-date basis sales totalled 9.8 billion flat to last year. Comps increased 2% for the quarter versus a decrease of 17% last year. And a decrease of 8% in 2000. Year to date comp store sales were down 7% versus a decrease of 11% last year and a 4% decrease in 2000. Please refer to the press release for divisional sales results and comparable store growth rates. Sales productivity for the quarter increased to 95 dollars per square foot from 93 dollars in 2001. On a year-to-date basis, sales per square foot was 258 dollars down from $283 in 2001.

I I'd like to cover our margin performance on slide 3. Gross profit in the quarter increased 38% to 1.3 billion. This resulted in a gross margin of 36.1% up from last year's third quarter margin of 28.5%. The increase of 7.6% points consist mostly of a 6.1 percentage point increase merchandise margin due to better mark down margins, increase in regular price selling and the absence of last year's fabric write off. The remaining portion of the improvement relates to occupancy cost as a percentage of sales which have decreased one and a half percentage points. Merchandise margins improved over last year's levels at all divisions.

Gross profit for the year-to-date increased 5% to 3.3 billion. Gross margin of 33 and a half percent was up from last year's margin of 31.9% and this was more than accounted for by better merchandise margins. Looking at operating expenses on slide 4, in the quarter operating expenses of $1 billion were up $62 million compared to last year, but declined as a percent of sales to $27.7% versus 28.4% last year. Advertising expenditures were 167 million up 39 million to prior year due to incremental advertising in Old Navy that included a TV campaign and two circulars. We also had a higher bonus accrual resulting from the improved business performance. On a year-to-date basis operating expenses as percent of sales decreased .6 percentage points to 27.5% this year.

Turning to slide 5. I'd like to walk down the PNL to net earnings. For the quarter operating income was $306 million. This is a significantly above last year as the increase in gross profit was only slightly offset by higher operating expenses. Net interest expense increased to $58 million from $18 million last year as a result of the funding program completed earlier this year.

Regarding tax rates based on our current assessment of full year earnings and the mix of earnings we believe it is appropriate to reduce our effective tax rates from 49% to 47% for the full year. Due to this adjustment our third quarter results reflect both the new rate and a true up of 3.7 million dollars for the first half. Together the new rate and the true up benefited third quarter EPS by about a penny. Using this new rate we had net earnings of $135 million versus a net loss of $179 million in 2001. Last year's results include a one time tax charge. Diluted EPS was 15 cents up from a 21 cent loss per share last year. Year to date operating income was 578 million. Up $210 million versus last year's.

We have seen year over year performance getting better each quarter this year. Net interest expense was 156 million dollars versus 68 million dollars last year and net earnings were 229 million dollars versus 26 million dollars last year with diluted EPS of 26 cents this year versus 3 cents last year.

Next let's look at inventory on slide 6. As you saw in today's press release we announced that we have made changes in an accounting report used to record in transit merchandise inventory. These changes correct an understatement of the company's in transit inventory balances and the corresponding accounts payable balances. These adjustments will not impact previously reported or prospective net sales, net earnings, net cash flow, networking capital or financial covenant compliance. In addition, there was no impact on the amount of inventory actually ordered from vendors or sold to customers in any effect affected reporting period. We first saw a lower an expected inventory level in July . But the prospect of a west coast port strike and the related increase in goods shipped via airfreight provided a reasonable explanation for the lower in transit total. However, the lower trend continued in August and September and in October we began to research further. The issues giving rise to our amendments fall into two buckets. First, a system enhancement executed in April 2002, and second issues with the definition contained in the accounting report that pulls data from the in transit tracking system.

First taking the April system enhancements. The changes inadvertently caused an error in the accounting report. A field that the report programmed was to pick up as no longer populated after the enhancement. So as carriers were migrated to the new functionality starting in April through Q3 '02 their in transit inventory records from dropped from the accounting report. Second while scrubbing down the accounting report after having discovered the glitch from the system enhancement we found other areas where we felt the methodology used to query the system required modification to accurately report in-transit balances. All of these issues have been resolved, reviewed and tested.

I want to make sure something is clear, there were no issues with the underlying data of our inventory tracking system. The error occurred in the way the accounting report retrieved data from the system. As a result our operations were unaffected. Maintaining a strong control environment remains one of our top priorities and we will continue to review and audit our processes. While this does not impact reported or prospective net earnings, and while it may not be required, we will file an amended 10 Q for Q1 and Q2 of 2002. In the press release, we have disclosed the balance sheet adjustment by quarter for 2001 and the first half of 2002. Depending on the quarter, the adjustment varies from 71 million dollars to 248 million dollars. On an amended basis our inventory was down 1% to 2.8 billion dollars versus last year while our square footage grew 5% year over year. As a result inventory per square foot was 73 dollars versus $77 last year down 5%.

Turning to slide 7, I'd like to talk about stores and square footage. We increased square footage net of closures by four and a half percent year over year and ended the quarter with 4294 store concepts which equates to 3158 locations. Please refer to the press release for a chart outlining quarter ending concept count, location count and the square footage by brand. We still expect to end fiscal 2002 with net square footage growth around 3%. While we anticipate concept closures to be similar to last year's level location closures will likely be higher.

For fiscal 2003 we expect to have new store openings of about 30 to 40 locations. Which translates to 40 to 60 concepts. Approximately 60% of the resulting square footage growth is from Old Navy with the balance spread equally between the other brands. At this point we do anticipate store closures will likely be higher in 2003 such that net square footage is expected to decline about 2% for the full year. Looking at capital expenditures on slide 8. Third quarter year to date total capital expenditures including lease rights were approximately $189 million. 75% below the $760 million spent in 2001. Depreciation and amortization for the year-to-date was $582 million versus $590 million last year.

Our current outlook for capital expenditure for the full year is in the low $300 million range. This is down from our previous guidance of $360 million. All spending categories are coming in below budget and we are also seeing a timing shift of certain IT spending. Also we anticipate full year depreciation and amortization expense to be in the high $700 million range. With regard to 2003 we've not yet finalized our budget but expect the capital expenditures will likely be in the range of $350 to 400 million. We'll provide more specific guidance next quarter.

Turning to the last slide I'd like to comment the current business and full year guidance. Clearly we're pleased with the results this quarter. We've seen progress made the product assortment and positive customer reaction through better merchandise margin. However while October performance significantly exceeded expectations our outlook remains cautious until we see a more consistent performance over time. There are a few areas of guidance I'd like to update you on for the balance of the year.

Regarding SG&A we still expect spending to increase slightly for the full year in dollar terms. Even though advertising costs will increase about 20% on a full year basis, our total SG&A which includes advertising is still only expected to be up about 1 to 3%. Regarding interest we continue to expect our gross interest expense excluding interest income on cash investments to be approximately $255 million for the full year. And finally looking at our inventory buys for the fourth quarter, we expect inventory per square foot to be up as much as 10% versus last year. This increase from prior guidance reflects the impact of both receipt timing and the delay of January package though stores as a result of the port closures. For the first quarter of 2002 we expect inventory per square foot to increase in the low to mid-single digits. Completes my prepared remarks. At this time I'd like to turn the call over to Gary Muto.

Thank you; Gap's turn around strategy continues to gain traction in the third quarter. Although still slight negative our comp store sales trend is improving. With comps having turned slightly positive in October we believe the momentum was driven by customers favorable response to fall product reflected in higher conversions and averaging unit retails versus last year. In addition we continue to drive healthy margins improvement year over year. More disciplined financial management in our business is also helping to drive improvement. The retail environment continues to be highly promotional and we responded aggressively in the third quarter.

Our promotional strategy was successful producing incremental sales and maintaining strong margins. We'll continue to strategically use merchandising and marketing motions to drive sales in key categories we are heavily invested in and have healthy margins. Overall we're focused on three priorities at Gap. First, delivering well balanced product assortment that reflects Gap's style and quality. Second, consistently offering the shopping experiences customers expect from Gap. And third, evolving our marketing to communicate more effectively with our customers.

In each area we're making progress. In product, our asortments are stronger every season reflect are our emphasis on delivering customers every day in seasonal casual style with the right mix of fashion newness. The right fabrication, fit and color palate. And the quality and detail Gap is known for. For example, we've been successful with stretch establishing Gap as a destination for quality stretch fabrications offering exceptional comfort and fit. Advertising and in store marketing helped drive customer demand. In our men's business denim, pants and knits performed well for fall.

We are continuing to work on finding the right mix with every day style and fashion newness in your men's business. Across all categories product quality has been a major focus this year. We've made significant investments in improvements such as upgrading fabrics, stitches, buttons and detail. Customers are beginning to see the difference. For example in fall holiday men's shirts, women's outerwear, pants and warmest jacket reflect Gap's commitment to quality. Attention to detail what's customers expect from Gap and we intend to make sure quality remains our key brand attribute. We're also making progress with improving our customer shopping experience. Customer satisfaction ratings have increased significantly during the past six months. We are very pleased with our progress in this area.

We are elevating our standards around store operations, in store merchandising and customer service. While traffic continues to be a challenge, we're countering some of the impact by emphasizing customer service and the overall store experience. Our sales associates are focused on conversion. Making sure that more of the people who walk into our stores leave as satisfied customers. We're doing this in three ways. Making it easy for the customers to find the items they want. Improving customer service, and completing purchases more quickly at the cash register.

Our third priority is to evolve our marketing and more effectively communicate with customers. With our fall marketing we set out to reestablish an emotional connection with our customers we've lost and we wanted to bring our loyal customers into the store more often. We also focused on making sure our product messages were integrated across all of our marketing efforts. We're continuing to learn from our marketing and beginning to place more emphasis on listening to customer feedback. Hiring ahead of market demand is one of my top priorities. Our holiday marketing which include print, direct mail, TV and in store focuses on color and gift giving. Our campaign features key items and product categories such as sweaters, outer wear and scarves. We want to make holiday shopping and gift giving as easy as possible for customers.

Just before Thanksgiving we're sending a shop full holiday gift guide for Gap adult, kids and baby. Also positioning Gap body as a holiday gift destination with a separate direct mail gift guide. The gift guide includes as mystery gift card worth up to $100. Customers have to come into the stores to find out how much the cards are worth. Magazines and outdoor advertising begin this weekend and TV launches November 21st. We're also be distributing holiday catalogs with top magazines and newspapers around the country. We're also placing newspaper print ads.

To close in my first three months as Gap Ramp President I am pleased with the progress we're making to execute against our brand position and regain our strength and customer loyalty and trust. As we stabilize our business I am excited about Gap potential. Gap is an icon premium American brand. We're elevating our ability to serve our customers, and long term to create new opportunities for growth. That completes my prepared remarks and I'd like to turn it over to Maureen.

Thank you Gary. At the Banana Republic we're getting back to our brand mission to be the most trusted and approachable fashion brand for grown-ups who want to live life with style. They'll look to us for our unique mix of casual and luxurious apparel and accessories that work across all parts of their lives. We emphasize the most important words of our mission: trusted and approachable for grown-ups and unique mix of casual and luxury. This really acted as a filter in setting the stage for progress in two key areas. Products and marketing.

Let me begin with talking about product. The fall assortment was this first complete season designed by our head designer Debra Lloyd. And represented a return to a modern, sophisticated and polished esthetic. Debra and her team brought improved quality, fabrics and design details to the Banana Republic fall assortment. Though vigorous focus we placed on increasing quality standards successfully elevated our brand from the level of excellence that our customers expect from our brand. In creating these standards we institutionalized consistency and attention to detail in the product development process. For example in men's we established minimum quality standards for each type of pant. Casual, professional and dress.

We have also added details on our best pants including front linings and split seams to allow for tailoring. Furthermore, we've improved the fabric of our woven shirts and enhanced the durability of our cashmere sweaters. Skirts, woven shirts and suiting all performed strongly in the quarter. Our elevated quality and branded pant fit strategies drove performance in the dress pant category for men and women. Building on our accessories business jewelry was out to all stores in October reinforcing our lifestyle percentage as wardrobe destination. Finally our key categories that made Banana Republic famous helped bring back customers we had alienated. Performance is strong in cashmere, leather and outer wear. Men also respond well to our program we introduced this spring.

Turning to marketing. Our second area of focus. We developed several key strategies. We began to implement them in the third quarter. The first was to reengage the customer with a message of trusted grown-up fashion. We accomplished this mission by highlighting in our fall ads our shift back to refine dressing such as the red lady coat and the pencil skirt. We also allocated our marketing dollars towards the back half of the year when we knew our product assortments had improved. The shift should result in year over year increases for the third quarter and fourth quarter.

The second strategy was to get the male customer back. We segmented our marketing efforts for the first time in the third quarter including different fall look books that were distributed separately to men and women. Our third strategy was to get our best customers to visit and spend more. We contacted our best customers monthly in the third quarter through our look book and direct mail. Our look book achieved the highest line in almost two years. Also we enhanced our credit card program. Previously, it is was not marketed to our credit card holders but instead offered as surprise reward for holders who achieved a certain level of purchases. This Fall we actively began to educate all of our card holders on the lux program and increased the aspirational component for basic card holders to spend more to qualify for the lux card benefit. The marketing initiative has achieved great results and helped drive a several point increase in the penetration of private labels credit card purchases.

Finally during fall we continued to make progress on improving our windows and visual displays. We were more focused and compelling and featured categories that reinforced the style and direction of the brand such as men's dress pants and women's woven shirts. The displays were simple messages that showed the customers how to put an outfit together and what to buy. So looking forward for holiday, we will continue to emphasize elevated styling and refined dressing. Specifically we will focus on texture, warmth and luxury, highlighting cashmere as a key product category. Our gifting message will layer in late November and showcase incredible gift ideas.

Our fourth quarter marketing plans will build upon our key strategies to improve customer loyalty and drive traffic. We'll emphasize our gift giving themes through direct mail which will be complimented through our windows and in store presentation. We are showing our appreciation to our best customers and entice them to spend their holiday dollars with us. Specifically we will be sending them additional mailings and offering them enhanced services during the quarter including free gift wrapping, shipping and special shopping nights.

Finally we plan to extend the reach of our advertising through greater use of national magazines and newspapers and outdoor and key cities. When you look at the retail landscape today Banana Republic continues to have a unique brand position. We have a renewed focus around product, store environment and service and I believe we are well positioned for continued improvement going forward. That concludes my remarks and now I'll turn it over to Jenny for an update on old Navy.

Good afternoon. I am extremely pleased with Old Navy's results for the third quarter. Our results reflect a success of our strategic initiatives in four areas. Merchandising, marketing the shopping experience and operating efficiency. I've been discussing these strategies over the past several months.

Today I will update you on the progress we have made in Q3. Our three merchandising strategies creating strong product acceptance, making smarter inventory investments, and implementing revised pricing strategy have contributed to improved financial performance over the past two quarters. First, customer acceptance of our product increased through the use of product filters. A focus on fundamental items and improved quality. We saw the success through higher year over year customer conversion rates and higher average retails. Second, we will also able to make smarter inventory investments. Buying more deeply and focused assortment of key items. The success of our recent painter jean campaign is a great example of this strategy.

Going forward, we'll continue to offer items that appeal to the entire family. Finally, in regards to pricing strategies, we execute a promotional strategy that has reduced markdown activity and resulted in higher net margin overall. This strategy supported by direct marketing circulars continue Old Navy's strong value message to our customers. Turning to marketing, there are three major areas of focus. Increasing and reallocating our TV spending, refining and evolving our circulars, and increasing the penetration of Old Navy account customers. In the third quarter, we increased TV spending year over year with additional weeks and more national GRPs. We air our first ever October campaign. Bring the marketing gap between our back to school and holiday campaign. This increase frequency of advertising kept us top of the mind with customers. We're very pleased with improvement in traffic generated by the painters jean TV campaign.

In October, our traffic comp were down 3%. Improving significant from the negative 16% traffic comps in September . We continue to be pleased with the result of our circulars. Starting in August , we changed the format to four pages and distribute issues two times per month. These changes allow us to do three things: Talk to our customers even more frequently, further enforce our strong value message and show case our breadth of product for the family. Circulars allow us to tailor our message. Our circular targeting moms has been a success. Significantly improving quality of traffic. This customer shops less than a typical teen customer, however she is more likely to make a purchase once through the store and tends to spend more. Our improved conversion in units per transaction metric during that past few months reflect the success of this campaign.

Finally, we have increased the number of Old Navy credit accounts customers significantly year over year. Old Navy account customers spend more than other customers and are the most loyal, growing this customer base should increase comps. Regarding our focus on the shopping experience and operating efficiencies, we're continuing to make progress in both areas. We've made our stores easier to shop by simplifying signage and how we present our goods. We've also streamlined the tools of our store managers used to operate their store efficiently and effectively.

And for holiday we will continue the successful strategy employed through the year. For holiday we will increase our TV presence again with a family fleece campaign, air time will run five and a half weeks versus four and a half weeks last year. With a 30% increase in GRPs. Three spots have been created to segment the marketing message for teens, kids, and entire family. Our TV campaign begins this evening. In addition to television, we are testing the expansion of our circulars to a much broader market in November and December . We'll also continue our work to identify and create targeted marketing, messages for each segment of our customer base. Looking forward, we will continue focus in the areas of product, marketing, store experience and operating efficiency. We expect to see improvement in our performance in these areas and we continue to deliver Old Navy brand promise of fun, fashion and value for the whole family. Thank you.

That concludes our prepared remarks. We will now open up the call to questions. We would appreciate it if each caller limits their questions to no more than two.

Your first question is from Mark Friedman of Merrill Lynch.

Great job in the quarter. I was wondering if the president could talk about spring since the big focus for fall and holiday has been going back to franchise items if you could talk about what you are doing as far as layering on top of that from a fashion standpoint and other areas on the merchandising side? And then my second question is, Paul, could you call me offline and tell me what store you are going be working in on Thanksgiving weekend? [ Laughter ] [ Laughter ] Thanks.

I could take that. This is Jenny. For Old Navy one of the things that we're focusing more on spring is really our teen segment bringing back a little bit more trenches for those that particular segment.

For Gap it's continuing to get the product mix right. Offering the correct amount of fashion and evolved classics is what we're continuing to do. And also look at the men's and women's businesses differently.

And for Banana Republic really focusing on core competents which are suiting woven shirts, skirts and pants.

And I'll call you. [ Laughter ]

Thank you.

Your next question is from Warren of SG Cowan.

Good afternoon. Thank you. First I was hoping Heidi you could elaborate on the revised guidance regarding 2003 real estate. Sounds like there's a couple hundred stores that would be closed to reach 2% decline in square footage. I am wondering if there's a new standard that you are applying to make those decisions? And if you could give us some sense as to if any of the brands is more likely to see a bigger portion of those closings. Then for my second question if I could ask you Paul you mentioned that as part of your plan you will be trying to be really customer focused and learning what the customer has to say. I am curious if you can give us some sense as to if that involves focus groups and testing and maybe just your initial sense of whether or not you think the current brand portfolio addresses reasonably and appropriately targeted markets then also what competitors you would view as the ones you will be watching the most closely as you continue to learn about the brands. Thanks very much.

Okay why don't I take the real estate question first. As I indicated in my prepared remarks we do expect closure to be a bit higher in 2003 than they were in 2002. That's not on the basis of any different rigor that we're allowing to store closure model. But it's just simply the way the numbers come out and based on the leases that are coming up for action next year. Just based on our best guess at this time. Obviously we haven't had to make all of our decisions yet so the number is still in flux but I think what we have given you as net square footage guidance is a pretty good number of course. But as you know we do a full IRR on a store every time a lease comes up for review. And we load it with full capital and expenses and we also only look at revenues that we consider incremental to that store. We make an estimate of the sales transfers that could happen to other nearby stores in the event we close the store. So we think we've got a very, very good process of properly evaluating store renewals decisions that will maximize shareholder value. Now when you think about next year and ask the question about is there one brand that has a bit more than the others it would be Gap.

Then to answer your question about our consumer focus and orientation. Of course you know that the teams periodically go through brand reviews, do focus groups and talk to our customer, what I hope to do is bring a little bit more rigor and consistency to talking to our consumers. And I expect we'll do that in two ways. It's something that we -- I'll take from my Disney experience. One, we will put together a process whereby we'll get feedback from our field, from our sales associates who are on the line talking to our customers every single day in a more rigorous and quantifiable way so that our merchants and product develop people can hear monthly what's happening on the floor. At the same time, I hope to deploy something that might look similar to what we did at Disney where we would do customer intercepts at the point of sale on an ongoing basis so that we can build a data base over time and understand trends more frequently and then with greater speed. So there's a couple different research techniques we hope to deploy. But I think the key message is that it's more quantifiable and more rigorous and more timely.

And how about with respect to the competitive analysis? How would that be conducted in your view?

Broadly speaking each of these brands compete in different segments. And so when you look at the competitive landscape certainly Old Navy is positioning themselves in the value markets and there are you know core customers out there that they focus on as it relates to their product. Their product offering and price points. As with Gap you know in the specialty market. Then Banana's market niche is in a lot of ways kind of unique and different from everybody else in the sense they have a clear esthetic and an opportunity to go after something that's unique I think in the market place by comparison. So it's the usual suspects as you would suspect in Old Navy from the target and the specialty retailing in the mall stores, department stores, you know as you would expect.

Thank you.

Your next question is from John Morris.

Congratulations on some nice improvements in the quarter. Maybe if each of the presidents can talk about the men's side of the business, what they're seeing. Are there signs of life? What would the expect to drive that business going forward? Then also for Heidi with respect to the inventory plan, finishing up at about I think 10% per square foot, without the timing shift and the delay from the dock workers, what would that have been and was that on plan? Thank you.

It's really very difficult to separate because some of the differential between what we thought Q4 would be and where it's coming up is just the timing of actual spring receipts. You know our inventory per square foot number is done on a single day. It doesn't necessarily represent average it doesn't at all represent average inventory. So it can be be volatile to predict because just one day difference on receipt can make a difference. So some of it as we look at the pipeline we think some of the receipts will be coming in earlier. You know if I were to wager a guess an educated guess I hope on the difference I would say about half of it was related to the dock worker issue. And you know to be honest with you that is still up in the air as well as to how that's going affect us. What I've given you is an inventory indication based on how we plan to go through the remainder of this year. But obviously if the holiday selling season is stronger, we may be able to end the year with a better number than that.

This is Jenny I am going talk about Old Navy first. Men's. We've been very pleased with the men's business the last few months. More importantly the assortment I think is really much more focused. And what a man would expect to find in our store. And our sales are telling us that. The more importantly the painter campaign is really our first campaign really focusing on men. And we've seen a great improvement in traffic from men coming into our store and we will continue to target the men's segment going forward.

And for Gap the goal was to reestablish the men's business as a pant destination in two ways. Obviously denim is the key part of our business. But also to look at the pant business especially the chino business we're excited that we're going relaunch chinos in spring of next year with an upgraded fabrication fit and attention to detail. And I think it's just going through the men's business and look at the quality and the product attributes that each of those products need to be. I think the work that still needs to be done is to get the mix right. Men do need a certain amount of newness. That's the work that will continue to go on. But we have to make sure we have the evolved classics that they rely on this Gap on and we're pleased.

At Banana Republic we are seeing improvement. Particularly with regards to he more refined dressing meaning our dress pants, woven shirts and outer wear. And as with Gap we are seeing also improvements in our chino business. In addition we saw improved scores in men's attitudes towards the brand eventually.

Thanks.

Your next question is from Dana Cohen of Bank of America Securities.

Good afternoon, guys. I guess I got two questions. The first is to Paul. You said you will be in stores and I guess we'll all take that e-mail of where you will be, but can you talk about how much time you expect to spend in competitors stores? Then Heidi I just wanted to go back to this inventory thing. I guess confused as to why if the started in April of this year why you are restating last year? Because it would seem to me the numbers from last year should have been correct. And then second within that you know how do you prevent things like this from happening and why it picked up quicker than it was?

Why don't I take the inventory question first, Dana. It is a little bit confusing to follow I appreciate that. We had two issues. The software issue that occurred in April of this year had an impact on our Q1 and Q2 2002 inventory and accounts payable levels related to in transit I. think I tried to describe in some detail why that happened. But while we were investigating the low in transit numbers that we were seeing, we in the process of that research we saw that we of course went through the whole methodology in the report that draws data from our underlying in transit system. And what we saw is that some of the definitions that were used we felt were not appropriate.

Maybe it's helpful if I give you an example. For example, we have to decide in this inventory report because the underlying in transit data is a fairly long period of time tracking our inventory. So we have to decide when we want to pick it up for accounting purposes and when in transit ends for accounting purposes. And the model considered the end of the in transit period to be when the product was dropped off at the DC. But in fact that is not precisely the end of the in transit period. It is once it is stocked in the D.C.. Which can be three to four days later. So that type of definition we felt we needed to change. And it affected last year as well as this year and that's why we're reflecting the adjustments. We thought it was important for you to see the year-over-year comparisons clean. Obviously it was something we were going to make a change on going forward but we felt the historical comparisons were a value to you.

And just in terms of why it took so long to figure it out what was going wrong?

Well actually I don't think the software one took that long because it was -- The carriers were migrated on to this new enhancement. So we didn't really start to see the affect in any significant way until July . And we got on it pretty quickly after that. I think the bigger question is why didn't we see the definition issues that I was talking about in the original report. And I think the reason for that is that all of the numbers trended properly over time. And so there was nothing that would signal there was anything wrong in the report. In addition because our businesses don't use that report they look into the full in transit information which was fine to manage the business, there was nothing in the business that would signal to you anything was wrong. Also, it doesn't affect cash, doesn't affect earnings, doesn't affect sales, and those are the usually the things when things get out of kilter is when you start to realize there's an issue. This was an original definition and the program ran as designed. And I think that's why. You know obviously the control environment is very important to us over the last several years we've significantly increased our investment in internal audit. We'll retain that commitment and we've got some lessons earn learn odd the IT testing sites from the April event.

Great. And Paul?

To answer your other question. You are going hear a very consistent theme from me which is we are going to be increasingly more consumer focused. And every opportunity we have to try to learn more of what the consumer needs and what they want and how we can fulfill that need is going important for us to make our business decisions. So as I go out to the stores being in the stores gives me lots of opportunities to do a lot of things but first and foremost is to listen to our customers, talk to our customers, talk to those customers are that coming in the store and talk to the customers not coming in the store. So that's a critical part of all that. At the same time as you would expect, part of those visits will be around operational focus. What we need to do more than anything else is to figure out how we can make work easier for our sales associates in the stores so they can provide better, greater guest service. And that's a critical piece of what I do when go out in the stores to understand what the barriers and complexity of their job, how to give them resources and tools to be more successful in what they do. Of course in my travels I'll be spending time seeing what other people do. Probably most importantly we'll keep our focus on what we're going to do. But always looking at the competition is kind of a healthy dose of reality.

Great. Thank you.

Your next question is from Neely Taminga of Piper Jaffrey.

Let me add my congratulations to a job well done. I have a question about Old Navy. Where do you see opening the store in terms of its size. I know there's been a lot of discussion about you know the boxes are oversized. But I am wondering as far as the new store openings next year where the store size could be? Then also in terms of remodels. Heidi, are there remodels planned for next year? Is that reflected in these square footage guidance? And you know would you be remodeling you know Old Navy stores to a smaller size, maybe some more color on that issue.

Well the remodels generally do not impact square footage. I mean I guess at some point sometimes we have expanded stores in the past. We are doing far less of that. And I don't envision that to be any type of material item at all for next year. Not something that would move the needle.

And as for the new store really depending on the market. Really determines the size of the store. They range about 16,000 to 20,000 square foot.

Okay great.

Your next question is from Robby Ohms of Morgan Stanley.

Thanks. Two quick questions. First one, Paul I was hoping you could kind of tell us your philosophy of how you are going interanlting with the brand presidents? Then this second question was for Heidi. Can you just kind of walk us through why the expense growth accelerates in the fourth quarter? Is it advertising or what drives that? Also how did you get cap-ex down so dramatically again? Thanks.

I'll take the financial question first. In terms of expense growth it is a little bit higher in the fourth quarter fourth quarter because unit sales are higher in the fourth quarter. Earlier in the year we had negative unit growth then it started to get flatter and overall we are going have positive unit growth in the year that's heavier in the back half that drives store pay roll. It drives DC variable and all of -- those two things are very big pieces of our SG&A. The other biggy is advertising. That's up probably 30% in the back half.

Then to answer your other question. I really see my role as doing two things. One providing the overall strategic guidance to the company and the brands at large. And then most importantly providing the resources and tools to make our brand teams more -- successful. So that's my role. Their role in particularly now that we've made the shifts so that the product develop -- development group reports directly to the brand president they have total accountability for the performance of their brands. So I'll be helping them be successful and also holding them accountable.

I realize I didn't answer your cap-ex question.

Yeah.

I actually think what it reflects is the company's real focus and attention and concern over cash flow as we entered this year. And we were very, very attentive to the capital investments we made and we're all quite pleased that it's coming in under budget. Some of it is timing to be quite honest. Sometimes it's difficult to know whether it's going to be in the fourth quarter or flip into Q1 especially some of our IT projects but aside from that we're controlling the capital very well and I think it's appreciation of the capital position that we're in.

Great. Thank you very much.

Your next question is from Emmy Kozloff of Stanford Bernstein.

Question is on sourcing. Paul, you mentioned that you feel there's infinite opportunity and specifically mentioned shortening lead times. Can you give us a little more color on what your thoughts are?

Well you know I think that the teams have worked hard to try to figure out where along the value chain we can take time out so that our speed to market, the efficiency to market could be that much greater. And we're going continue to do work. Some of that's going to come from system enhancement that are guy toug allow us to have better visibility and control over some of the decision making that we go through. But a lot of it is going come from old fashion roles and responsibilities and make sure that we have clarity on all the hand offs. Whether from product develop to merchants merchants to production organizations so we're going put a lot of rigor into defining that and making sure we can be as efficient as possible. I think it is a big opportunity for the company. You know the time it takes today. And there's no reason that we're all committed to trying to find ways to shorten it. Every piece of the value chain.

Do you have any target in terms what you expect to be an appropriately lead time for a company of Gap's size in.

It's little early for me to opine on that. We have a very unique you know selling proposition at the same time. So I am not sure what the right comparables will be to other organizations. We have a distinctive approach to the way we think we are unique in selling our products. So we don't want to throw out the baby with the bath water so to speak but we clearly recognize there's efficiencies just in our profits.

Great. Thanks.

Your next question is from Marcia Aaron of Pacific Growth Equities.

Talk a little bit more about the specifics on the feedback loop that you plan to implement between the stores and the merchants and how do you ensure that they're actually taking that into account. Then can you discuss the real estate if you have taken -- undertaken a review of the real estate and what you see going forward? In terms of the fleet.

Well on the first one the we haven't designed the approach specifically on how we're going to do it. But very quickly the simple thing is to get an easy quick survey tool in the hands of our field so they can then answer questions as we choose to put out there. You know and we're not sure whether it's going to be weekly or monthly. Then it's report that will -- we'll consolidate and get to our merchants and planning folks and you know it's funny thing because people know I am going read it and other people I am sure will read it as well. We'll hold them accountable because it's important. Not going to give us you know all the right creative additions but it certainly will help provide better guide rails as we move forward.

Were you asking if Paul had reviewed the real estate?

You know the fleet and where you stand in terms of -- There's obviously been a lot of discussion about the size of the fleet and if it's the right size. Either too big or too small.

Honestly at this point it's too early for me to answer that question. The team's done a lot of work and of course I'll focus on that as well. Of course we are feeling good about our performance and we want to make sure that we're making decisions based on the appropriate baseline for our overall volumes before we pull any new triggers.

Okay. Then, Heidi, one quick. The diluted sheer count seemed awfully high this quarter?

Yeah there's something happening in Q3 because our earnings are at the level they are the convertible bonds become dilutive. If you'll call back later we can give you all the calculations on how it works. The first half it was not it was just interest expense.

Great. Thank you.

Your next question is from Todd Slater of Lazard. I have two questions. First for Paul we were wondering if you had a chance to look at what kind of ROA you think the business can generate and how long do you think it will get there? For Heidi we were wondering if you expect any improvement if the shrink rate this year and if so by how much? Thanks.

Well again a little premature to comment specifically on that but I will tell you that you know the company's done a fantastic job on focus on our top line and our margins and as we've said I think we still have opportunity to improve upon that. At the same time we are going to have a laser focus on our invested capital and also on our free cash flow after tax. Those are kind of two metrics that Heidi and the team have been focusing on and it will be important for me as well.

As far as shrink is concerned we do our fall annual counts in all of our businesses early in the year so. Early this year when we did the counts we still saw an increase in shrink rates versus the prior year and we've seen it even last year versus the year before. We have been implementing a number of programs over the last 12 to 18 months and we've done some targeted store and some partial counts, unit counts on an interim basis. And we're starting to see that turn the other way pretty nicely. But we won't have another full annual count for all of our brands until early next year. But it appears based on the sampling to be going in the right direction.

Thank you.

Your next question is from Dana Tellsby of Bear Stearns.

Paul, can you talk a little bit given your marketing background where do you see the opportunities for Gap and is it different by brand? Heidi, can you talk about inventory and what your outlook is for the first half of the year? And then lastly in terms of our style, Paul, how do you envision work with the organization? How is it different from disney so far? Thank you.

We can ping pong back and forth. First though marketing side I would sa that effectively the methodology would be the same for each of the brands. But I suspect the outcome obviously will be very different. We will go out and talk on our consumers. We' understand the consumer insight they give us about these brands. It will be product focus and emotionally focused. Think one of the greatest strength each of these brands have is the emotional connection with our customers and we need to understand that insightment then we'll go ahead and figure out how do we communicate that. And that will mean a variety of work on how we strategically think about our marketing mix. It will not be one size fits all. We will use the marketing mediums to best communicate the message and most importantly as we think about marketing segmentation and we talk to various groups whether they be age dem graphics, ethnic demographics or life stage demographics we'll find both the right message as well as the right medium for us to be able to communicate. I think that will give us both, one, a better laser targeted communication strategy as opposed to a broader shotgun approach. Then the efficiency of our media dollars will be that much greater as well.

Your inventory question we're only guiding today to where we see first quarter inventory per square foot. But I think we've said all along for the past several months we see the business improve we feel it's important for us to take stronger inventory positions going forward to drive profitability. Obviously balancing the risk of that investment. As you look to the first half of next year one thing that is very important to remember is the comparison we have first half of this year inventory per square foot was down 24% in e second quarter down 18% so. We've got some rebuilding to do and I think that's what you see in the first quarter but we'll give guidance on the second quarter in future calls.

Okay.

And then the last thing is I think that the -- There's a lot of analogies between this organization and Disney. But maybe I'll comment on two things quickly. One is the brands are similar in the sense that the unbelievable emotional appeal that these brands have are very similar. I give my short story which is I used to go into supermarkets and I'd get accosted by people telling me what was wrong with disney and two long -- too long of lines and price. When I took this job I was hopeful I wouldn't get accosted in my supermarket any more. Fortunately I do. It's because people are very passionate about our brand. That part is great. Secondly there is a tremendous amount of spirit and energy in the culture of the talent here. And that was what I expected but it's actually even greater than I had thought when I first walked in. So there's some similarities. Of course we don't talk about pixie dust any more.

Thank you.

Your next question is from Barbara of Buckingham Research.

My congratulations. Couple things. Can you talk about strategies in the fourth quarter what are you doing over Thanksgiving to mitigate the impact of the calendar shift? And then secondly can you talk a lit bit about sweaters and your strategies? They've been apparently not great around you know how are they with you. What are you going to do to -- Where are you versus plan and last year and sweaters. Then also the same for outer wear.

We're trying to decide who goes first on this. [ Laughter ]

Okay just regarding this top line in the business I think your question regarding sweaters. Obviously sweaters are key on gift giving category for the holiday season. So at Gap we're just making sure that we're well poised having the inventory stocked on the floor. There will be some value during the holiday season. That has been planned up front. And just going to make sure that we're poised for business. As far as outer wear we've been very, very pleased with it across all sectors from kids, baby, to adult. That category we just continue to fuel. So we're really excited about that.

And Old Navy actually we kicked thof holiday season with a sweater promotion that we just dropped a circular last week. It is doing well. As for outer wear I think the weather is on our side so we've been very pleased as Gary said the performance of outer wear.

Lastly with Banana Republic outer wear has been a key performer for us all season and will continue to to do be. With sweaters it's early to tell we're aright in the midst of our cashmere push right now.

I'll take a stab at your question regarding the late Thanksgiving. You know with what's really -- What makes it more difficult to answer the question is we think the port strike May have had changed our plans more than a late Thanksgiving did. But certainly we've got major advertising coming up. TV coming on in both Gap and Old Navy before Thanksgiving to drive as much business as we can before December then we do have like we did last year although I believe in one of the brands it's little bit longer this friends and flame events are going to continue in early December . We think we nid to do that in part because of the shorter time frame. And in part because of the port situation. So those are broadly the kind of things we're doing. But we expect that people are still going buy what they need to buy in the holiday season and they've got to do it before the end of the month.

Great. Thank you.

Your next question is from Richard Jaffry of UBS Warburg.

Thank you very much. A question for Paul and what he sees as the role I guess corporate role particularly in terms of marketing. Know you plan to touch on that. And the other key issues. Corporately everything seem to come back historically, sourcing, design, sounds like you are pushing the responsibility down the departments. Are you going to put yourself out of work?

That would be a great thing. You know it's too early for me to say that I'm going do any kind of organizational change you know differently than the way we're structured today. I don't suspect anything terribly significant. I did talk about a couple areas of talent where as a team we all want to raise the bar. I think it's in some cases strategic planning and some cases our marketing expertise. So I suspect we'll do that down at the brand level. But certainly areas like consumer research where we have opportunities to consolidate and have a shared resource you know we'll consider that. Most of the -- Certainly the accountability lies at the brand level and corporate group is really here to provide the tools and resources to make them successful.

Shall I assume there will be a corporate marketing person coming on as there is for each division.

No it's too early for me to tell you my thoughts on that.

Your next question is from Dorothy Lackner of CIBC World Markets.

Yes thanks and congratulations everyone. A question for Paul first of all if you could talk a little bit about what you see internationally for Gap ltd. I know you haven't yet begun your travels but just given your background at disney how are looking at an international or global business. Then for Heidi in terms of the dock worker situation ho are you thinking about that for the spring season? Thank you.

Well first on the international side, you know I guess the headline is I think that there's a tremendous opportunity for us to take these grands -- brands internationally. Having said that, we clearly need to study what models will be most profitable for us to take these brands internationally. So what we're going to do spend a lot of time understanding that it isn't completely clear to me that it's necessarily a retailing model. We have tremendous brand product capability and how we enter a market and which brand we lead with in a market is yet to be determined. So I think you can over the next several months you will see us starting to put kind of our strategic work against that then try to determine where we go forward with the brands. Because I just look at mainland China it's huge opportunity. We look at the success that Gap is having in Japan and wonder which brand might be next. Then as I said it's -- Having experience in working in Europe it's not one market it's multiple markets that. I have different preferences, different economic models within each of those markets. And we're just going try to be as smart as we can and figure out the best way to get shareholder returns.

Regarding your question on the potential spring impact of the dock worker situation. The plant -- plans that we have in place were designed to minimize that. So we expect very little. What you did see though because we are saying that we think inventory per square foot could be a bit higher than planned at the end of the fiscal year there is some carry over into the first quarter. But the type of product that is carried over is the type of product that lives a little bit longer. So we feel it's not liability largely that is carried over. Also we probably will send some to our outlet business to be sold in that channel at a later date so. We're really not at that point and time expecting any measurable impact on spring.

But in terms of just rerouting --

Oh is that what you meant? Well if there are no future disruptions that's not obviously something we have to contend with. But certainly we are watching the negotiations very, very carefully. We've got strong con tingency plans in place we've not yet had to pull any trigger that based on our dates. And so we'll just monitor it on a daily basis and we have contingency plans and will pull the triggers on them as we need to to minimize any impact.

Great thank you.

Your next question is from Kendra Devainy of Folcrumb.

Great. Thanks I have a question on the IT. You mentioned that some of the cap-ex was timing issue. I am wondering if any of the other projects you may be considering are being pushed out? In conjunction with that maybe Paul you can address one of your key initiatives with distribution. Does that have to do with IT products underway or anything new that you forsee in the future.

Some of the projects are rolling out more slowly. Primarily those that involve significant new product development on the part of retech. But otherwise I think we're moving ahead quite well. I think one of the most significant ones are those is the whole planning project. And year' learning a tremendous amount about that in terms of how we set priorities for the much larger project called the merchandise system in retech terms there are enough product in our terms we call it The Gap merchandising system of course. So I don't think it's overly serious. But it's still early in our whole infrastucture rebuilding effort.

Is it active in any of your brands yet? Or still in test mode?

No in fact the top planning I was at a meeting this morning of all the brands and all of them are implementing it. I think with some considerable success. And even though there's always some pain with the bugs I've been impressed with how dedicated people are in making this work. And we're seeing some real benefit from that.

Great.

Then to answer your question on distribution you know at this point my first look at the IT systems that John's been helping implement here, I don't see any reasons why we have to change or course correct in any significant way. At the end of the day our speed to market will be less. The systems will be the enabling tools but how we think about our business decisions and our business rules you know and our ability to use those tools effectively will have greater impact on our speed to market.

Great. Thank you.

This is Sabrina and we'll have time for just two more callers.

Your next question is from Ellen of William Blair.

Thank you. Couple questions. First of all, Gary, with respect to marketing, can you just update us on your progress and finding someone to take the marketing role? Then how will the holiday television campaign be different from fall? Do you expect it to be more of compelling driving customers to the stores versus just image. And then kind of also similarly related with respect to traffic, I am wondering if you guys want to comment at all the traffic trends so far through November ? And if you are seeing with respect to the same concept like Gap for Gap, Old Navy for Old Navy, are you seeing similar trends between mall and off mall locations or different trends?

Okay let me start with your first question regard the search for the head of marketing. Own the search along with my counterparts NHR we're actively looking. We've not found the appropriate candidate but we have not stopped and it is a top priority. As regard to what the holiday TV campaign looks like, it is product focused. It's round sweaters and cold weather accessories. It has a much more clear focus point of view. There's no two spots a woman's spot then a men's and women's spot and it's much more targeted. i think key items we'll -- will cut through in a much more bold way. And that was the approach that we took.

As far as your traffic question is concerned we can't talk about current business.

Then with respect to mall versus off mall stores?

You mean in the past several months that type of thing?

Just curious to know if the trends are similar or if they're different based upon the locations?

In the past several months? Because we're not talking about current business. Maybe Jenny's the best to comment since she has the most off mall business.

Actually looking at it for the last few months it's really inconsistent. We just took a look at ate last week and there was really not any conclusive conclusion on which one has better traffic.

Okay. Thanks. Then Heidi, just with the tax rate. I know you said it would be for the fourth quarter, but is there a way we can think about going forward how the -- Like is there certain sliding scale or something that we could assume with how the tax rate wrao change based upon a certain percentage or net margin or something? Or a better date where the tax rate will go for next year.

I know this drives you nuts but there is just no way to come one a formula for it. The best we were able to say is that as we approach you know 75 cents to a a dollar a share when we approached a normal 38 to 40% rate. But the speed at which we get to that depends so much on the composition of our earnings. And there's just no way to model it out I am afraid.

Okay. Then one last question for Paul. I know you have only been there for a few weeks but I am just curious to hear your first impressions versus what you were expecting? Any surprises, positive or negative?

Better than I thought and no surprises.

No surprises? All right thanks.

This will be the last question, operator.

Okay your last question is from Richard Baum of CSFB.

Thank you. I was getting worried. [ Laughter ] I am going have to invent a question here because 50 have been asked already. But what I wanted to ask Paul is you know you spent a lot of years at Disney you spent some time in the retail business, you spent some time in the theme parks, what are the one or two let's say greatest lessons learned at Disney in retail and in the theme parks that you think are most applicable to Gap? And the flip side of that is things that you learned at Disney that would you absolutely want to avoid? [ Laughter ]

Well certainly answer the first question. You know given this a lot of thought and maybe the way I can it as -- describe it is Disney was in a lot of ways all about experience. We are -- Or we were story tellers in the way we think about presenting our products to the consumer. And that's whether it's the actual product or whether it's the guest service that we would give at one of our parks or one of our retail stores. And the more I think bit I think about this business no differently. A lot of ways ate theatrical business. When you walk into our stores we need to tell a story. It has to be a compelling story. It's got to evoke all kinds of different images and emotions. And each of these brands will do it differently. So I think that we have done a good job of that. And its' my expectation that we will reinforce that and look at it in stronger way. Because as important as our product is, the experience that our customer has in that store, they've come to expect from us the best customer service in the mall or in the strip center and far better than our competition. So in that way I think the disney lesson learned is that it is theatrical and it is about stories and it is about compelling ideas that we put and that we're focused on and we put in front of the consumer. Things that I want to forget? I've forgot.

Let me ask you one follow-up in that vain. If you were Siskel or Ebert and you're rating the movies, you've got three movies out that you are looking at in terms of how they deliver this theatrical experience, what would be your preliminary marks for Gap, Old Navy and Banana Republic?

Well of course being politically correct the answer is three thumbs up!

Then you really don't have anything to do.

Go see the movies. No I think and I think probably Gary and I spent the most time talking about this for Gap. And what else can we do, how else can we think about you know that box. And it obviously dove tails into how we think about positioning the product and positioning the brand. So I think that's the one that has some opportunities for us to think about it in a different way.

Great. Well thanks a lot. All the best. Good luck.

Great.

We'll be following you.

I'd like to thank everyone for joining us on the call today. As always the investors relation team will be available after the call for further questions. Thank you.