蓋璞 (GPS) 2002 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen.

And welcome to Gap, Inc. fourth quarter conference call.

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Investor Relations at 650-874-4670.

I would now like to introduce your host, Sabrina Simmons, Vice President of Treasury and Investor Relations.

Good afternoon, everyone.

I would like to welcome you to Gap, Inc.'s fourth quarter, fiscal year 2002 conference call.

Before the call begins, I would like to remind you that the information made available on this web cast and conference call contain 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 subject to risks and uncertainties, and the company's future results of 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 Securities and Exchange Commission.

This afternoon, we will begin with Paul Pressler, our Chief Executive Officer, providing an overview of our recent accomplishments and updating you on our companywide priorities.

Then, our new Chief Financial Officer, Byron Pollitt, will discuss our fourth quarter and full year financial performance.

After Byron finishes, Paul will give brief highlights on Gap brand and Banana Republic, and then Old Navy performance will be covered by its President, Jenny Ming.

After Jenny's remarks, we will open the call to questions.

Going forward we expect to follow this format on each quarterly earnings call.

Specifically Paul, our CEO, and Byron, our CFO, will be permanent hosts of the quarterly call, and we will rotate in different heads of business each quarter.

We expect this afternoon's call, including Q&A, to last about an hour and a half.

With that, I'll turn the call over to our CEO, Paul Pressler.

Thank you Sabrina.

Looking at our results for 2002, I want to begin by expressing my pride in what our team has accomplished.

They did what they said they would do.

Each brand committed to steadily improving performance throughout the year, and we saw clear momentum in the second half.

In particular, our teams focused on executing well in the fourth quarter.

And our comparable store sales results and earnings reflect that effort.

In short, we focused on the fundamentals of our business, and we began the process of getting our company back to an earnings growth position.

Our successes in fourth quarter were largely driven by improved product design in quality, more balanced and brand appropriate merchandise assortments, and better customer service.

As you know, from prior conversations, I have spent a tremendous amount of time in the field, meeting with our people and trying to ramp up my learning curve by taking a hands-on approach to experiencing all areas of the business.

During the past few months, I have been engaged in meetings with our merchants and designers, and in doing so, have come to appreciate our talents in these areas.

Our merchandising and design teams deserve credit for our improved assortments and strong customer acceptance of our product.

I am confident in their ability to continue evolving our assortments.

That said, we all recognize the work we still have to do.

We know that these early achievements are only a downpayment on a much larger commitment to our shareholders, our customers, our employees, and their families.

We are resolute in our determination to continually improve all areas of our business.

We will protect and nurture the creative, competitive strengths of our company, while also ensuring our operational effectiveness and analytical ability to better understand and serve our customers.

We need to earn the right to grow by improving our balance sheet, tightly managing our costs, and creating sustainable strategic plans for each of our brands.

I am focused on several key areas to ensure we have the competencies and resources we need to drive long-term quality growth.

You've heard me speak about these before, and today I would like to give you an update on each.

First, marketing and consumer research.

We're working to gain additional consumer insights and better understand the emotional connection people have with our brands.

Our goal is to develop a better frame around our marketing efforts, and a more analytical approach to how we think about the business in general.

One of our core strengths is, and always will be, our creative ability to interpret fashion, style, and other cultural trends into merchandise that is appropriate for each brand.

At the same time, we must improve our ability to better support and balance our creativity and inspiration with research that not only helps us validate but also influences our strategies and creative thinking.

These efforts include more and better consumer data that yields, for example, a more effective segmentation of our customer population.

Which in turn results in better insights to inform our decision making in areas like product development and product positioning.

In December, we hired the ad agency Leo Burnett as our strategic brand partner.

Burnett is assisting us in refining the segmentation process and better understanding the emotional appeal of our brands, which will help us in creating a more relevant marketing and communications programs, tailored to each customer segment.

We're finishing consumer fieldwork right now and expect to have the first phase of our segmentation work by brand completed in early spring.

We are also continuing work begun last year.

For example, our merchandising, production, planning, design and tech services teams in each brand have traveled the U.S. to perform in-store fit clinics with our customers.

Our goal was to gain the insight needed to improve our existing fits, as well as to create new fits to better serve our customers.

We spoke to hundreds of men and women through a combination of focus groups, shop alongs, and store visits for each brand and key competitors.

We started this process last year, and have already seen positive sales results in all three brands.

We'll also continue to use online surveys, Gallup research and in-store forums, such as customer and staff surveys, to inform our decision making across each brand.

We have more than 120,000 store employees in 6 countries interacting with customers on a daily basis.

Ongoing internal surveys will help us leverage the insights of our own employees to better understand their desires, experiences, and purchase preferences of our customers on a market by market basis.

Customer expectations will ultimately drive the way we run all aspects of our business, which makes sourcing and logistics another area of focus.

We are sharpening our strategies on all of our supply chain initiatives, so that we are optimizing for speed and flexibility while keeping a close eye on cost.

Technology is playing an important role in these efforts.

Through strategic partnerships with supply chain technology leaders, we are upgrading our operations infrastructure across all areas of the product pipeline.

This is allowing brands to more accurately forecast and manage inventory and make better database decisions.

I believe our global sourcing base is a major point of competitive advantage.

We will continue to strengthen this advantage through stronger relationship management with our vendors.

Strategies such as stage manufacturing and preseason testing will help us better meet customer expectations.

We're also well positioned from a logistics standpoint.

Thanks to our regional distribution structure, 80% of our Gap, Banana Republic and Old Navy stores are within a day's drive from any of our distribution campuses.

Improving our supply chain will be an ongoing priority.

And we will continue to drive close alignments between our brands, our sourcing and logistics.

Finally, I want to speak about our priority around talent.

We need to make sure we're leveraging the talent we have and that we're creating new competencies where needed.

My executive leadership team will share ownership of talent development across the company.

We will also be hiring talent to strengthen our skills in areas such as marketing, international, online and human resources.

We're working tenaciously to bring the right marketing leadership on board to each brand.

With Brian Pollitt as our new CFO, we're also focused on strengthening the opportunities for finance, strategic planning and information technology to drive greater returns in the business.

Byron has real depth of experience in leading these areas.

He brings to Gap, Inc. the same kind of financial rigger and focus on returns that he was known for at Disney.

As we also announced today, Eva SAGE GABEN is joining us in the newly created role of Executive Vice President of Human Resources.

Eva has strong experience driving human resource strategies across a diverse and global employee base.

She will help lead our ongoing commitment to developing talent throughout the company.

To close, I am pleased with the progress we have made and the work we have under way to continue improving our performance.

We have tremendous opportunities to leverage the strength of our brands and the scope of our operations to better serve our customers and create long-term growth. 2002 was a strong downpayment on our commitment to our customers, our employees and our shareholders.

In 2003, we are absolutely determined to translate more opportunities into real bottom line value.

With that, let me turn it over to Byron, who will take you through the details of our fourth quarter and full-year performance.

Thank you, Paul.

I want to begin my comments today by saying that I am extremely pleased to speak to you as a new member of this team.

And while my tenure to date is short, and I am still in the process of moving up the learning curve, I look forward to an increasingly insightful dialogue on these calls and in other interactions.

As have you heard from Paul, it could be said that the theme of this call is all about continuing to make downpayments on our promises.

As I move through the specifics on our performance, you will hear this theme echoed many times.

With that said, for those of you participating in the web cast, please turn to slide three on earnings performance.

For the fourth quarter, we achieved earnings of 249 million or 27 cents per share, compared to a loss of 4 cents per share in the prior year.

For the full year, we earned 477 million or 54 cents per share compared to a loss of 8 million or one cent per share in fiscal 2001.

Please note that while the convertible note was dilutive for the fourth quarter, it was not for the full year.

Our growth in earnings was achieved by improved performance in all areas of the business: sales, gross margin, operating expenses, and tax rates.

I will now walk through each of these areas to highlight the underlying business drivers.

Please turn to slide four for more detail on sales performance.

In the fourth quarter, total sales were 4.7 billion, representing an increase of 14% versus 2001.

For the year, sales totaled 14.5 billion, an increase of 607 million or 4% over 2001.

Our results are reflective of more successful product execution and more focus assortment.

We moved towards more brand appropriate styles that resonated with our customers and rebalanced our assortments by narrowing lines and taking deeper inventory positions on key items.

Despite a weak retail environment, we achieved higher conversion rates and higher average unit retails, reflecting the success of improved product acceptance in our inventory strategies.

Consolidated comp store sales for the fourth quarter increased 8% over the previous year, compared to a decrease of 16% in 2001.

For the full year, comp store sales were down 3%, compared to a decrease of 13% in 2001.

While full-year sales productivity was $349 per average square foot, down from $393 in 2001, the fourth quarter finished with a 10% gain in sales productivity, rising to $120 per square foot, compared to $109 last year.

Now, let me share with you how these broke out by brand for the quarter.

At Old Navy, where the recovery progress is furthest along, fourth quarter comps were positive 14% versus negative 20% last year.

For Gap brand, the recovery started in the fall on the heels of Old Navy's recovery.

Gap's domestic comp were positive 4% versus negative 16% last year.

Gap international comps were positive 6% versus negative 14%.

Banana Republic comps for the quarter were positive 5%, versus negative 7% last year.

For full year totals and comp store sales by division, please refer to our earnings press release.

Turning now to gross margin performance on slide five, for the quarter, gross profit increased 59% to 1.6 billion, resulting in a gross margin of 35%, an increase of approximately 10 percentage points from the fourth quarter of last year.

Of the 10 percentage point improvement, over 8 percentage points are due to the combination of improved product acceptance and deeper inventory buys in key items.

This drove sell-throughs at higher margins across all brands compared to the prior year.

The remaining portion of the gross margin increase for the quarter relates to the leveraging of rent, occupancy, and depreciation costs, which contributed about one percentage point versus last year as a percent of sales.

For the year as a whole, gross profit increased 19% to 4.9 billion.

This resulted in a gross margin of 34%, up about 4 percentage points from last year.

This gain was almost entirely due to merchandise margin improvement.

Looking at operating expenses on slide six, in the quarter, operating expenses decreased as a percent of sales by .2 percentage points, from 26.1% last year to 25.9% this year.

While this is not as much leverage as you might expect, given our sales increase, we are comfortable with this level due to the following factors.

We have a pretax charge of $59 million for sublease reserves, which were taken to reserve for excess corporate office facilities that we intend to sublease.

This equates to a $40 million after-tax charge for the quarter.

The reserve is the difference between our rent obligations and the rate at which we expect to be able to sublease the property.

During the quarter, we also saw increased marketing expenditures to help build awareness of new product and a higher bonus accrual due to improved profit.

Now, a brief word on advertising expenditures.

For the quarter, advertising expenditures were 134 million, up 16% over prior year, due to incremental advertising at Old Navy, including an additional week of TV and additional circulars.

For the year, total advertising expenses were 496 million, an increase of 17% from 2001.

Again, the increase is primarily from higher advertising spend at Old Navy aimed at capturing a higher share of voice in the value sector.

For the full year, operating expenses as a percent of sales decreased half a percentage point, from 27.5% last year to 27.0% this year.

Total operating expense dollars increased 95 million, or about 3%, driven by higher store payroll and additional advertising.

Turning to the tax rate on slide seven, our full year effective tax rate was 40.4% versus 49% last year, excluding the prior year tax charge.

The improvement in rate has been driven by three factors.

First, the mix of our earnings has improved, with a higher level of domestic operating earnings that are taxed at a lower rate than international operating earnings.

Second, improved earnings performance diminished the impact on the tax rate of certain taxes that do not fluctuate with earnings.

And last, we have achieved favorable resolution of several tax audits in the quarter.

Since we accrued at a higher tax rate during the first three quarters of this year, our fourth quarter tax rate is 33%, reflecting an adjustment to true up those prior periods to the full year effective rate.

Please turn now to slide eight for a word on cash flow.

First, a quick definition.

When we reference after-tax free cash flow, we mean total cash flow from operations but before financing activities.

In other words, the cash flow available to debt holders and shareholders.

Our business is a strong cash flow generator, even at only modest earnings levels.

This year, we generated after-tax free cash flow of over 970 million.

This resulted in an end-of-year balance of 3.4 billion, an amount roughly equal to our total debt.

To help better understand the components of our cash flow performance, let's talk more specifically about depreciation and amortization, working capital, and capital expenditures.

For the year, depreciation and amortization was 781 million versus 810 million last year.

In terms of working capital, for Gap, this is principally driven by changes in inventory.

Turning to inventory on slide nine, we ended the year with 2 billion in inventory, up 279 million versus last year.

However, keep in mind that last year we were at an unusually low inventory level because we had aggressively liquidated product that wasn't working for us and restrained inventory investments until the second half of 2002, when we were more confident in our product.

On an absolute basis, inventory per square foot was $54 at the end of the quarter.

While this is below our peak levels of $59 in 2000, we expect to bring this number down over time.

On a square foot basis, inventory is up 13% versus a 20% decline last year.

These results are above our prior guidance largely due to favorable shrink results, which we have now incorporated that our forecast models, and favorable currency translations.

As the dollar has weakened, our international inventory translates back to higher U.S. dollar values.

While we are comfortable with the overall composition of the inventory, inventory management remains a huge opportunity for us, and we are committed to managing it more efficiently in the future.

Looking at capital expenditures, full year expenditures were approximately 303 million, about 70% below the 957 million spent in 2001.

This lower spending level is due to our decision to reduce our square footage growth rate.

In fact, new store capital was only 85 million dollars, compared to $440 million last year.

The overall decrease in capital expenditures alone drove more than a $600 million improvement in after-tax cash flow compared to 2001.

Please turn to slide 10 for more detail on capital expenditures and stores.

As it relates to capital expenditures, I would like to take this opportunity to comment on our real estate strategy.

As I previously indicated, our ability to focus on restoring comp store sales was supported by scaling back square footage growth.

For the year, we increased square footage net of closures by about 3% and ended the quarter with 4,252 concepts which equates to 3,117 locations.

Please refer to the press release for a chart outlining fiscal year ending concepts and location count and square footage by brand.

Over the past year, we have brought into our real estate strategy more sophisticated tools that allow us to analyze multistore markets, and with those tools, we can better optimize our potential for earnings growth and return on capital from both existing and new stores.

That said, with the store base of over 3,000 locations and a typical minimum lease term of about five years, we have a naturally recurring opportunity to review 400 to 500 lease actions each year.

It will be our strategy to utilize these opportunities over the next few years to optimize the number of stores in our store fleet.

Turning to slide 11, there are few areas I would like to comment on for 2003.

Looking at operating expense dollars for the first half of the year, we expect about a 9% to 11% increase year over year.

Most of the increase relates to a projected increase in units sold, which directly drives store payroll and variable expenses at the distribution centers.

For the first quarter, we expect operating expenses to increase year over year in the mid teens.

A major driver of this growth will be advertising.

In Q1, Gap will launch a spring TV advertising campaign instead of waiting until summer, which was last year's approach.

In addition, Old Navy will increase the number of promotional circulars compared to prior year.

Regarding advertising, during the first half of 2003, we expect to spend about 10 to 20 million dollars more than the prior year.

This first half growth is driven by Old Navy TV frequency and additional Old Navy circulars.

For the first quarter, we expect to -- we expect advertising to increase by about 40 million dollars, due to a timing shift at Gap brand and additional Old Navy circulars verses prior year.

As referenced earlier, Gap's timing shift reflects a spring TV campaign this year versus a summer campaign in the second quarter last year.

With regard to interest, we expect our gross interest expense, excluding interest income on cash investments, to be between 250 and 255 million for the full year.

By quarter, this amounts to about 65 to 70 million in Q1 and 60 to 65 million in each of the following three quarters.

Given our strong cash position, we expect to pay down the $500 million note maturing in May 2003, and this is reflected in the lower interest expense following the first quarter.

Despite the May maturity, interest expense does not decline more significantly year over year, as savings from the paydown are offset by a full year of payments at higher rates for those notes that were impacted by the 2002 credit rating downgrade, as well as a full year outstanding for the convertible bond.

Turning to the tax rate, we currently expect the 2003 effective tax rate to be between 39% and 42%.

As we have previously indicated, the actual rate will ultimately depend on several variables, including the mix of earnings between domestic and international operations and the overall level of earnings.

Looking at our inventory buys for 2003, we expect inventory per square foot to be up 10 to 15% in Q1 and up in the mid teens in Q2.

While we have said we would invest more inventory as we felt the product assortments improved, these expected levels are slightly higher than planned.

While we are not concerned with the current inventory outlook, we will modify our inventory position accordingly as we address the balance of the year.

Our current outlook for capital expenditures remains 350 to 400 million for the year.

Store capital is estimated to be about 180 million of total capital expenditures, with about 40 million for new stores and 140 million for remodels.

Of the remaining capital spending, about 190 million is for IT, with the remainder split between distribution centers and headquarters.

We still anticipate new store openings of about 30 to 40 locations, which translates to 40 to 60 concepts, accompanied by store closures, which will likely be somewhat higher than 2002.

Overall, net square footage growth is expected to decline about 2% for the full year.

Our depreciation and amortization for 2003 is expected to be in the mid to high $700 million range.

We predict that increases due to a new distribution center for the online division and accelerated depreciation related to increased store closures, will be offset by decreases resulting from the gradual fall-off of existing assets and lower depreciation due to reduced store growth.

In terms of after-tax free cash flow, if one simply assumed earnings levels equal to 2002, added back the guidance provided for depreciation and capital expenditures, and assumed a slight use of working capital, you would see that after-tax cash flow in 2003 could reasonably exceed 800 million, which would fund both the repayment of 500 million in debt due in May and further strengthen our cash position.

I would also like to provide some insight on basic and diluted share count for 2003.

Our current basic share count is 887 million.

Each quarter, you need to add an amount for options exercised as well as the dilutive effect of stock options which are in the money.

In 2002, the dilutive effect ranged from 3 to 7 million shares every quarter.

And if the convertible bond is dilutive, it represents an additional 85.6 million shares.

In terms of knowing when the convertible is dilutive, assuming our current 2002 effective tax rate of 40.4%, the dilutive break point would be 14 cents per share in any quarter, or 55 cents for the full year.

Lastly, I would like to take a brief moment to discuss February, which ends on Saturday.

Given the sharp drop in consumer confidence and extreme weather conditions on the East Coast, February has been challenging.

However, we are pleased with a month-to-date positive sales comp in the high single digits.

These results are somewhat short of our beginning of month projections.

The reasons for the short fall are difficult to read.

Clearly, part of the story is the storms in the Northeast, which caused stores to close and slowed our spring selling.

However, in our view, that does not fully explain what is happening in February, and we are still evaluating business performance.

Month-to-date, while our markdown margins continue to be significantly better than prior year, we are selling more at markdown.

Further, these higher markdown margins are not enough to offset less regular price selling.

As a result, our overall merchandise margins are coming in slightly unfavorable to prior year.

To help put February performance in context, historically, February has represented approximately 25% of first quarter revenues, which means the two strongest months of the quarter are still to come.

In summary, I want to reiterate what Paul has said many times: that we need to earn our way back to growth.

And I am pleased to report that we have already seen improvements in the performance initiatives we have undertaken.

Margins have expanded as a result of better price realization, we have placed a greater focus on optimizing our real estate portfolio and driving earnings productivity improvements, and we are on track to begin reducing our debt levels with the $500 million payment due in May and we will consider other opportunities to reduce debt if they make economic sense. .

Finally we will continue to focus on building after-tax cash flow in addition to earnings.

We have seen this year just how strong a cash flow business we have.

That completes my prepared remarks.

At this time, I would like to turn the call back over to Paul.

Thank, Byron.

Before turning over to Jenny for an overview of Old Navy, I would like to a moment for quick updates on Gap and Banana Republic.

Gap's holiday and fourth quarter business results showed that the brand continues to make significant progress in its turn-around effort.

Gap's comp store sales were positive in each of the last four months, and the brand turned in a positive 4% comp for fourth quarter.

Customers are clearly liking the continued merchandise improvements.

Gap saw increases in both men's and women's sales, with the most popular categories being sweaters and outerwear for both men and women.

This helped drive strong margin improvement.

Gap's focus on elevating brand and service standards in the store helped offset challenging traffic numbers and produced an impressive in conversion and average transaction size.

Although traffic was down 8% in the quarter, it improved from the 12% decline in Q3.

Looking at marketing, the crazy stripe holiday campaign helped re-establish an emotional connection with the brand.

The campaign also had a strong product focus and helped fuel sales in the featured items, such as sweaters and success accessories.

Looking to first quarter, Gap is continuing to focus on improving product in terms of style, quality, color, and mix of assortments, finding new ways to consistently offer a greater shopping experience, and communicating more effectively with our customers with the right blend of product and brand messages.

At Banana Republic, we were pleased with our sales performance in the fourth quarter.

The brand made significant strides in offering customers what they expect from Banana Republic: a unique mix of casual and luxury options with great style and quality.

These product improvements have begun to resonate with our customers and help drive improvements in average unit retail for the fourth quarter.

We also saw consistent improvement in markdown margins over the previous year.

In marketing Banana Republic continued to re-engage each customer segment through relationship marketing and messages that spoke to sophisticated lifestyles and dress for both men and women.

The holiday gift guide, which was available in store and sent to Banana Republic's best customers, was also a success in driving sales of featured items, such as leather outerwear.

Looking to 2003, Banana Republic's key priorities are to improve regular selling price, increase traffic, create a more upscale service model in stores, and continue to tighten brand positioning and further segment marketing.

Now I would like to turn it over to Jenny to provide an update on Old Navy.

Good afternoon.

I'm very pleased to have the opportunity to walk you through the successes Old Navy has had in turning around our business this year and to give you a brief introduction to our plans for 2003.

First I will walk you through 2002.

In putting together our strategies for the year, we were focused on fixing the business.

We carefully examined our brand positioning within our competitive stand, looking at where our customers shop besides Old Navy and making specific decisions on which customer segments to go after based on the existing potential market share, share of wallet, and brand affinity.

We used this information to form strategies for merchandising, marketing, the shopping experience and the operating efficiency.

In merchandising, our strategies were centered around product, investments, and pricing.

On the product front, we set up guard rails to help us better define our product mix according to flexibility.

We referred to this as our product filter, and it ensures that our design and merchandising teams are aligned, regarding the mix of product and that the mix stays consistent season to season.

It also ensures that we offered the appropriate product mix for each of our target customer segments.

In order to better serve a broad customer base, we adjusted our assortments to include not only emerging trends, but more fashion forward items, but also a larger on trend or fashion current items and fundamental items such as basics.

We have also made efforts to improve quality.

By increasing the weight and upgrading the wash of base fabrics of twill, denim and knits, and we conducted fit clinics to ensure our fits best fit our customer's needs.

These efforts are paying off both in improved business and in better survey results for customers perception regarding product.

In our product investments we're streamlined, with a significant reduction in the number of styles offered and a renewed emphasis on key items.

This strategy was reflected in our focus on rugby for back to school and performance fleece during the holiday season.

Finally, we increased our use of promotional pricing.

This resulted in less markdown activity, driving an increase in margin, and reinforcing Old Navy's value message to its customers.

Our circular launch in the spring further drives the value message home.

Turning to marketing, our strategy for 2002 focused on increasing and reallocating our TV spending, introducing the circular, and increasing our penetration of Old Navy account customers.

In order to compete with other value retailers, which traditionally spent significantly more advertising dollar on television, we increased the number of weeks of TV and the amount of national geographies for each campaign.

We also aired our first Fox spot in between back to school and holiday to help keep us top of line with customers throughout the back half of the year.

Another change to our marketing this year was the shift from a youthful fashion message, reflected in the looks spot, to a broader fashion for the whole family message, represented by the rugby launch.

And for holiday, the family fleece spot targets three distinct customer, teens kids and entire family with a consistent message.

Our circular strategy evolves throughout the year, learning about how to most effectively used this vehicle increased.

We started out with an eight page monthly issue, but found that shorter more frequent circulars were more effective.

Beginning in August, we move to a four-page twice monthly issue.

This strategy allow us to talk to our customer even more frequently and to further emphasize our value message and to present our breadth of product for the entire family.

We have also tested national circulars, which were very effective for countrywide events such as Black Friday.

We are pleased with the launch of the circular this year and the circular was designed as a vehicle for key sales of the key customers, the mall.

It succeeded by driving sales through improved conversion and units per transaction.

Our final marketing strategy centered on revitalizing our Old Navy account program.

We nearly doubled our customer base this year.

Old Navy account customers are important driver of growth because they spent 50% more per transaction than the average Old Navy customer, and they visited the store 30% more often.

In looking at the shopping experience, we felt our stores have become too complicated to shop, which confused our customers and inconsistent with many value players.

In order to improve the shopping experience, we simplified the instore signage and merchandised the store predominantly by category with less outfitting.

This strategy has added benefit of making the store simpler to operate for our sales associates.

And our final set of strategies was designed to improve our operating efficiency.

We gave the store tools that allowed them to operate the store more effectively.

An example of this is our score card, which ranks stores according to selling score and store management.

Store managers can compare their score to other similar stores to get a better gauge of their business performance relative to their peers.

This tool reinforced our focus on driving sales and containing costs.

The strategies in merchandising, marketing, the shopping experience, and operating efficiencies has driven significantly improved financial results.

Our strong comparable store sales in the back half of the year led to a positive comp for the entire year.

Margins showed great improvement in the second, third and fourth quarters, driven by significantly less product at markdown and better markdown margins.

Our emphasis on operating efficiency, let us invest more marketing and still show a significant amount of the growth in margin dollar to the bottom line, resulting in a substantially better earnings than 2001.

As we head into 2003, we have several strategies in place to continue to grow our business.

Our first strategy is to continue to refine our brand positioning as a value player with a specialty flair.

This means further enhancing our value proposition and continuing to improve our shopping experience and operating efficiency, but not forgetting that we are a fashion brand, which is our competitive advantage.

In addition, to sustain our financial growth by maximizing the productivity of our existing stores.

We plan to achieve this by adding new product lines in under served categories to drive incremental sales.

Maternity is a great example of a new category for our stores.

We initially offered the product online and had strong response.

Then we decided to have the line in three flag ship stores.

As a result of the test, we decided to roll out maternity to 50 more stores this month, and the initial results have been good.

We plan to add maternity to an additional 15 to 30 stores by the end of the year.

Furnishing such as socks, underwear, are an example of under served category.

We know our customer needs these products and will buy them elsewhere if he can't find the right item at Old Navy.

To meet our customer needs, we will buy furnishings more deeply and make sure we're always in stock.

As Paul mentioned, we also need to better understand the motivation of our target customer segment, so we plan to continue to use focus groups, store surveys, and other tools to gain a more in depth understanding of exactly what our customers expect from Old Navy and then build business plans that direct these needs.

And our final strategy, is to market more effectively to our target customer segment, which will be evident when you see our spring campaign.

The TV ads begin on March 11, run for almost five weeks and featuring a great product for the whole family.

We will have two separate creative executions that allow us to speak individually to our younger customer and our family customer segment.

In addition, Old Navy will be sponsoring American Idol during the spring campaign to further highlight Old Navy to the younger customer segment.

So in conclusion, we feel good about how we were able to turn around Old Navy in 2002 and build a platform for growth for 2003 and beyond.

Thank you.

That concludes our prepared remarks.

We will now open the call to questions.

We would appreciate it if each caller limits his or her questions to no more than two.

If you wish to ask a question, please press the star key followed by the number one on your touch-tone phone.

If at any time during the call your question has been answered, please press the pound key to withdraw.

If you're on a speaker phone, please pick up the hand set before asking your question.

Your first question comes from John Morris with Gerard Clower.

Thanks.

Good afternoon.

Thanks very much for that comprehensive report.

Byron, I guess the question I would ask for you, with respect to the update that you gave us on the February margin trends, are you -- just for clarification, are you implying if the same trend in merchandising margins continues for the next two months, could we see a consolidated gross margin below last year's first quarter?

We are not implying anything about margins beyond the first month of the quarter, for February.

So you should read no implications beyond what we have indicated is the experience we have recorded so far, February to date.

Okay.

But I guess just, you know, assuming if that trend were to continue with the margins actually, would your consolidated gross margin be looking to be done and the buying and occupancy possibly offset that?

I think the perspective to take is February is a difficult month to read.

It represents historically about 25% of our revenues for the first quarter.

We've got weather, other complicating factors, and I think we should just take the February performance guidance for what it is.

The experience we've had through nearly the first -- through four weeks of February.

And I think -- I think we should leave it at that.

Fair enough.

My follow-up is you had mentioned that inventory in Q1 and Q2 might be slightly higher than planned, can you give us a sense for why and whether that's evenly distributed or by division?

Well, the two first components that we hadn't quite anticipated was at the -- when we -- as we were completing our year-end audit, we ended up with better shrink results than we had anticipated.

Which gave us an inventory boost at the end of the year, which carries through the first two quarters of the year.

And secondly, when we trued up our inventory translation for international inventory, we got the benefit, primarily from the pound, of a weaker dollar and ended up recording a translation gain on inventory.

Those are the principal components of the uptick, neither one of which were fully contemplated when we gave our prior guidance.

Perfect.

Thank you very much.

Your next question comes from the line of Jan Hoppinger with JJK Research.

Hi, this is Jan Hoppinger.

Byron, I don't want to harp on February but I would like to ask another question about it.

Given what I know about the inventory levels last year, would it be that your markdowns then, which are forcing the margins lower, have forced the comp store sales to come in as they have?

In other words did you respond to the business and take deeper markdowns during the month?

No, I -- you know what?

I think that the answer to that should wait till we have a better understanding of what is happening in February.

It's a good question, can't answer that at the moment.

Okay.

And then on the merchandising front, I was hoping you could help us understand the flexibility you're building into the business, and if that would be shortening lead times so you would have more nimbleness with respect to reacting to trends in the marketplace?

This is Paul and I will answer that.

I guess the best way to answer it is comparable to what I had said earlier, is that we definitely are focusing on our product pipeline and our cycle time, just about every aspect of it, and recognize that over time, that we absolutely want to be able to improve, not only our time but also, you know, the inventory working capital, you know, that we have sitting in the pipeline.

So that's a continuous focus for us, and we're making some down payment.

So it's possible then to reduce the lead times?

Well, yes, it's not going to happen overnight but it's definitely a focus for the management team.

Thank you.

Your next question comes from the line of Mark Friedman with Merrill Lynch.

Thank you.

Good afternoon, everybody.

Paul, Jenny, I was wondering if you could elaborate a little bit more on marketing plans.

This is spring, it is the first since Leo Burnette has gotten involved, how active are they on the spring campaign?

And Paul, as far as Gap, Jenny gave us a little bit of insight about some of the things that Old Navy is doing, if you could give us a little bit of insight of what Gap's plans are and timing for their launch of national TV advertising.

Yeah, sure.

Let me clarify one thing.

Right now Leo Burnette is working on strategy work for us, not creative.

So they have been helping us field a variety of research to our consumers that's going to help provide better understanding of our segmentations, particularly as it relates to what we call the emotional connections with our customers, so that our advertising will become better segmented and hopefully more efficient.

As it relates to our business, and Jenny can talk about it a little bit more, but even Jenny in the advertising you saw in the fourth quarter and beginning this year, clearly making a different communication statement to the family market versus the younger family, the pre-family markets or teens.

And we recognize that one size doesn't fit all.

So the Leo Burnette work. on top of the other research we're doing. is trying to understand the market baskets and then contouring our message specifically to it.

With regard to Gap, they will begin their advertising March 3 or 4.

And it will run for about four weeks and I think that when you see the creative, you will see there, too, we specifically targeted women, and not trying to be all things to all people by doing men and women, we will have a separate campaign in print for men, and in the women's campaign I think you will see is A, brand appropriate, I think it clearly talks to our customer in the emotional sensibility to it.

And then more specifically, it's got a great balance of product, the kind of wardrobing approach to our profit, and clearly our customers can be able to find themselves in this commercial and understand how to use the profit by occasion.

Thank you.

And I had one separate other question.

If you could just talk to us about any other positions out there you're looking to fill, either on the operation side or on the product side, that -- where you think need to be added?

Well, I do have a couple of openings that we are really focused on, one is a President of International, is one position.

We do have with Jeff Fivele's departure, Jenny is working on replacing him, at the product design level in New York for Old Navy.

We are also in search for marketing candidates for each of the brands.

At a very high, strategic level, we have great people that are doing the work of the -- the work today.

Art directors and folks we want to bring in, as I talked to in the past, a little bit higher strategic level, and then also the President of Gap Internet Direct.

Is another position we will be filling.

Thank you.

Your next question comes from Jeff Klinefelter with US Bancorp Piper Jaffray.

My question is for Byron.

On the operating expenses for Q1, you mentioned that the dollars are I think year over year for Q1 should be up in the mid teens due largely to incremental ad spending with Old Navy and Gap.

If your could just clarify that again, it should be 15% off the number last year, is that a Q1 phenomenon, are we going to see increasing like that moving through the year?

And finally clarifying the point on margins again.

I think, you know, maybe you could give us some context, considering the -- just how negative comps were in the month of February.

How margins could be, you know, in the positive mid single digits could be tracking similar to that month last year.

Okay.

So on the marketing side, as I indicated, you will see a significant boost in the first quarter, because the -- while the first half on advertising should be up 10 to 20 million, we expect to see about a 40 million dollar increase in the first quarter.

Because of the timing of TV.

The other part of selling expenses, remember we are forecasting higher unit flow, so we have expenses directly related to that, both in the stores as well as the distribution centers.

Your other question was related to margin.

And all I can really tell you at this point, is that so far, in the quarter, we are not selling -- we have not taken any specific action to mark down any sooner.

What we're seeing is some reluctance to buy at -- in terms of mix, at full regular pricing.

And that's what we're trying to understand.

And so that's kind of the map that is working on our margins.

And that's about all I can tell you up to this point.

Okay.

Thank you.

Your next question comes from Ronald Ellis of Bank of America.

Hi guys, I certainly appreciate the slow, methodical and thoughtful presentation here.

Regarding cash flow going forward, I know that you mentioned you might be seeking other opportunities outside of the maturities, the bonds in '03 to reduce indebtedness.

But I am wondering if you could perhaps be more specific, I think, in looking through the credit agreement, and indentures, it would appear to us as though your main alternative would be to repurchase bonds in the open market.

Yeah, Ron this is Sabrina.

You know, there are certain restrictions given today's credit agreement, but I think what we are saying is we will look at all the alternatives, first from an economic perspective to see what makes sense.

Maybe none of them will make sense.

And we also have to take a view on, given the juncture of our turn-around, how aggressive or how prudent do we want to be.

So I think the first decision is just to see, does that activity make any economic sense.

We have some makable provisions in some of the bonds, and we will be evaluates first the alternatives from an economic perspective.

Would open market purchases be something that may be interesting outside of the triggering a make hole for you.

We're not ruling anything out.

We are going to look at all the alternatives and base them on sound economic decisions.

Thank you very much.

Your next question comes from the line of Dana Cohen with Bank of America.

Hi, sorry guys.

Quick question.

Byron, I hate to beat a dead horse, but are you saying advertising is up 10 to 20 for the year and 40 for the quarter?

For the first half.

Advertising will be up, we're projecting it to be up 10 to 20 million dollars, of which in the first quarter versus last year, we expect advertising to be up 40 million dollars.

Okay.

Great.

And then my second question is Paul, to get lead times to shrink here, and obviously I recognize that's a long-term strategy, you know, what changes do you need to make, you know, to make that happen?

You know, you commented that you think sourcing is a strength, but the sourcing organization really is not set up in any way to do, you know, speed sourcing.

Well, Dana, you know, I could go on for hours about this, for sure.

We're trying to attack each different component part of it.

So clearly, the way we think about our initial adoption of our product, which is the interfaces between our design group and our merchandise group, that's one element of the supply chain that we begin to focus on.

Then we look, obviously, at our production opportunities, to see how we can be more effective there.

And then so on and so on.

So what we're really trying to do is take it and break it down into component parts where we think that we can get faster sells and a better adoption rate than some of the things that we have done in the past.

Some of it's going to come from looking and focusing at opportunities of pieces of our inventory, particularly as it relates to basics, and see where we have opportunities to make earlier fabric commitments and then be able to kind of flow our goods almost on a just in time basis and we will be testing some of that in the spring as well.

Great.

Thank you.

Your next question comes from the line of Emmy Kozloff with Sanford Bernstein.

Hi, there.

Just two technical questions, are you comfortable that the sublease reserve charge of 40 million is essentially a one time event and do you have any plans to sublease additional space going forward?

And secondly can you break down the store closings for us by division?

On the -- Byron.

On the first point, we've got through our excess office facilities and we are pretty comfortable at this point that we've got them adequately provided for.

So we're pretty comfortable at the reserve level obtained once we take the charge for the fourth quarter.

And regarding the other question, we don't give closures by division.

All right.

Thanks, Byron.

Your next question comes from the line of Todd Slater with Lazard.

Thanks very much.

Byron, I just want to get back to the first quarter if I could, for a second.

The reason I think for the focus on the margin comment, because the margin comparison in the quarter is pretty easy, down about 500 basis points, so it's a concern that after such terrific margin improvement, you would so suddenly hit a wall against such easy comparisons.

And also SG&A dollars as I understand it are up the level you're talking about in the quarter, that combination, the margin kind of hit and the flat margins in the SG&A dollars up -- up -- the order of magnitude you're talking about, would or could imply an EPS decline, so I think that's why we're trying to get our arms around what you're planning in the first quarter.

This is Jenny.

Let me shed a little light on what Byron has been talking about.

I've been digging a little deeper into February.

As I can see as we all know with the cold weather, for our holiday and markdown, we're selling at -- even though we owe about the same amount, a little less than last year, we're selling at better, because of the weather, and a higher margin, so our penetration of that sales is higher.

So what what we're going to start in March, we're going to own less.

So we should see an increase and bounce back in the margin for the rest of the quarter.

This is what I can see in March.

I mean for the first quarter.

And this is just starting, digging into looking at it.

Again you're talking about just a slight shift from sales of more markdown, but not more inventory.

But the penetration was more.

I mean you could understand you sell a lot more performance fleece at markdown in February because it's much colder than last year in February, so the margin itself is higher.

Does that make sense?

That's a little more acceptable.

Thank you.

Your next question comes from Brian Tunic with JP Morgan.

Good afternoon, thank you, two questions, first one is for Byron.

When do you think discussions with the debt ratings agencies regarding upgrade could take place, and what do you think the impact could be on your interest expense?

And the second question is for Jenny, you know, as you've certainly seen the off the mall competition get better on the apparel side.

Do you think this puts you more on the defense regarding your pricing, or force you to speed up your markdown strategy?

Thanks very much.

I'll start with the first question on the rating agencies.

We speak to the rating agencies very frequently.

If not monthly, certainly quarterly.

And we do much deeper annual reviews which we just finished and Paul participated in.

I think the issue with the rating agencies is one, that they are taking an attitude of very much wait and see.

So we do not anticipate them taking any action, and we're not counting on them taking any action in the near future because I think their perspective is that they have little to gain by upgrading people in the retail sector aggressively and very much to lose.

So, you know, we will continue our dialogue with them.

And I think we will just move forward and wait and see.

So not expecting anything in the near term.

With regard to interest expense, were we to be upgraded, there is a 25 basis point improve on 700 million dollars worth of our bonds, which we issued in November, '01, with each upgrade.

Okay.

Terrific.

And the question for Jenny.

Regarding pricing, I always take the offensive instead of the defensive.

That's the reason why I think our promotional pricing strategy has worked very well.

Because we give a value up front to our customer.

And that we do not have to take a steep markdown as often as we've done previously, and this strategy has worked extremely well.

And listening to our customers, they really felt that our value proposition is actually stronger than ever.

And was there any difference between the performance of the Old Navy stores located in malls versus strip centers during the year?

No, actually, not -- not that much of a difference at all.

Thanks.

Your next question comes from Todd Slater.

Thank you.

My second question, Paul, was -- I just wanted to get your view on an area focus you talked about in December and that was needing to improve the customer experience on the floor, and you talked about streamlining labor hours and reallocating associates, though they would spend the 80 to 90% of of their time on the floor and they had been spending maybe only 50 to 60.

I'm just wondering if you can update us on the initiative and if the labor streamlining might, you know, also improve expense dollars since labor is such a significant piece of the SG&A total.

Thanks.

There is a lot of work under way in lots of different buckets.

Clearly we recognize that for, particularly for Banana Republic, kind of the service model that we need there, doing a much stronger one on one customer service, is going to be required.

So we're kind of building the plans around what that looks like.

And then making sure that we've got the appropriate staffing and the right -- appropriate place to make it happen.

You know, I can give you by way of example, the roll-out of our conversion plan for the fourth quarter, proved to be effective in a lot of different ways, not only did it focus on what we realized were the key drivers of conversion, you know, for -- in our stores, by getting people into our fitting rooms, because we know we have a higher conversion rate by doing that, but allowed us to focus our talent and labor by zone within the store and get them really focused on what they need to do.

By doing that, we eliminated a lot of the other activities that were in the box and more importantly, we gave them a focus.

You know, that became important.

So certainly over time, both the sales, you know, increases we should see more leverage, but I think you will see a kind of a redeployment of how we think about our labor dollars, making sure that we are -- have our labor models, are focusing on where the most amount of sales are.

As simple as making sure that those stores that have higher sales on Saturdays and Sundays that our labor models reflect that, or even day parts and that's the kind of modeling we're doing now and hope to be able to role out during the year.

Thanks.

Your next question comes from the line of Donald Track with Jefferies.

Mr. Track, your line is now open.

That question has been withdrawn.

Your next question comes from the line of Steve Corncroft of Berman Capital.

Hi, guys, I just had a question on inventory.

Maybe if you could help with some of the answers you've given already.

In the 13% increase in inventory on a first quarter base, I think you mentioned, I know they're extenuating circumstances in the shrink you got at the end of the season as well as the currency exchange, but could you put it in some perspective in terms of it how much of it is the real inventory gain?

Are we talking about 5, 6% of the two variables that kind of explain half the increase in inventory?

And the second question, if you could also explain the inventory, why is up 16% and payables are down at the same time.

So on the inventory piece, we had originally given guidance of high single digits, and so we're up an incremental five to six.

Most of that is in fact shrink and foreign currency translation.

And with the weather we've been experiencing in February, we've got a slowdown in sell-through versus what we had anticipated.

And so that's -- and the -- we have fully received our first flow of spring, so particularly in the Northeast, we've got the stores set for spring and we've got pretty cold weather outside.

So we're talking about a few percentage points in the math once you subtract out shrink and foreign currency translation.

Okay.

And Steve, this is Sabrina.

I think on payables, I it's fairly simple from a DPO basis, payables basis.

Most of our merch payables are done via letter of credit, and it's really hard to get that to a science, how many days it takes to pay, and what we saw in reality and it's empirically true is that last year at this time our DPOs were just higher and sometimes that's just processing, it's discrepancies that have to be cleared through the system, et cetera, so we have just become more efficient and we're managing the DPOs to a lower level this year.

So it's really driven by a shift in DPO of the LC process.

Okay but it's not as if you're prepaying, getting early payment discounts or something extraordinary like that?

No, I mean we have open account vendors as well.

And on some of those open accounts, sometimes, you know, we have standard terms in the industry, where if you pay sooner, you get a discount.

But that's not -- that's not the driver at all.

I think it's just a DPO on the LC processing.

Okay.

Thanks very much.

Your next question comes from the line of Barbara Wycopf with Buckingham Research.

Hi, good afternoon.

I want to congratulate you on a solid quarter and also add my thanks for the detail.

Two things.

Could you update us on the stage of where you are in the implementation of the new merchandising system?

You know, have they started, when will they start, when will they be complete.

And secondly, can you talk about how much merchandise margins went up in fourth quarter and the year?

Usually we get that kind of detail and I must have missed it or you didn't give it or whatever.

Thank you.

First this is Byron.

First on the merchandise system, I can -- let me first give you a brief update on where we are and then -- then I would ask your indulgence because having only been here four weeks it is -- I want to get much more involved in the roll-out and what the -- you know, the next phases of the rollout involve.

Before giving you all guidance more specifically on when the next modules and what they will be, will be implemented.

What I can tell you is that both the top down and bottom-up planning modules are in implementation as we speak.

And that we are about ready to roll out our demand forecasting module.

So those three are the ones that are in play right now.

And the -- the next set, I would just, again, just ask your indulgence and I would be delighted to talk about that once I've become more familiar with what a prudent roll-out strategy is.

For the quarter, gross profit increased 59% to 1.6 billion, which resulted in a gross margin of 35%.

Which is an increase of about 10 percentage points from the fourth quarter of last year.

Actually, I was interested in the merchandise margin.

Of the 10 percentage point gain, 8 -- a little over 8 percentage points of that gain was the merchandise margin.

Great.

Thank you.

Your next question comes from the line of Stacey Peck with Prudential.

Hi, thanks, here you are giving us all this detail and none of us can get it straight, but I need to ask this margin question again.

With regard to what you said about the markdown margins, in February, is it simply what Jenny said, which is, you know, we're selling a lot more fleece at markdown because it's cold and that's relevant for all the divisions?

Or is there something else that you're studying and you're really not sure what it is.

And if so, is there any major difference either geographically or by brand with regard to that markdown pressure?

And do you have any concerns about some of the spring products that's in store?

You know, the traffic in the north east is down considerably.

And that the -- what Jenny described, given the weather, is undoubtedly an important part of it.

What we can't tell you is, is that the lion share of the reason right now, once we complete February, we will be in a much better position to give you guidance and some further discussion on this after -- at our monthly sales review next week.

Okay.

And then just in terms of the second question, is there an opportunity in average unit retail or initial mark-up for any of the brands here in the spring quarter?

Well, I think as I had mentioned earlier, certainly for Banana Republic, you know, we have seen improvement in average unit retails and more direct selling, and that's certainly you know, our strategy.

Jenny is here shaking her head as well.

That clearly I think there an opportunity, and that's for Gap as well.

For each of them, it's coming from quality in our products, it's coming -- so I think that there's opportunity, I don't know if Jenny you want to add to that.

We've seen a steady increase in our average unit retail for the last three quarter and obviously lapping into the first quarter, and as Paul said the better quality and really the key is the acceptance of our product more than anything.

Yes, we do feel that there's opportunity.

You know, we know that our products are more fashion right and you know, as we've been talking about, the more we get closer in line to what our consumers want, meeting the breath of the age demographics that we want, we will sell through at reg price, a lot faster a lot more products.

Thank you.

Your next question comes from the line of Kendra Devainy with Fulcrum Global.

Gross margin question, bigger picture.

You had looks like an 800 basis point improvement in the fourth quarter.

And I'm wondering how close you are to peak margin, I'm assuming that was in '99.

And you know, Paul you had mentioned in the past, maybe you would need to look at some pricing in the Gap division and I'm wondering if there is any -- you know, where you can get, if you can get back to peak, where do you sort of project your margins over time and is there some pricing that you're looking at Gap that would affect that.

The historical high was 41 compared to where we are at 35 today, so clearly we're trying to close that gap, with the ten point improvement already off of 01.

So, you know, I don't know how fast we will get there.

Certainly our goal is to continue to drive it.

And you know, the best thing to say, it will come from these strategies.

You know to be able to do that that and it's a combination of driving our UPTs and driving our average unit retails, but that's clearly a focus of where we're going and I think we've made a down payment and shifting the trend in that direction.

Huge increase in '02, I am wondering if the rate is starting to slow over the next three years or so and if you see that playing out and if you have any thoughts on the pricing of Gap.

It would be hard for me to judge, clearly going from 25 to 35, in some ways is a lot easier from going to 35 to 41 so it's a little hard for me to tell how quickly.

We will chunk at it every day and I think the same is true for Gap.

You know, clearly, when you see what's going on in those stores, our, you know, our pink Mac, the pink jacket have been fantastic, the sweaters color assortment, those things are really moving out at reg price and moving quite nicely.

The twill in the store today foremen's is starting to get momentum as well, so we're feeling good about the product mix in key categories that we are known for, and you know, as we said we definite I will have moved -- you look at our twill pant today, we've significantly made improvements in quality, we've reflected in the price and our consumer is voting yes.

Okay.

Great, Byron on the comp [INAUDIBLE] plan, I'm wondering what the February comp plan is and what is it for Q1 and any other detail you want to give.

I think you know we don't talk plan on calls like this so sorry.

You can't tell us what it was real relative to plan, whether you are below plan?

Right.

This is -- to give you a sense of expectations, and direction, and that was the purpose of the reference.

Okay.

Great.

Thank you.

We have time for just one last question.

Your next question comes from the line of Dana Sulvey with Bear Stearns.

Good afternoon.

Paul, can you talk about, you mentioned in December some of the priorities were about product testing, any updates on product testing?

And also you talked about developing a quantifiable database from the field organization with the monitoring system.

Is there anything new to update you us on that?

And Byron, can you tell us little bit about on the SG&A side, on the -- just on payroll costs, things like that, any adjustments that you expect to be making for this year, full time versus part-time help?

And then just Jenny can you talk to us a little bit, it seems like you're doing some more advertising and marketing.

Any research that you've done or any focus group to learn more about your customer.

Thank you.

I'll start.

You're unbelievable.

I've forgotten half your questions already.

Let me start, first one on testing.

Two things are happening, one thing we feel very passionate about and we all are looking very closely at is what I call the market profile, that we have a better understanding by store what are the nuances and differences so that we can begin first to assort our business alone those lines.

We're starting to do that, we actually we have a survey that we will be rolling out to the field as our first downpayment of that within the first quarter, so that will give us the first indicator of how we start to think about these market buckets.

We're also doing it from a consumer standpoint in our research on our segmentation, we are focusing on trying to understand what those nuances and preferences are, and then the next phase of that will be trying to get in down to a market level and a store level.

So, it's in the works and it will be -- you know, all this will be ongoing, that we'll continue to add to the data as we move forward, but specifically that's [INAUDIBLE] in the field in the first quarter.

Great.

On SG&A, full-time, part-time, and store payroll our plans, which I cannot give you any detail on, are -- do call for us to grow revenues this year through absolute growth in unit volume in the stores, so we do plan to add two store payrolls during the course of the year.

But we don't contemplate at this point any substantive change in the mix between full-time and part-time.

Regarding customers, [INAUDIBLE], what kind of surveys do we do and what kind of feedback do we get?

We were very pleased with what we've done last year, but we're going step up and do more detail this year.

One of the things that we do is customer satisfaction survey which is continuously, every month, every single store.

We get really great [INAUDIBLE] satisfaction of their shopping experience.

And then we also get obviously, we monitor a lot of our calls from our call center regarding our policy of service and marketing our products, and then of course we continuously [INAUDIBLE] brand usage. which really helps us see how we are doing against our brand [INAUDIBLE].

And then the customer segmentation [INAUDIBLE].

We really make great strides, especially in the family segment which was really our focus last year.

As Paul said and I also mentioned, this year our focus on customer segment was really finding out the emotional connection and what is the motivation for shopping at Old Navy by segment, that's what we are planning to do in 2003.

I'd like to thank everyone for joining us on the call today.

As always, the investor relations team will be available after the call for further questions.

Thank you.

Ladies and gentlemen, this concludes today's Gap, Inc. fourth quarter conference call. ) You may now disconnect.