蓋璞 (GPS) 2007 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Gap Inc. fourth-quarter 2007 earnings conference call. At this time, all participants are in listen-only mode. (OPERATOR INSTRUCTIONS) The conference call and webcast are being simultaneously recorded on behalf of Gap Inc. and consist of copywrited material. They may not be rerecorded, reproduced, retransmitted, rebroadcast or downloaded without Gap Inc.'s express 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 comments or statements you make appear on any transcript or broadcast of this call. If you have any questions regarding this policy, please contact Gap Inc.'s investor relations at 415-427-2175.

I would now like to turn the conference over to our host, Evan Price, Vice President of investor relations.

Good afternoon, everyone. I'd like to welcome you to Gap Inc.'s fourth-quarter earnings conference call. For those of you participating in the webcast please turn to slides two and three. I'd like to remind you that information made available on this webcast and conference call contains forward-looking statements, including those identified in today's earnings press release, which is available on gapinc.com, as well as and other statements that express our expectations, anticipations, beliefs, estimates, intentions, plans and forecasts. Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause actual results to differ materially from those in the forward-looking statements. Information regarding factors that could cause results to differ can be found in their annual report on Form 10-K for the fiscal year ending February 3, 2007. Investors should consult our quarterly report on Form 10-Q for the quarter ended November 3, 2007, and today's press release, which is available on gapinc.com .

Future economic and industry trends that could potentially impact net sales and profitability are difficult to predict. These forward-looking statements are based on information as of February 28, 2008 and we assume no obligation to publicly update or revise our forward-looking statements, even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. This presentation includes non Generally Accepted Accounting Principle measures, non-GAAP operating expenses, free cash flow, and diluted earnings per share, excluding Forth & Towne's net loss and expenses associated with the Company's cost reduction initiative, which under SEC Regulation G we are required to reconcile with GAAP. The reconciliation of these measures to GAAP financial measures are included in today's earnings press release which is available on gapinc.com. Joining us on the call today are Chairman and CEO, Glenn Murphy, and Executive Vice President and CFO, Sabrina Simmons.

Now I'd like to turn the call over to Glenn.

Thanks, Evan, and good afternoon. Before handing the call over to Sabrina I thought I'd take a few minutes and touch on what I think are three important topics. First off, it's my perspective of the importance of the year we just finished, 2007. Secondly, my overall view of this coming year and the volatile economic environment we are facing. And last, I just thought I'd spend a few minutes and identify what we believe are some of the Company=wide priorities that all of us are going to be working working on in 2008.

2007 was an important year for all of us here at Gap. We restructured our business and went to more of a brand-centric structure, which is going to serve us well in the long term. We became serious about managing inventory to traffic trends and driving better margins. We refined our target customer and strengthened our product teams. We really began to work a simplifying, what has unfortunately has become a very complicated and bureaucratic culture. As we look towards 2008, we are quite aware of the plight of our customers. The combination of the housing market, fuel prices, the threat of inflation have really put some downward pressure on consumer confidence.

At a high level what we decided to do -- just to keep it simple, at a high level we decided to focus on fewer high-return priorities, take on and execute more operationally-improved initiatives,so a chance to really get everybody in the business to focus on what's operationally important to us going forward, and let's make that the core of our initiatives in 2008. Increase the level of accountability, not to say that people in our Company didn't feel accountable in the past, but really define what accountability is in terms of delivering on our financial commitments, adding a few new metrics inside of our financial commitments, and holding people accountable for delivering on those budgetary and priority commitments inside the business. Lastly, as we talked about before -- and I know Sabrina will touch on this a number of times in her comment -- is really the renewed focus inside the business on return on invested capital.

With that in mind I think it's important to take a few minutes, it is year end and we're looking forward to our guidance in 2008, and just to set in context, what are Company-wide priorities for the coming year that we're going to be working on? First off, we're going to improve our earnings with a focus on growing margin dollars. We understand the importance of top-line growth and we certainly understand the importance of store comps, but in this environment, given where we are in our turnaround, it is the prudent approach to focus on growth in gross margin dollars. Secondly, we're going to finalize a by brand, by channel, by country set of real estate plans. I've been lucky to get out enough from the office and I've been to over 350 stores, and those trips, in combination with the real estate work that is already under way, have led us to a few early observations.

First, we will be very selective going forward on new store openings in our North American market. Secondly, with over 40 million square feet of leased space, the real opportunity in North America is in reducing our square footage per point of distribution, and less so in closing points of distribution. So while the real estate strategies are yet to be finalized -- and they're still being worked on -- we do see a much better use of our capitol and to be quite honest with you, a much better return on our capital in North America by focusing on three areas, what we're calling internally the three Rs; right sizing our stores, relocating or repositioning our stores, and remodeling our stores. The only real growth in square footage beyond 2008 will be in our international and franchise markets. As many of you know, we're opening our first Banana Republic in March -- March 20th to be exact -- on Regent Street in London. It'll be followed by four other stores in 2008, and that's going to be the beginning of introducing that second brand in North America, Banana Republic, into the European market. And we're also expecting to open an equal amount of franchise stores to our current 70 store base in 2008.

Another real key priority, which you've heard us speak about before but we're very serious about, is to continue to reduce cost. Our biggest area of opportunity is on cost of goods sold, where our current base inside the business is nowhere near as low as it should be. On top of goods sold we're going to be investing time in our capital per store, how much money we're putting on a per foot basis per store, and also we've got a new system coming now starting in March, which is really going to help us with managing our store labor. Also, as I mentioned at the beginning, we are going to focus on a return on invested capital. Our current returns are not acceptable to us at all. We want to recapture the five points we've lost over the last five years.

And lastly, no discussion can be held in this Company with analysts, investors and shareholders without talking about our unwavering commitment to developing great product. We've made progress in this past year to different levels and different brands, no question about it, but more work needs to be done and we feel that we have delivered to -- we need to deliver to our store's product that is truly reflective of what each brand stands for. AI know at times people may wonder what my role is on product development. The key thing for me is to make sure that the brand president's clearly articulate to their product vision to their design teams and their merchandising teams that they ensure they stay true to that position.

So before I hand it over to Sabrina to talk about the results in the fourth quarter and guidance for 2008, I thought I'd address the recent leadership changes at Old Navy. I do believe in many of the strategic initiatives that have been put in place at Old Navy over the last number of months. To name a few, I do believe in a faster pipeline, what we call internally and you've heard us refer to as P-to-M, and I do believe in the work that's gone on in integrating our marketing. Don and I just simply disagreed on how to make this happen, and in the end this philosophical difference really was the reason for our mutual decision. Tom White has stepped in on assignment. Tom's a 30-year veteran, has done a really good job for us at outlet, and has done a good job so far with us in the two weeks he's been at Old Navy in making sure the brand moves forward and doesn't even for a minute lose any momentum.

So in closing I've been here for seven months, I feel even better about the business today than when I joined that fateful day in August. Even though we, along with other retailers, are heading into some headwinds -- we understand that -- we have great brands, we have a very diversified business with the three brands, the two channels, and two strong international beachheads in London and Tokyo, but most of all what's going to make the difference between us articulating to you today our vision and actually executing on it are the people in the business. I have been very impressed by the people in the business and their commitment and what I'm trying to help them do is teach them to win again, because it's been a tough few years and I think the business here is starting to believe by executing and delivering on what they're committing to, we can once again win.

Well, thank you for your time and why don't I hand it over to Sabrina. Sabrina, over to you.

Great. Thank you, Glenn. Good afternoon, everyone. As we've discussed on previous earnings calls, our strategy is to pursue improved performance in a way that supports the long-term health of our brands. This means we're focused on delivering our earnings through more regular price selling and healthy markdown margins, and we're pleased we made progress in 2007. I'll begin by reviewing our fourth-quarter and full-year results and then provide an overview of our outlook for 2008. First, fourth-quarter results. Net earnings were $265 million, or $0.35 per share, gross margin increased 220 basis points to 34.8%, and we completed our $1.5 billion share repurchase authorization, buying about 30 million shares in the fourth quarter. When looking at the full year, we generated $1.4 billion in free cash flow and total cash distributed to shareholders in the form of share repurchases and dividend payments with nearly $2 billion. For webcast participants, please turn to slide four.

As I just stated, fourth-quarter earnings were $265 million. The fourth-quarter effective tax rate was 38.8% and the full-year effective tax rate was 38.3%. Full-year earnings on a GAAP basis were $833 million, or $1.5 per share versus $0.93 last year. Excluding about $0.07 per share of expenses related to discontinued operation of Forth & Towne and our cost-reduction initiatives, earnings per share for 2000 were $1.12. See today's press release for a Reg G reconciliation. fourth-quarter weighted average diluted shares were 749 million and full-year weighted average diluted were 794 million.

Turning to slide five, sales performance. fourth-quarter total sales were $4.7 billion, down 5% versus last year. Please note that the fourth quarter of last year had 14 weeks compared to 13 weeks this year. Total Company -- comp-store sales were down 3% in the quarter versus down 7% last year. full-year comp-store sales decrease 4%, while total sales were down 1% to $15.8 billion. The three percentage point spread between the comp-store sales and total sales was driven primarily by net new store openings and continued online growth. Online sales grew 24% to $903 million for the full year. Please refer to our earnings press release for total sales and comps by division. Turning to slide six, gross profit.

Despite the decline in sales, we are pleased that fourth-quarter gross profit increased 1% to $1.6 billion, gross margin was 34.8%, up 220 basis points compared to last year. Merchandise margins improved 370 basis points in the fourth quarter, which were partially offset by 150 basis points of occupancy deleveraging. As a reminder, in 2006, fourth-quarter occupancy expenses as a percent of sales were lower due to the fact we had an extra week of sales in January. In the fourth quarter of 2007 about 80 basis points of deleveraging was the result of not having the extra weeks. Full-year gross profit was up 1% to $5.7 billion. Gross margin was 36.1%, up 60 basis points, with 140 basis points from higher merchandise margins, offset by 80 basis points from occupancy deleveraging. Please turn to slide 7 for operating expenses.

Fourth-quarter operating expenses were $1.2 billion, down $30 million versus the prior year, driven by lower payroll. Marketing expenses for the quarter were $149 million, down $9 million versus last year, driven by the absence of television at Gap Brand. Full-year operating expenses were $4.4 billion, down $55 million versus the prior year. Marketing expenses for the full year were $476 million, down $97 million versus last year. Turn to slide eight for further detail on full-year operating expenses. When analyzing year-over-year operating expenses it's important to keep in mind that 2006 reported operating expenses were reduced by the following events; $14 million in expense recovery related to the Visa MasterCard settlements, and $31 million in income from a change in the estimate for unredeemed gift cards. Looking at 2007, reported operating expenses include charges of about $32 million related to our cost reduction initiatives. Therefore, as illustrated on the slide, 2007 operating expenses on a non-GAAP basis declined $132 million. See today's press release for a Reg G reconciliation.

Turning to inventory on slide nine, we ended of the quarter with $1.6 billion in inventory, down 12% versus the prior year. Inventory per square foot was $37, down 15% versus up 2% in 2006. This decline is below our prior guidance of down in the mid single digits, driven by Old Navy. Given the level of markdown units we carried into January at Old Navy, we took aggressive action to clear through those libel units. Entering February we remain comfortable with our overall inventory levels. Please turn to slide 10 for capital expenditures and store counts. Full-year capital expenditures were $682 million. We opened 214 new stores and closed 178. These figures include 45 Old Navy outlet conversions and 18 store repositions, which were recorded as both an opening and a closing, and 19 Forth & Towne store closures. Company-wide we ended the year with 3,167 stores and square footage increased 1.8%.

Regarding cash flow on slide 11, we continue to generate strong free cash flow. For the year, free cash flow, defined as cash from operations less capital expenditures, was an inflow of $1.4 billion compared with an inflow of $678 million last year. The increase was driven primarily by lower inventory levels and the change in our payment terms that we discussed on our third quarter earnings call. Refer to our press release for a Reg G reconciliation of free cash flow. With regards to cash distribution, we repurchased a total of 30 million shares in the fourth quarter for $613 million, and a total of about 89 million shares in the full year at an average price of $19.05. We ended the fourth quarter with about $1.9 billion in cash and short-term investments. As a reminder, regarding our long-held investment policy, we invest our cash with principal preservation and liquidity as our primary objective.

Turning to slide 12, our outlook for 2008. In order to provide some context on our guidance I'd like to spend a moment on our near-term financial strategy, which informs our outlook for the coming year. First, while top-line growth and comp-store sales are important, our primary objective in 2008 is to drive bottom-line earnings. Our continued approach to disciplined inventory management should support healthy merchandise margins. Simply put, tightly managed inventory levels should reduce margin pressure. Combining this with better products should result in more regular price selling and improved markdown margins. As Glenn stated, we will also continue our cost-management discipline and increase our focus on return on invested capital. This includes working to drive sales per square foot within our existing stores. And regarding cash, we remain committed to distributing excess cash to shareholders through continued share repurchases and dividends. With that context, let's now review our 2008 guidance.

While we were pleased with the progress made in 2007, we recognize that there is much work to do. Additionally, we expect the macroeconomic environment to remain volatile. As a result, we are providing an earnings per share range that we believe reasonably incorporates these factors, as well as variable factors such as product acceptance and the consumer environment. We expect diluted earnings per share to be $1.20 to $1.27 in 2008, operating margin to be 8.5% to 9.5%, interest expense for the year to be about $20 million, full-year effective tax rate to be about 39%, and the percentage change in inventory per square foot at the end of the first quarter to be down in the low teens compared to last year. Regarding total capital expenditures, we expect to decrease our spending by about $200 million compared to 2007 to about $500 million. Here is the breakdown: Stores, $350 million with $130 million for new stores and around $220 million for existing stores; IT about $100 million; headquarters and distribution centers about $50 million. We expect full-year depreciation and amortization to be about $550 million.

At this time we expect to open about 100 stores in 2008/ Excluding about 35 new stores in our international division, this leaves about 65 new stores in North America across all of our brands. Given that our real estate pipeline is 12 to 18 months, about 80% of those 65 stores were already committed by last fall. We have worked to cut down the openings where possible in 2008. We expect to close about 85 stores that are weighted toward Gap brands. Full-year net square footage growth is expected to be less than half a percentage point. We will execute fewer remodeled in 2008 as we take a closer look at both the scope of our projects and the cost per square foot.

Now I'd like to specifically address our new philosophy regarding real estate investments. Coming off several years of disappointing return on return capital invested, we feel strongly that we must instill greater discipline around capital allocations and focus more on improving returns. Our point of view is that the greatest value can be unlocked in driving productivity per square foot of our existing stores, and therefore we plan to open new stores in North America only in a very select situations. Let me emphasize that we consider this an important change in our real estate strategy. You can refer to our fourth-quarter press release for a summary of store activity and gapinc.com for 2008 store guidance by division.

Now let's turn to cash flow. We continue to deliver strong free cash flow and expect 2008 cash flow to be about $900 million. Please see today's press release for a Reg G reconciliation of expected free cash flow. For cash distribution, when we deliver earnings growth we will consider increasing our dividends. Based on our 2007 net earnings performance we intend to increase our annual dividends to $0.34 a share from $0.32. And regarding our share repurchases, today we announced authorization of a new $1 billion share repurchase program. As has been our practice, we will use only excess cash to repurchase shares. In summary, we are committed to generating shareholder value by driving bottom-line earnings through continued disciplined inventory management, which should enable healthy merchandise margins, maintaining an ongoing cost discipline, increasing our focus on ROIC, and finally, continuing to distribute excess cash to shareholders.

Thank you and I'll turn it back over to Evan.

That concludes our prepared remarks. We will now, open the call for questions. We'd appreciate limiting your questions to one per person.

(OPERATOR INSTRUCTIONS) First question is from Lauren Levitan of Cowen and Company.

Thank you and good afternoon. I was hoping for a point of clarification regarding the expense control initiatives. Sabrina, you showed us at slide eight, the $132 million in savings in '06. Can you contrast that to the $100 million target that you gave us for annual savings from the initiatives you put in place in '07, how much of that was achieved in '07, and what are the biggest areas of opportunity as you go into '08 to build upon those? Thanks very much.

Sure. So, Lauren, what we talked about is about halfway through the year, you'll recall on our Q2 earnings conference call, we really talked quite a bit about the fact we had executed most of our cost initiative work in Q2. What we talked about is that we reduced head count by 2,200 people, and based on the non-vacant head count that we've reduced, that equated to about $100 million on an annualized basis for payroll, so we had half a year's worst of that in 2007. As I mentioned on the Q3 earnings call, against that reduction of head count, in any one quarter at any one time, and certainly as you enter a new year, you have some offsetting factors that are putting pressure -- upward pressure on SG&A. As an example, in the fourth quarter, although we are indeed seeing the savings from payroll that we called out, offsetting that are some other pressures in the fourth quarter; as an example, increased bonuses given our increased earnings.

As you look at the (inaudible) currently facing, are there any new initiatives or new projects to save additional expenses that are embedded in your current guidance or that you'd be contemplating? Thanks very much.

Sure. So I don't think you should expect any big announcements like you heard in Q2 of 2007, but we're embracing is just a culture of cost management, and so we're going to be looking at is every single line item, including line items that don't fall under SG&A, like Glenn talked about our biggest opportunity being an average unit costing. But there really are going to be no sacred cows and we're going to work every single line item. Now I'll give you an example of what we're doing, and Glenn mentioned it, we're implementing a new labor management system in North America that should be in all of our divisions by the end of Q3 and we hope that will really drive additional productivity in our store payroll.

Thanks very much and good luck.

Next question is from Barbara Wyckoff, Buckingham Research.

Hi, everybody, good quarter. Could you talk about the marketing problems for next year, vis-a-vis expense, and I guess that's it.

Yes. So, Barbara, let me first start by saying that our second-half plans are still in motion, so we are working through this and part of what's going to inform our second-half plans is our read on the effectiveness of our plans from the '07 holiday marketing campaign. And we're still analyzing and working through that, so there's a lot of opportunity to affect the second half. In the first quarter, which of course we are in, really Old Navy and Banana Republic have marketing plans that, in scope, are similar to the prior year. It feels different at Old Navy because we're marketing -- our television [slights] are lining up in the integrated marketing plan. They are lining up with our monthly flows and they change in terms of flavor each month with those flows, so it looks and feels different, but the overall campaigns are the same duration, et cetera. With regard to Gap brand, the difference there is last spring we had a television campaign last spring which we're not anniversarying this year, but of course we are still investing in marketing at Gap brand. We have some really nice campaigns that are building buzz in a different way, so as an example we have the Pierre Hardy sandals coming on in the March, we have the CFDA shirt campaign coming out in April, so there will going on but it won't take the form of television at Gap brand.

I think also that as we mentioned earlier, we're very aware of the environment in which we're operating in in 2008, so not all of our marketing money is being revisited but some portion is being relooked at to make sure it's used appropriately, given the fact that the consumer sentiment is where it is, and that particularly applies at Old Navy.

Okay, thank you.

Next question from the line of Kimberly Greenberger with Citigroup.

Thank you, good evening. Glenn, you mentioned something about a payroll -- or an opportunity to manage payroll a little bit more carefully. Is this a system that you're looking to put in? If you could expand on that a little bit more and give us some idea around the timing of that, that would be great.

No, it's definitely a -- i guess it's twofold. I think that even in the absence of any technology support, we would be relooking at part of a complete overview of our cost inside our business, exactly how we show up structurally and what is the right customer service model per store? My observation would be, again, in advance of any system coming in -- although we are going to implement one -- is we've taken a fairly vanilla, generic approach to managing labor across our brands by store, by week, by hour. We've been making some minor changes on that front. with the system, which is going to be starting to rollout in March -- and we'll get to every brand by the end of the year, may not get to every store but definitely get within every brand by the end of year -- is a tool that we desperately need. Our current computer scheduling system is -- to be kind, I would say it's dated,

So this new system, which we -- our heads of the brands and our head of field operations, and I've actually spent some time on it, having some experience, having put this into previous business -- should give our stores a tool they've never had before and will give our office -- which is unfortunate but true -- will give people in our office the visibility to labor inside a store, which we currently do not have. So I think it's going to be win/win, and I think with it we can certainly become more productive and make sure the right labor in the store on the right day.

That sounds great. Glenn, is there an opportunity to tie in the traffic counters that you have it your stores to that labor scheduling system to match traffic patterns and labor hours?

I think that on a daily basis it's really not something you can use effectively, because a commitment of a shift is a commitment of a shift. But what it will give us, which we don't have today, is an historical view over a 24-month period of how our stores traded, particularly when it comes to holiday weeks. You can imagine how useful a system is like this when it comes to November and December. So it's unfortunate, but our stores have information like this. It's manual in some cases, but this will suggest a schedule. You still need a person who understands the business and understand the quality of their employees -- part-time and full-time -- to make the decisions, but the amount of labor we put into creating schedules and trying to do the right thing, our stores -- I would not say they're operating blind, but they don't have the information they need to make good, sound judgment decision.

Great, thanks. Good luck in '08.

Thank you.

Next question is from Paul Lejuez with Credit Suisse.

Hey, thanks, guys. With the opportunity that you mentioned in driving average units down, a couple question on sourcing. What's happening to your vendor base? Are you becoming more concentrated and rationalizing that base, working more strategically with certain vendors to achieve a lower average unit cost? And then just more broadly speaking, are you seeing general pressure out there in your sourcing base?

Well, to answer your second question first, there's definitely pressure, we know there's headwinds in terms of inflationary pressures, particularly in our biggest market in China. The reason we've articulated today that we're confident on it, it all comes down to where your cost base is starting, and our observation is that regardless of the headwinds that exist on inflation pressures in China, that the cost base we're currently at is not as low as it should be for a Company of our size. So that gives us confidence, even with these headwinds, that can we have more strategic relationships? Yes. I think it's just -- personally, having been around this for two decades, people float out the word strategic partnership easily and it just rolls off people's tongues.

I think it's really incumbent on us to make sure we understand from a relationship point of view, from a sharing of information, from holding vendors accountable on a number of fronts, which is quality, flexibility, on-time delivery, and yes, making sure we get the cost, given our size, is an opportunity for this business. Have we had some historical starts, stops on this front? Likely. I spent a lot of time assessing it. I've traveled to our hubs in South Korea, in Hong Kong, in Singapore, I'm off to Turkey and India next month, and everything I have looked at and the people I've met with, our conclusion is, even though there are some headwinds out there, that we have an opportunity to lower our cost base.

In the sense of timing, Glenn, on when that might occur and at at what level?

Well, the level is tough to articulate right now, but we believe in 2008 we will get some of the benefit of the work we're doing.

Thanks, good luck.

Next question is from Janet Kloppenburg of JJK Research.

Good afternoon. Glenn, I was wondering if you could talk a little bit about the transition going on that Old Navy, what we might expect to see there in terms of positioning of the brand and terms spending, let's say, on marketing in the brand until Tom and his team have their strategies in place, and whether or not you expect -- well, maybe you could give us perspective on back-to-school, if it was planned by the old leadership team and if there's some opportunity for that period to improve for the brand? Thank you.

No problem, Janet. I would say that the way we look at Old Navy, the first thing we're spending time on is our target customer. If you want to look at it three ways, you book-end Old Navy's customer. We have fashion on the one side, there's a fashion component, and there's a family compound. The most important part of the three dimensional approach to Old Navy is the value component. So those three, at times -- have we recently gone to market and maybe pursued a strategy that was more devoted to one of those dimensions than the other three? I would say the answer is yes. Do we believe going forward we have to make sure we spread out our messaging, our marketing to our customers in all three dimensions? The answer is absolutely yes.

The back-to-school marketing is not completed. We are committed, however, for the first half of this year on a theme similar to the fourth quarter that just ended in 2007, not identical, but somewhat similar. Myself and Tom and Michael Cape, who's our head of marketing, who is very capable, who's been with us for just over a year, are spending some recent time -- actually we're together on Saturday -- talking about, A, the target customer to reinforce that message, and then looking at our back half marketing spin and what's the most effective and appropriate way to invest money and guarantee that we get a return on it.

But some of these imbalances and the focus on fashion over value or whatever it is, do you think those balances will be -- those imbalances would be improved by back-to-school, or is it too late for that to happen now?

No, I believe, Janet, and to be fair to me I don't want to say 100%, but I'm pretty confident that the imbalance can be rectified for back-to-school, and even though I think in the first half of this year the balance will be improved from the fourth quarter, it'll still be out of balance.

Okay. Should we expect a positioning change of the brand, or are you comfortable with this new positioning targeting the younger customer?

No, I think that -- my perspective is that the core customer of Old Navy that's been there for 14 years, we should not change. We should evolve, I think, as any good retailer would do. We should become more relevant, as any good retailer would do. If for some reason the imbalance in our marketing has caused us to get off of our core customer, one of Tom and Michael Cape's and my priorities is to make sure we get it back on balance.

Great. Lots of luck, thank you.

Next question is from [Dana Selzey] with [Selzey Advisory Group.]

Good afternoon, everyone. You've talked about speed to market and how beneficial it'll be. Can you talk about how you look at it impacting the business in all three divisions, both in sales and profitability? Does it help you manage inventory, raise margins, get more full-price sales, and the timing? Thank you.

I would say that it does everything you just said. Historically, we've been as high as 48 weeks working out and that's unacceptable. We are not, like some of the fast-fashion retailers out there, but we certainly need to change a number of years ago. We've made some head room in 2007, no question, particularly at Old Navy where the pipeline has been reduced pretty substantially.

Is it exactly where we want today? No. Are we taking some of those lessons and making them brand specific to Gap and to Banana Republic? Absolutely. Some delaying decisions as long as we can, making sure we understand exactly how our product is performing, reading tea leaves in spring to affect summer. These are -- I would say are not transformational ideas for the industry, but are somewhat transformational for Gap Inc. And the outcome is, yes, better product in the right store at the right time, making sure that we can maximize reg sell pricing and therefore maximize gross margin dollars per foot.

Thank you.

Next question is from John Morris of Wachovia Securities.

Thank you. My congratulations, too, on a great performance in a tough environment. We're also glad to hear you enunciate the opportunity to enhance store-level productivity through better use in real estate. I think given the rationalization that we've seen taking place at Gap, North America, which I think is something like a third of the store base over the last five years or so, is the opportunity through that effort primarily at Old Navy and international? And if so, how will you go about that specifically in terms of better utilization of the square footage as opposed to just product improvement? How better to drive that improved productivity?

You can probably define right size in a number of ways. Historically for us, over the last six years with 800 store closures, right sizing has been defined by closing stores. In the opening comments I made, while they were brief, what I was trying to get across is do we have opportunity to close more stores going forward? Yes. We announced that we're closing 85 stores in 2008. We have a big base, we have 3,200 stores, so culling out underperforming stores, or stores that are no longer strategically important to us, is what we're going to do, like every good retailer, going forward. What I can tell you is the closures of stores will come at a decelerating rate to our historical number we've closed over the last six years, but we're still closing stores. The real unlock for us and the real value creation is getting our square footage per store right, and that is work that I believe we can do.

We have done a little bit of that so far, just a little bit, in the first part of 2008, but as -- the real estate strategies aren't completed yet. They'll be done sometime by of summer, and once we have those, then it comes over to our real estate teams to go and execute on that. And I think our ability to right size our square footage, which will make us more productive, and at the same time, are there opportunities to optimize inside of that box if it is reduced by making sure we're represented properly in the right departments and the right categories with the right fixtures, identified in an appropriate way for these brands, yes. So I would be focused almost exclusively on North America. Some work on square footage at Gap band, absolutely. Some opportunity in square footage at Old Navy, absolutely. Some opportunities on square footage at a Banana Republic, some, but not as much as I see in Gap brand and in Old Navy right now. And less so internationally.

So, Glenn, would the right si -- the right sizing, I assume, would come from leases coming up for renewal where you can relocate to more efficient-sized stores, and can you give us a feel for -- are there a lot of leases coming up for renewal at Old Navy in 2008?

I'm always amazed and I came from what I thought was a fairly big business, but I'm always amazed how many leases we do have coming up for renewal every year. To be fair, regardless -- I think a traditional approach to a business, is you look at your store base as the lease renewal approaches. In some cases, regardless of the term on the lease, if we have a store that is quite a bit larger than our prototype store and we have an opportunity to deal openly and honestly with our landlords, and be able to give some square footage back, maybe in some cases even mark-to-market that square footage and get a remodel out of our current -- that other square footage you want to keep, I think that also presents us with an opportunity. So, I wouldn't exclusively say that the right sizing of the square footage will be driven by lease renewals -- that's part of it -- but I think the strategy that we're working on right now that'll be clear -- because the strategies going to be by market, by store priorities. Once that is clear, we will go out and execute that strategy.

Terrific, thank you.

Thank you. Next question is from Jeff Black with Lehman Brothers.

Yes, Glenn, just a broad question for you. We talked to you originally and we had a lot of conversation about store productivity and we've heard a lot today about getting more efficient, and I just wonder what kind of year we are looking at. Is it a year to get better profit margins and then next year is the year where we'll working and nailing down comp? And related to that, Sabrina, what kind of comp is being contemplated for the guidance of 120/127? Is this down five up, down five comp-store sales? If you could shed any light on that for us that'd be helpful. Thanks.

Well, why don't I let you answer the comp question and I'll come back.

Yes, Jeff, we don't guide specifically to comps, as you know, but what I will tell you again is that our focus -- even though we want to get positive retail comps, our focus is on driving gross margin dollars, and especially in this year where we see the probability of the environment staying pretty challenging for the consumer, we think it's especially prudent to be managing our inventories in a very disciplined way. So does that make positive comping impossible? No. But does it make positive comping tougher? Yes.

And I think when we think going forward -- I think that was the first part of your question, Jeff, what we're looking at is, we know this business, in order to justify the faith of our investors and our shareholders, we have to start to show some growth momentum. As we address the fleet and really hunker down and and become more aggressive on cost, which would give us flexibility to invest appropriately in ways to correct the current traffic trend that we are on and to improve our top-line sales, in combination all of those things can happen. But I will tell you one thing that we've agreed as a management team is the continuum of time, it's exactly when is the right time to do that? We think we have a very good plan that we've articulated for 2008, and we are already having conversations -- a few of us -- preliminarily about a three-year plan, and we know at some point this business has to start to show improvement on the top line. I think by doing what we're doing on inventory, doing what we're doing on cost, and getting to an improved earnings year in 2008 will provide us the flexibility to make intelligent decisions in the upcoming year.

And, Glenn, just a clarification, how much of the store base do you think can be right size? Is this a giant chunk of stores that you think yo9u can move through and right size?

I think it's a sizable amounts of our fleet, yes.

Okay, good luck. Thanks.

Thank you.

Next question is from Lorraine Maikis of Merrill Lynch.

Thank you, good afternoon. With the cut in CapEx I assume that you are pulling back on some of the Gap remodels that you were expecting. Is this temporary or do you plan on letting of those remodels go? And in terms of Old Navy, are there any plans there in terms of changing the pace of remodels? Thanks.

Yes, I'm glad you asked that question, Lorraine. o for gap we're actually not slowing down the pace of remodels versus 2007, so we did about 70, 75 remodels in 2007 and we would expect to do about the same level at Gap. Where you really see the difference in remodels in the number of remodels in 2008 is Old Navy. So the number of remodels at Old Navy are really being scaled back in 2008, and the reason for that is because 14 years into the brand's life, we all agree that it's time to evolve that store format, but we don't want to be expending the remodel dollars and rolling out a remodel until we're really confident about what format is going to be meaningful to our customer experience and we also need to be confident that we've engineered that such that the cost per square foot is acceptable for a rollout. So that really is a matter of time and that's the big difference in the number of remodels we're doing year over year.

Thank you.

Next question is from Richard Jaffe with Stifel Nicolaus.

Good afternoon. We say Stifel. Just a follow-on question. There's clearly some opportunity to improve product, and you've hired on a couple of great talented executives, Patrick and Todd. Wondering what their impact has been today, how fast you anticipate their impact will be visible in stores, and how they're initiatives will match with both marketing and with the idea of very-tightly controlled inventories? Will they have the freedom to deliver their product?

I think that their impact to date has been actually substantial, even though neither one of them have put their own mark on the target audience, the definition of how we're going to design that, into stores just yet. These are -- I would add Simon Keen, too, at out Banana Republic business -- these are incredibly passionate, well respected heads of design, and what I believe they've done more than anything else is they've given that team -- I talked about earlier about trying to teach the Company to win again. Inside the design offices in New York and here in San Francisco's they have really lifted the spirits, they've lifted the quality of the work, and I believe they're going to be huge ambassadors for attracting talent back into those -- into those offices. So that's the first thing they've done because for the respect level they have and how they've come into the business and how professional they've been.

And their product will actually show up at different times. I think Todd's impact in Old Navy will probably be seen this summer. Patrick's impact would be limited this summer, would be more in the fall product that's going to go in to Gap brand. And Simon will be more in the holiday product. But Banana needs less repositioning on its product than the other two brands, so I think we should be watching the work at Old Navy and the work at Gap more carefully. When it comes to the inventory piece, obviously the design people do not have a large say, in some cases if any, in terms of what the inventory buy actually is, but it's going to be us sitting down and evaluating how comfortable we are with what they're bringing to market, again being very aware of the environment in which we're operating in, and making intelligent inventory decisions and placing bets very selectively as we look the product they're putting forward. I think it'd be easy for us to get ourselves excited too early, too soon until the evidence is there in terms of product acceptance through conversion and through a change in traffic, at which point we are happy to buy more, but until we see any concrete evidence we're not changing our philosophy.

Got it, thank you.

Your next question is from Christine Chen with Needham & Company.

Hi there. Can you hear me?

Yes, hi, Christine.

My phone's been cutting in and out the entire time. I was curious, you've always said your credit card customers are the most loyal, and I'm wondering that, as the product has gotten better, particularly at Gap core concept, if you've seen more transactions from your credit card customers?

We think that's important, that base of customers' whose on our private label, and now as you know in the fall we launched a co-branded card, we think that is a tremendously important and valued customer, and we actually think there's even more opportunity to stay closer to that customer and to market to that customer. Has the base changed meaningfully? I wouldn't say meaningfully of the last little while here now.

And then as far as the share repurchase, could you help us think about how we should be modeling it in over the quarters? Pretty evenly spread out?

It's hard to predict. As you know, we approach our share repurchases opportunisticly. What I think is fair to say is we've tended to align the share repurchase weighting with our cash flows, and our biggest cash flow obviously come in the second half of the year, and in particular in Q4.

Okay, great. Thank you and good luck.

Your next question is from Mark Montagna with CL King.

Hi. Just a question about the customer's choices. In the second half of last year you reduce customer choices at the Gap division by 30%. Are you going to continue that next year and is that going to spread to other divisions?

I think the biggest opportunity in terms of managing the CC count is probably more at Old Navy this year than it is that Gap. We feel like we get a lot of heavy lifting, both in terms of bringing inventory levels in line by the second half at Gap and bringing the CCs back in line with what we think at a healthier level, that was all work done in the second half of '07. So as we enter '08 we feel good about that position. A bigger opportunity in that area is probably around Old Navy.

By what percent would you expect the Old Navy customer counts to decline?

I don't want to attribute a specific percent. It's probably less than we did in the second half at Gap band to bring them more in line, but I'm just pointing out that that's the brand that probably has the opportunity in 2008 to tighten up the CCs.

Okay, thanks.

And operator, we have time for one more call.

Your final question is from Michelle Tan with UBS Securities.

Great, thanks. I was just wondering if you could share with us a little more color on the international business as it stands today from a profitability and return standpoint? And then also, how much potential you think there is from the other brands in terms of total stores overseas and the returns that you would expect to see there?

Well, we're making an assessments about how big the opportunity is. You heard me mention that beyond 2008 the only real square footage growth we see is going to be international business and our franchise business. We've only got 70 stores in franchise right now, it's in ten countries. So far we are pleased with the results in those 70 stores, and I think I mentioned we're going to at least have an equal amount of stores opening in 2008. The international business, which is rooted in Japan and Britain and in France, has an opportunity to add more stores, but I think what they're doing there and they're being pretty smart, given the unique attributes of those marketplaces, this is an idea that started in Japan for us, is doing stores within the stores and department stores, which is called in the UK a concession store.

That is a very good use of capital, has a great return for us, has a good sales per foot, and is complementary to some of the more flagship traditional stores we have in London and in Paris. I think that our team led by Steve Sunnucks in Europe and John Ermatinger in Japan and Art Peck on the franchise side, have some levers to pull that we never introduced over 20+ years ago in North America, which is stand-alone stores, malls, concessions stores and a franchise play. So that combination is a better use of our capital, will produce a better return than if we just took our North American philosophy and dropped it into Europe.

Got it, thank you.

Thank you.

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.

This concludes today's conference. You may now, disconnect.