蓋璞 (GPS) 2010 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen.

My name is Marcelo and I will be your conference operator today.

At this time, I would like to welcome everyone to the Gap Inc.

fourth-quarter 2010 conference call.

(Operator Instructions) I would now like to introduce your host, Mark Webb, Vice President of Investor Relations.

Good afternoon, everyone.

Welcome to Gap Inc.'s fourth-quarter 2010 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 the information made available on this webcast and conference call contains forward-looking statements.

For information on factors that could cause our actual results to differ materially from the forward-looking statements, as well as reconciliations of measures we are required to reconcile to GAAP financial measures, please refer to today's press release, as well as our most recent annual report on Form 10-K and our most recent quarterly report on Form 10-Q, all of which are available on GapInc.com.

These forward-looking statements are based on information as of February 24, 2011, and we assume no obligation to publicly update or revise our forward-looking statements.

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.

Thank you, Mark, and good afternoon, everybody.

Before I hand the call over to Sabrina, let me give you some highlights from my perspective on 2010, and then we're going to take a few minutes to talk about 2011 and how we're continuing to build on our total strategy for Gap Inc.

At our investor meeting in October, we talked about a range of performance on a comp level the business is trying to achieve being between a flat and a plus-five comp.

We've now done that for six quarters in a row.

And our total sales, our absolute total sales, were up 3% for the full year.

That's a 200 basis-point delta versus our comp, and in Q4, we had a 300 basis-point delta versus our comp.

So our total sales are starting to kick in.

You're getting that from our Internet business, which has been very strong; from our franchise business, which is growing at a very nice rate; and from new stores that we've opened, either outlet locations we've opened or new country openings in China and in Italy.

Our operating margin has gone from 12.8% to 13.4% in 2010, a 60 basis-point improvement, and we are now starting to figure out the comfort zone for the Company, which is growing EBIT dollars, which is important, complemented with our share buyback program, gave us an EPS improvement of 19%.

Now if you look at the last four years, Gap Inc.

has had a CAGR improvement of 19% on EPS.

So from a financial perspective, I thought there was a continuation of very good performance in the bottom line, some comp performance which has been absent in this business for far too long with our 1% comp in 2010, and we are using that to make sure our teams know here, this is the kind of company that needs to build every single year and needs to start showing growth in its North American business.

We had some really good accomplishments in 2010.

We continue with our real estate strategy.

I think we did a good job in store consolidations.

Our remodel programs, we did 200 stores at Old Navy in 2010, and we reduced almost 1 million square feet out of our fleet.

Our speed pipeline is now in place.

Every one of our brands will be using that to get closer to their customers.

The closer you get to the customer and product, the better it is for us when it comes to product acceptance.

China was a big opening for the Company.

We opened four stores in the fall, and all of them are in the top 10% performance of our stores around the world.

We opened up in Italy, in Milan.

A great opening of a Banana Republic complemented with a Gap beside it, and those two stores are in the top 10 stores around the world in each one of their brands.

Our franchise business opened up in four countries.

We are now in 23 countries, and we are seeing the momentum now.

Franchisees are excited about Banana Republic and Gap; more stores in existing countries and more franchisees wanting more countries that they can be the master franchisee for.

Our bottom-line business went global in 2010.

We now are shipping to 90 countries around the world.

Just six months ago, we were shipping into one country, and we're now shipping into 90 countries around the world.

Our global outlet business has got a lot of momentum behind it.

We've opened up in power centers now in Canada.

We've opened up also in power centers in the UK.

We've introduced our Gap Outlet business to value centers in Japan.

Athleta opened up its first flagship store here in San Francisco, so there's now two Athleta stores.

That was a big milestone.

We went from a catalog business to being online on the web to the universality platform with Gap Inc.'s family of brands, and now a physical presence with this very nice and well received flagship store in San Francisco.

Some challenges we had in 2010 that we've talked about previously.

First off, we really pushed hard to get a better in-stock position in the business.

Our scores, our customer scores, indicated we achieved that.

But as you started seeing a shift in the middle part of last year towards more fashion, we ended up with more basic units than we needed.

Now we've worked our way through that as we turned the page to 2011, but that was a bit of incremental work we had to get done in the latter half of 2010.

And the second challenge for us in the business was consistent product execution.

Now, through the year, by brand and in certain categories, no question we had home runs.

We had some phenomenal, creative, innovative product that customers absolutely came into the stores or online and wanted to buy.

But consistently, by season, we're still not there.

And our brand presidents know that, our merchants know that, our designers know that, and the only way we can continue to perform at the level I spoke about earlier is to make sure we make this part of the DNA of the Company.

Let me just spend a minute on our North American businesses.

We made some structural changes two weeks ago.

Our Gap Global Creative Center is up and running.

Our international teams were in there all last week.

Each one of our brand presidents in North America know what they have to get done.

They know their priorities.

They are working away at them as we speak, beyond just the consistent product execution, which is critical in 2011.

A couple of common themes that show up in each one of our businesses is the need to get new customers into our stores.

That's definitely a common theme.

In the last couple of years, there's been a lot of focus on holding on to the customers you had, but now we are redirecting marketing, using new mediums and new strategies to get new customers inside of each one of our brands.

And also, we worked last year on new categories.

Our customers are telling us there's more categories they want from us, and we started testing some last year.

We worked on some in each one of our brands, and I think you'll see through the year more and more marketing towards that and more space inside our stores towards introducing these new categories.

Let's talk about 2011.

Now, like all apparel companies, we are all dealing with the inflationary pressures from the increase in cotton pricing.

As a Company, we've put a lot of work into our pricing architecture in the last 12 to 18 months, and that's critical to making good decisions when it comes to pricing and promotion, but we know our competition.

We know it by brand.

So, the value proposition of each one of these brands is very important, but we have to acknowledge the fact there was going to be inflationary pressure being felt by ourselves and everybody else through 2011.

As I look further into 2011, there's a lot of important continuation of countries we've been in, our strategic initiatives on growth, but also a couple of new areas we want to see grow in 2011.

From a continuation perspective, you're going to see us open up between 10 and 15 stores in China.

We're going to go into Hong Kong for the first time.

So, right now we feel good about those first four stores I referenced earlier.

Now we've got to open up these 15 stores and make sure that China becomes this long-term critical cornerstone of growth for the Company.

From a European perspective, we're going to open up about 10 stores in Italy.

Continuing with Banana Republic and Gap in Italy, and open up in Rome for the first time in late May to early June of this year.

We're going to bring Banana Republic to France for the first time.

Got an amazing location on the Champs-Elysees, and I'm hoping that the Champs-Elysees Paris location will do to France Banana Republic what the London Regent Street location did for our Banana Republic business in the UK.

We're going to open up 75 stores in our franchise markets, more new countries, more stores in existing countries, the biggest year we've ever had in the franchise business since it opened five years ago.

We're going to open up over 25 stores in our outlet business.

So, more continuation of existing markets, and we're going to go into Italy for the first time with our outlet stores.

We're going to open up between eight and 10 Athleta stores here in the U.S.

So building on San Francisco, we're going to New York.

We're going to go into LA.

Feel really good about Athleta and its prospects, and I think we're finding the right balance now between the catalog, the Web, and the physical presence which, quite frankly, our customers are demanding.

And this is just the beginning of what this brand can really become.

And in some ways complementing our Athleta business is our Piperlime business, the only business we have that's truly horizontal inside the Company.

We put apparel in last year, and now we have private-label apparel that came out this spring, and we are stepping up the marketing on Piperlime to make it even a bigger part of our growth initiatives going forward.

Now foundationally to support all this work, we are making the right targeted investments in our IT infrastructure and the right targeted investments in our supply chain around the world.

So, a lot going on inside the Company.

With all that said, my focus in North America is still very strong, still very strong in Banana Republic, in Gap, and in Old Navy.

We have to make sure this business performs.

Good initiatives being worked on by each one of those brand presidents.

They understand what has to get done to get the consistent product execution.

Work being done on marketing, work being done in the stores.

We need to grow in North America.

So when you take what the Company accomplished in 2010, what its plans are for 2011 and going forward, Gap Inc.

has a very compelling business proposition and strategy.

We have multiple distinct brands and channels, which differentiates us in the marketplace.

So in spite of near-term pressures, we believe in our long-term strategy.

We executed very well in 2010.

We will do the exact same thing in 2011 and feel good about the trajectory in which we're on.

We're building momentum here.

Not just momentum in our international business.

We have to make sure the focus and the effort and the execution is happening in our North American business as well.

With that said, let me pass it to Sabrina to take you through the financial results for the full year and for the fourth quarter.

Thank you, Glenn.

Good afternoon, everyone.

I'll begin today with a review of our fourth-quarter and full-year results, and then provide an overview of our outlook for 2011.

Please turn to slide four.

I'm very pleased to report that we delivered on all of our stated objectives in 2010.

Here are some highlights for the full year.

Net sales grew 3%, or nearly $0.5 billion, with comps up 1%.

Including online sales, comps were up 2%.

We successfully launched wholly-owned stores in China and Italy, and continued to grow our global online business.

Even while we made those investments, rent and occupancy expenses leveraged by 60 basis points, operating expenses leveraged by 80 basis points, and operating margins grew to 13.4%, our fourth consecutive year of operating margin expansion.

Likewise, we delivered our fourth consecutive year of double-digit earnings-per-share growth at 19%, or $1.88.

Finally, we distributed $2.2 billion of cash to shareholders.

Turning to slide five, Q4 earnings were up 4% to $365 million and Q4 earnings per share was up 18% to $0.60 per share.

Full-year earnings were up 9% to $1.2 billion.

On slide six, fourth-quarter and full-year net sales were up 3% to $4.4 billion and $14.7 billion, respectively.

Our online division and international businesses taken together represented 22% of total revenue for the year, up two points from last year.

Total sales and comps by division are listed in our press release.

Turning to slide seven, fourth-quarter gross margin was down 130 basis points to 38.2%.

Merchandise margins were down 160 basis points, offset by 40 basis points of rent and occupancy leverage.

Fourth-quarter gross profit of $1.7 billion was nearly flat to last year.

For the year, gross margin was 40.2%, down only 10 basis points from fiscal 2009's decade high.

Merchandise margins were down 70 basis points, offset by rent and occupancy leverage of 60 basis points, and gross profit was up 3% to $5.9 billion for the year.

Turning to inventory on slide eight, at the end of the fourth quarter, inventory per square foot was up 9%, in line with our guidance.

Given our objective to at least maintain sales on downsized stores in North America, going forward we're transitioning to a new metric, inventory per store.

Inventory per store was up 8% at the end of the fourth quarter.

The increase in North America was several points below that of Gap Inc.

Please turn to slide nine for operating expenses.

Even as we continued to invest meaningfully in growth, we leveraged Q4 operating expenses by 100 basis points.

Total operating expenses for the quarter were $1.1 billion, down $10 million from the prior year.

These expenses included $160 million of marketing, down $22 million driven by Gap brand.

For the year, total operating expenses were about flat at $3.9 billion and leveraged as a percent of sales by 80 basis points.

Please turn to slide 10 for capital expenditures and store count.

Full-year capital expenditures were $557 million, focused on Old Navy remodels, global online, and international stores.

In 2010, we opened 118 new stores, weighted toward international outlets and franchise.

We closed 103 stores, weighted toward Gap brand North America, and ended the year with 3,246 stores in 31 countries.

Total square footage for wholly-owned stores was 38.2 million, down 2% to last year.

Store count and square footage by division are listed in our press release.

Regarding cash on slide 11, full-year free cash flow, defined as cash from operations less capital expenditures, was an inflow of $1.2 billion.

We repurchased 96 million shares for $2 billion and ended the year with $1.7 billion in cash.

Looking back, I'm pleased that in 2010 we delivered on our goals.

And now looking forward, like others we will face headwinds driven by sourcing cost inflation, especially in our outlets and our value brand, Old Navy.

That said, we've demonstrated our commitment to deliver shareholder value, and that discipline will continue.

Let me now walk you through our goals and expectations for 2011.

Please turn to slide 12.

First, grow topline.

Similar to 2010, we will focus on delivering a modest full-year positive comp.

Total sales should grow in excess of the comp, driven by our global growth initiatives.

We intend to manage inventory units in a disciplined manner, though inventory cost dollars will be higher, driven by the inflationary sourcing environment.

While we expect inventory dollars per store to be up in the high single digits at the end of Q1, obviously inventory units will not grow at the same levels.

Our second goal is to maintain discipline on expenses.

We feel confident that if we deliver total sales growth, we will leverage rent and occupancy and operating expenses on a full-year basis.

Third, we'll continue to invest in long-term growth.

In keeping with our philosophy of balancing short-term results with long-term growth opportunities, we expect capital expenditures to be about $575 million, driven by investments to support our global expansion and the continued rollout of our Old Navy store remodels.

In 2011, we plan to remodel another 100 stores, bringing the total to nearly 400.

Importantly, the majority of these remodels are also downsizes, which support our goal of driving productivity and rent and occupancy leverage.

Driven by these Old Navy downsizes, we expect full-year net square footage for wholly-owned stores to decrease by about 3%.

Our fourth goal is to return cash to shareholders.

As evidence of our commitment, since 2004 we've returned over $10 billion through share repurchases and dividends, which represents well over 100% of the free cash flow we generated over the same period.

We are very pleased that today we announced an additional $2 billion share repurchase authorization.

In 2011, we're also increasing our annual dividend by 13% to $0.45 per share, representing a yield of about 2%.

With regard to earnings per share, we expect full-year earnings per share to be in the range of $1.88 to $1.93.

Our operating margins will likely decrease in 2011.

This is driven by our assumption that the increases in average unit retail may not fully offset the average unit cost increases in our value channels.

Looking beyond 2011, we intend to return to the operating margin levels we achieved in 2010.

Please turn to slide 13 for a list of all of our 2011 guidance metrics.

We expect depreciation and amortization of about $550 million.

We plan to open about 190 stores, of which 125 are international, including franchises.

The remaining new-store openings in North America are either outlets or repositions into smaller, more productive boxes.

We intend to close about 125 stores weighted to Gap brand North America, and we expect our full-year effective tax rate to be about 39%.

Turning to the last slide, in conclusion we're proud that we've consistently demonstrated our commitment to our shareholders by delivering on all of our goals over the last four years, and we feel confident that our long-term strategies will continue to deliver value to shareholders going forward.

Thank you, and now I'll turn it back over to Mark.

Thank you, Sabrina.

Operator, that concludes our prepared remarks.

We'll now open the call up to questions, and everyone, we'd like to get to as many of you as possible, so please limit your questions to one per person.

(Operator Instructions) Janet Kloppenburg, JJK Research.

Glenn, I was wondering if you could spend a little bit of time talking about the transition going on at (technical difficulty) right now, and what your outlook is for that brand's performance for fiscal 2011.

I assume we should expect better performance in the back half of the year, and I'd also like to -- if you could talk a little bit about the marketing plans for that brand as well.

Thank you so much.

You're welcome.

Obviously, we have expectation for Gap brand North America to have improved performance.

What I can say to you is that -- a couple of big changes.

So, one, Art Peck is not a new employee.

He's been with us for six years.

He opened at least 100 stores in our franchise business while still being our head of strategy, and then spent 2.5 years running our outlet business while again being the head of strategy for the Company.

So he is familiar with the business, familiar with the brand, sees all the strengths in Gap brand that need to be tightened up and made sure that those continue to be strengths going forward, and of course, has been able to, from a slight arm's length, been able to see some of the opportunities that maybe we should've been capitalizing on.

So, he hit the ground running.

Now, he's been to New York.

He's with the team here.

He's in LA today.

And I think Art's job is to make an immediate impact on the business because we have expectations on that brand.

It's a very important part of our portfolio, and I believe that some of the ways in which he brought great progress and very consistent, strong performance to our outlet business, which still develops product, which still markets product, which still has merchandising and visual and everything else.

It's a different channel, but it has a lot of the attributes of the main business.

Granted, they are different, but they're not as different as they probably used to be 10 years ago.

So, I think given his track record there and, I think, his respect inside the business, filling in for Marka.

Marka obviously had a very good career for us for 24 years and did a great job inside the business, which I was very pleased with.

Her and I just agreed it was a good time for her to transition and to move on.

We did that jointly.

Having Art come in now and, I think, pick up those reins, I'm feeling very confident about.

And then, the bigger part of that is the setting up of the -- one of our goals has to be, and it's nonnegotiable, to get to more consistent product in all three of our North American brands, but particularly in Gap North America.

Having Pam Wallack move to New York and be the leader of our Global Creative Center in New York was critical, simplifying that relationship with the globe.

So some of the benefits from that, which again we have to get immediately, is one, a bigger global influence.

So now instead of just that team in New York being fairly one-dimensional out of San Francisco, now the influence from London and the influence from Tokyo and the influence from Shanghai is going to be felt in that office right away.

Pam leading it is a big plus for me.

So I think that's all positive.

I think it's -- again, it's a simpler structure we put together.

Patrick and Jen are still in place.

Patrick runs adult.

Jen runs kids and baby.

Patrick has a brand-new head of women's who started six months ago who came from a very good company.

I think that's going to provide some benefit to -- there's no way to sugarcoat this.

I'd say the weakest part of the assortment inside of Gap brand has been the women's product.

Not necessarily in bottoms, but definitely in tops.

And I think you'll see some of the work that she's going to get done this summer.

So, I think your timeline, Janet, is not too far off.

I mean, there's no hall pass for that team.

We expect that business to -- we've identified prior to the change what the opportunities were.

They know what the game plan is.

Now their job is to go in there through Art's leadership and get it executed.

(multiple speakers) Should we expect any changes in that team or other additions, or do you feel the team is complete?

Look what I'd say, Janet, is that we're making it very clear to everybody in the Company.

I don't need the Board to tell me -- I'm on a constant assessment of whether I'm doing a good job inside this business.

So I think everybody here knows accountability matters, performance matters.

And if people can't because it's -- we're not pleased, as I said.

I think different levels of degrees to our North American business.

I think it all centers, in my opinion, I made it very clear internally, I've said this externally at our meeting in October, the product has to deliver more consistently than it delivers, and when we're good, we're good.

But being good two-thirds of the time in this environment with this new consumer is -- that's not going to deliver.

That's not going to deliver for us, and we won't.

On the marketing front, I'm very excited about the change.

I've known the Ogilvy people and their Chairman and CEO; I've known them well for about nine months.

They have been getting ready in case this was an opportunity for us to actually move forward on.

It wasn't until just very recently.

We decided to make the change.

Our contract with our previous agency ran out.

We had an eight-year run with Trey Laird.

It was time for a fresh set of eyes and a fresh way to actually get a fresh voice to the business.

So we're excited with the Ogilvy team.

We have a global CMO in place named Seth Farbman.

I think he's going to do a great job for us.

So, this is -- everybody knows, we are in the now world.

This has to -- the work that has to be done to move the business to where I expect it to be needs to happen now.

Kimberly Greenberger, Morgan Stanley.

Thank you.

I was wondering if you could talk to us about your pricing strategies in 2011.

We noticed some slight pricing adjustments on a few items at Old Navy.

Have you been testing price adjustments as you try to offset some sourcing cost inflation, and what has your experience been by brand?

Thanks.

First of all, I'd say that we did some work in the last 12 to 18 months on category management, which is the first part you start before you get to pricing.

So, for us, what categories are we actually going to dominate on?

Which ones are going to be -- are going to carry the load for the growth and the share we want to gain?

So that's the first part.

So, understanding that clearly, being much more strategic.

I think that helps us when the teams sit back and they look at what is your value proposition going to be and what's your pricing going to look like?

What's your promotional cadence?

And what's it going to look like?

It's critical.

You couldn't do that blindly.

You can't do that evenly across the whole assortment.

You have to know the categories that matter to you the most.

So I think within that, there was a pricing architecture.

So there is a framework that we didn't have 18 months ago, we now have inside the business.

What you need to know with us is we're not going to just do the math on this, which is if our prices were to go up by X amount, then we're just going to spread that equally into our ticketed price.

That, to me, is the way people priced maybe 20 years ago.

You've got to be much more thoughtful when you know who your competition is, how you're going to win, what those categories are.

That will dictate the pricing -- choices you're going to make.

What I can say, whatever the one or two items at Old Navy are, regardless of inflationary pressures, cost is something you need to be mindful of.

It definitely informs your decision, but it can't be the only driver to the price that you put forward to your customer.

So you're going to see us be much -- even in the face of no inflation, we'd be making decisions on pricing that could be up, could be down, could be holding.

We're always trying to make sure we're making the right decisions so we can maximize gross margin dollars per foot inside our business.

Now with that said, obviously for the first time in a decade or more, we're seeing some inflation that is quite high.

So the teams need to be aware of that.

They need to stick to the framework I talked about earlier to make the right decisions.

What I believe you will see, Kimberly, more than just changes in ticket pricing, you're going to see us become much more surgical on our promotional activity, the difference between an AIR, which is a ticketed price, and an AUR, which is the [Scandel] price.

We introduced local markdowns over two years ago.

We introduced local promotions last year into two of our brands, and one more will take it on sometime this year, so the ability to be surgical, to be smart about it, is -- to me, is the bigger opportunity besides just changing ticket prices.

Even if it's done strategically, the real opportunity is in that promotional timeline, that promotional depth, that promotional breadth, that -- in 2008 and 2009 when the recession really was at its -- at the bottom of its cycle and people were making decisions to drive traffic and became overly aggressive.

I think all of us need to sit back now and go, what is the right approach to that in 2011.

And in our case, I wasn't happy in 2010 with how those promotions were necessarily done.

Not every one of them, just, I'd say, in general.

It could've been done more surgically.

Could've been a little more thought and innovation and creativity brought to it, and that's the expectation of a Company like ours.

Anybody can put an easel outside a door that says take an extra 25% or 30% off.

We've been -- we've fallen for that trick a few times.

And that's not smart as far as I'm concerned.

There's better ways to offer value than simply doing that, and you're going to see us put quite a bit of effort.

We were starting a little bit of that in the early part of this year, but as the year grows, because we've been getting ready for this now for six months, quite a bit of effort in being much smarter about our promotional decision-making.

That makes a lot of sense.

Glenn, is there an IT system that helps you make those surgical decisions on promotion?

Can you just remind us what that system is?

Yes, there is.

But my experience, and I've been around different businesses and I've been around inflation my whole life.

It may be new to the apparel business.

It's not new to other sectors.

This system is only as good as the person who's sitting in front of it.

And the system helps and expedites and makes it efficient.

It can make a recommendation, which at times is right, but the person in front of it needs to know exactly what that category stands for, has to have the competition information, and has to be making good recommendations that the field can execute.

So system-wise, I'd say we're good.

Probably not great, but good.

A few more tools coming, but I really think what needs to happen here is the people who ultimately control those decisions, through the lessons we learned in 2010, need to apply those and make better decisions in 2011.

Adrienne Tennant, Janney Capital Markets.

Good afternoon.

Congratulations to the team on so consistently hitting your goals.

Glenn, my question is on -- sort of on inventory philosophy.

In 2009, it seemed you were going for gross margin rate.

In 2010, gross margin dollars, and then, sort of heading into this year and looking at the inventory guidance, it seems that perhaps you are still driving promotions and maybe driving comp.

So, my question really is about the philosophy with which you want to drive the business go forward.

Adrienne, I would say overall, and I'll let Glenn chime in afterward, but overall our philosophy in 2011 is to manage inventory units in a very disciplined manner.

So we came off a year in 2010, which I discussed at analyst day, that we were operating for much of 2010 with levels of inventory above which we'd consider normalized because we made specific decisions to err on the side of the customer, especially in these basic categories, and really go in deep with big categories like our bottoms, our denim, our black pants.

Entering 2011, we definitely want to exercise more discipline against our units.

I think with regard to our guidance in Q1 even, it's important to -- it's important for me to maybe elaborate a little about the composition of that because in North America we've continued, the last couple quarters, to make a point that the North America inventory number is several points below Gap Inc.

Now because of the sourcing cost inflation, the units are even below that.

So we feel like in North America, our units will be managed appropriately and tightly against an increasing average unit cost environment.

In international, as you know, we are growing quite a bit.

In the first half, we have a very high single-digit store growth rate.

Many of those stores are weighted toward outlets and flagships, and when they open, especially, we carry a healthy amount of units.

Our merchandise margins internationally, by the way, are also higher.

So we definitely have more of our inventory increase at the Gap Inc.

level is weighted toward the growth initiatives internationally than in North America where our philosophy will be to keep units very tight.

And in general, I would say to you in an environment where average unit costs are increasing, we're going to bring our units down.

Okay.

That's very helpful.

Would that suggest that units are flattish at the end of the second quarter -- at the end of the first quarter, and then for the second half of the year down?

We are not guiding to the units, so we've just said high single digits in terms of cost per store, North America below that, and units definitely below the costs in all regions.

Okay.

Thank you very much.

That's very helpful.

(Operator Instructions) Sam Panella, Raymond James.

Thank you and good afternoon.

In terms of the operating-margin pressure in 2011, can you give us any color, either in terms of the magnitude or how we should be thinking about this?

Obviously, you have a tough compare in the first quarter, but perhaps sourcing cost pressure is greater in the second half.

Thank you.

I think overall, Sam, what I'd tell you is we made the decision to make a prudent assumption underlying our guidance, which is because we have large businesses within our portfolio that play in the value sector, the average unit costs in those values segments may not be fully offset by the average unit retail that we're goaling ourselves on.

Now, we're obviously going to be working hard here every day to get that equation as much in favorable balance as we can.

But we made the decision to be very prudent about the guidance we put out in a very unique year for us as a Company and for the sector.

And so, what the guidance signals is if you have the average unit costs exceeding the average unit retail in our value businesses, that's going to put pressure likely on the merchandise margin, and that in turn could pressure the operating margin.

So that's sort of the underlying assumption for the year.

Now, I did go on to say in my remarks, and this is important to us, that we view this year as unique, but we are big believers in our long-term strategy, and I think beyond 2011 we feel highly confident that we are going to get right back on track to the operating-margin levels we were operating at in 2010, which, again, by the way, is the highest operating margin we've had since 1999.

Betty Chen, Wedbush Securities.

Good afternoon and congratulations, again, for a great Q4.

I was wondering, Glenn or Sabrina, can you talk a little bit about the marketing spend for 2011, and also some of your strategies around that?

I've noticed also you've shifted to a new campaign with Old Navy.

Any sort of early reads on how the customer may be reacting to the new ads?

And then, also, in terms of further expanding into some of the new marketing areas, should we expect additional efforts into, like, Groupon that you did with the Gap brand or what are some new innovative marketing that we can watch out for?

Thanks.

I would say that don't expect any big swings in our marketing investments.

We actually have always said and been pretty consistent.

The pool of inventory that this Company has needs to be a strategic advantage versus some of the global competitors that we're up against.

If we look at our marketing as a percentage of our sales relative to an Indotex, relative to an H&M, relative to a Fast Retailing, so we're always telling our teams that that pool, while available today and many times being used intelligently and driving the right traffic and enhancing our brand health, we're always challenging them to make sure that we are looking at it and going, are we getting the proper return on it?

The Old Navy new campaign, after a couple of years of being on one creative platform, I think has been a refreshing change.

We have a brand-new head of marketing at Old Navy, Amy Curtis-McIntyre, who comes with great credentials.

She's been an amazing hire for the business.

And I think that she appreciated the creative platform we had before, but like any great marketer when she looks at a brand like ours, it was time to just shift gears.

And so far, I can quote you a bunch of metrics I got this morning, but so far when you look at the feedback and the comments, particularly coming through social media, it's been all very positive.

And I think part of that is that all -- I think I mentioned earlier, everybody, Betty, in our business -- we are not leading-edge right now.

We're certainly not trailing people, but the shift in our investment of this pool of marketing we had towards different mediums and trying different things and breaking some new ground.

Some people looked at the Groupon investment as, was that -- from a return perspective, was that the best investment we've ever made?

That's for us to determine internally.

What I can tell you is it targeted the lower end of our demographic range.

We go after a Gap brand between 25 and 30, where our market share is not as strong as it is with the 30- to 35-year-olds.

So sometimes making those investments, you have to balance these returns off.

You're going to see a lot more in 2011 from our marketing teams going after new customers, using new mediums to go after those customers, which is very important to us.

That can be cost-effective.

It's the right medium.

Social media, in my opinion, has yet to fully prove itself out as what is the return going to be, but we have to find a better balance, and some of our money in that pool of total marketing across all four of our brands is going to be redirected to new areas that maybe we have not invested in before.

So, and I don't want to do it just because it feels right or maybe other companies are speaking about it.

We want to do it because it's going to actually resonate.

It's going to drive the traffic.

It's going to grab that loyalty we are looking for, and I want to do it in a unique way.

That's -- just putting the Old Navy commercial creative onto an online site is not what a Company like us should be doing.

Obviously, Amy did some stuff with Shazam, she did some other things as part of this campaign.

When you're going to do it, you've got to do it right and you've got to get partnerships and you've got to lead the way, and I know our marketing teams quite well here and I think they're taking up that challenge and are going to take it head-on in 2011.

Thank you and best of luck.

Paul Lejuez, Nomura Securities.

It's Tracy Kogan filling in for Paul.

I was wondering what level of expense savings you guys would expect to achieve from the restructuring at Gap brand and the consolidation of the outlets.

And can overall expense dollars be flat next year?

Thanks.

We are not guiding to expense dollars, but certainly I put forth that we have a goal -- that for the full year when we meet our goal of increasing total sales, that our expenses should leverage.

And I think we've proven over the last several years that we've been quite disciplined with regard to our expenses.

We're actually very pleased that in 2010, after having invested meaningfully in our growth initiatives, we delivered total expenses about flat to LY.

So, though we are not guiding to the dollars, I think you can count on us to be responsible on a full-year basis with regard to the leverage.

Did you want to expand on the Gap part?

The Gap restructuring, Tracy, just overall was not done -- was not driven by a decision to save expense.

Certainly over time do we see the potential of some benefits in leverage as we merge the two divisions?

Certainly we do.

But that is not the driver to the overall reorganization with the Gap brand.

Stacy Pak, Barclays Capital.

Thanks.

I guess I was looking -- focusing more on domestic sales per square foot, and I'm wondering, Sabrina, if you'll give us any metrics behind some of the drivers like the Old Navy remodels, what are you seeing in the improvements in sales per square foot and four-wall margins and in the Gap store closures, anything on the volumes on the closed stores and benefit to surrounding stores.

And also, I guess, more broadly, traffic still wasn't fabulous overall in 2010.

And I obviously heard your answer to Betty's question, but what do you do about traffic across the brands in 2011?

Yes, I'll start with productivity in the downsizes.

So, what we're pleased with is we are making progress, Stacy.

In Q4, our overall Gap Inc.

sales per square foot were up 3%.

All of our divisions were up for the full year.

At the Gap Inc.

level, sales per square foot were up 4% and all of our divisions were up.

So we're pleased with the path we're on.

We obviously want to continue on that path and improve it.

What we're looking for with the 100 Old Navy Project ONE remodels we'll do this year, we think they are especially powerful because they are accompanied -- the vast majority of that 100 are accompanied by downsizing the square footage of those boxes.

So last year, as you know, we did about 200.

What we get from it is we definitely see those stores deliver incremental sales lift versus the trend they were on and versus the base fleet.

The good part about the 100 we're moving forward with in 2011 is we expect to continue to see that lift, but on smaller square footage, so we're also going to help our ROD leverage proposition with that and we're going to help our sales per square foot with that.

Now, we're going to do some remodels at Gap.

They're more modest.

I think it's 15 or 20 of them.

They're definitely around consolidations as well.

So when we look at those, we're primarily in 2011 focused on remodeling when we are seeing a reduction in square footage, and that should definitely help continue on the path of improvement in sales per square foot.

On the traffic front, we were either flat to a positive comp in 10 of 12 months last year.

Now that's comp.

That's just not traffic.

So I think there's been moments where the business understood what are the right ways for us to come out with something, again, that's innovative, that's fresh, that's different than you've seen in the marketplace.

So as we project forward to 2011, there were some good lessons learned in 2010.

There were certainly some mistakes made where the brand presidents are looking at and going, wow, that was just not smart.

And when you looked inside the marketplace, we didn't differentiate ourselves on how to get people to cross the lease line or to get off the couch and come into our store.

The marketing part that I talked about earlier with Betty, I think that's critical to me.

I think we have to -- and we will.

We are going to find a way next year, and it's going to start sooner rather than later, where the marketing of messaging is going to be yes, there's got to be value proposition.

At times, there is going to be a clear price, particularly when you talk about Old Navy.

But how do you use marketing as a tool, given the size of that pool, to actually not use it exclusively on ways to get in traffic where the discount is the driving force?

And there's a lot of different discussions we've had, and tools, good lessons learned from 2010, but your comment is absolutely spot on.

As I look at the same numbers you look at and go, just not a great year.

It was by no means a disaster, but we were not happy with the traffic we were able to get into the business.

And there's been moments of brilliance.

We've got to make sure we build on those.

I think a shift in the marketing attitude, and the strong and the clear messaging, talking to whether it's about product or whether it's about an event or whether it's about introduction of a new category, all these different tools available to the teams to make sure that marketing plays a role in getting traffic that does not rely exclusively on a discount.

That is definitely something we're focused on going forward.

Michelle Tan, Goldman Sachs.

I was wondering if you could give us any more color on the international margins.

What does international look like now on an operating-margin basis relative to the domestic business?

What are the store-level margins like and what level of store count would you have to get to to get the profitability of that all in at or above the U.S.?

When we say international, Michelle, they're actually very different models by region.

But what I'll tell you generally is that merchandise margins internationally do tend to be higher.

Rent and occupancy in certain regions, like Europe, also tend to be higher.

So you actually want those higher merchandise margins, but it depends on your mix of full-price stores to outlets, and that mix is changing today as we speak.

In Asia, in particular, like in Japan, we have a very nice leveraged model because a lot of our stores are store in store at percentage rents.

So, international, it's hard to comment broadly because every market can be quite different.

I think in general, it's fair to say the merchandise margins do tend to be higher.

There can be other offsets on that P&L by the time you get down to operating margin.

And one of the other drivers, while margin is important, as Sabrina brought up earlier, but I think we look at the mix, too, of the return on invested capital.

And when you have almost 200 franchise stores, and we have said this publicly before, when you look at our online business, a great return on invested capital.

We are now taking that globally.

You look at our outlet business, great return on invested capital, and has been a U.S.-centric business up until three years ago, taking that globally.

And our franchise business, almost 200 stores now, another 75 next year, and I think we present in October that that's easily a 400-store business.

Great return on invested capital.

So, one element inside of all three of those have in common is the ability for them to drive margin.

The online business is obviously a great margin business.

You are operating with one store, for the most part, which is your DC.

The outlet business is a great margin business because of the re-engineered product that goes in, and I think that that business has really found that balance between promotional activity and ticket pricing that I mentioned earlier has been a little less attractively executed in some of the brands in North America.

And our franchise business have very nice margins when you look at us, basically, and how we report it, being a wholesale business.

So, I think as that mix, Michelle, gets bigger, because that's where the real growth is coming in those three businesses, and I think we may have said in October if you look at Italy, if you had to do over -- all over again some of the countries we entered, but you can't change that.

They were 15 years ago.

Going into Italy with flagship stores, and then core malls where we get a very nice return on invested capital and strong margins, and then an outlet business and an online business, all within 12 months, makes that country profile so much different than we have, let's say, today in the UK.

So as that gets replicated around the world, particularly in China, which we're counting on to be a cornerstone of future growth, but operating in the way I just described in China will give us a much better shot at having better operating margins in those businesses as we start them right, as opposed to trying to correct countries we entered into 15 years ago.

Great.

Thanks.

That's helpful.

Evren Kopelman, Wells Fargo.

Good afternoon, everyone.

I wanted to ask about occupancy expense.

I was looking at the rent expense and the depreciation numbers you reported.

It looks like rent expense has been up 4% or so the past couple of quarters when you look at it on a year-over-year basis, I assume because of the international openings, and depreciation has been down 5%, 6%.

So I'm curious.

Is that where you are getting the occupancy leverage, the lower depreciation?

And also, looking at 2011, you're planning on opening a larger number of stores.

I assume rent expense will keep growing.

Should we expect a similar -- if that's kind of what's going on with the occupancy leverage, should we expect kind of a similar dynamic, and I'm curious if you think you can get 60 basis points again.

I think the biggest driver to the occupancy leverage, and again, on a one comp, we did the 60 basis points this year.

We're pretty pleased with that.

I think the two biggest drivers to that are the fact that we are downsizing the unproductive square footage in North America, so when you take in account the closures, together with just the downsizes, that's helping the ROD profile quite a bit, and you add that, Evren, to the spread we're getting from our online sales and our international sales.

And even though of course there's investments associated with that and those investments get depreciated over time, the equation is such that between the downsizing of unproductive square footage and that sales spread growing with online and international, those are the two factors that are really driving the leverage.

When we look forward into 2011, we feel confident that we will continue to leverage rent and occupancy with sales growth.

Again, a big piece of that equation is that Old Navy portfolio of remodels we talked about.

The vast majority of that 100 are downsizes.

So that's going to continue, and then the growth of our global online and our international strategies will continue.

So we feel confident the ROD leverage will continue on sales growth.

John Morris, BMO Capital.

We noticed some pretty nice progress that you have been making at GapBody with some of the emphasis on active athletics.

So, I'm wondering if you can give us a little bit more color there.

Is this something that's more seasonal or it's -- is it one of the new categories that you speak of, Glenn, that you're focusing on?

I know it's a smaller piece of the business, but inasmuch as you could give us a little bit of color about the progress you're making there at GapBody?

Is it being driven by active athletics and how would it fit with the overall scheme of continuing to expand with Athleta as well?

Thanks.

You know, I think that we made a conscious effort just about, I think, 18 months ago that the business had a lack of clarity about what we were going to do with GapBody.

We had some stand-alone stores, then we started to put them as part of stores we were doing with a separate door beside the adult store, the kids and baby.

Then we went out and hired a very, very talented designer who works for Patrick in New York.

She's been with us about 15, maybe 18 months.

And I think the minute she came in and got an assessment about where we want to take the business, how big can it be, and what the right aesthetic is, you're seeing, I would say starting last fall, definitely on holiday, and clearly in spring, an overall lift in the business.

I think she's done a great job in foundational products.

I think she's done a great job in lounge products.

She fought hard, and so did Patrick, to make sure the global business was able to get into GapBodyFit, which is the athletic pants that you are referring to, John, and they've been a very nice success for us.

They're in about, I'd say, 150 stores with the full offering, which might be somewhere between 400 to 500 square feet, and another, I'm just guessing now, 100 or 150 stores and probably with 250 to 300 square feet.

So that is exactly what I was referring to earlier that I believe culturally as a Company, because we are constantly in and out of product every four to six weeks, that the focus on new categories that other retailers have had has just been something that has been missed by us, and looking at that and going, well, I believe in GapBody and so do our customers.

I think they've been a little disappointed for a period of time when we came out strong and kind of lost our way, but under Patrick's leadership, [Bud Nevay] who runs that business for us as the designer and has a great merchant partner here and a great merchant partner globally, I think there's a lot of potential in that business.

And I think it's a nice -- look, that's a $30 billion category, so you have some people at the high end with $100 million investments in athletic pants.

You have people like Athleta, which would be 30% to 35% less than that.

Then you would have Gap at a range of between $45 and $50 and their amazing fit.

And also, John, I was playing off the fit notion.

You have this great fit on denim pant, the fit message that came out on the black pant, and now a fit message that comes out on the athletic pant, which was consistent with Gap strategy.

And then you have Old Navy plain between $19.50 and $29.50.

So, that's sort of the power of our business in three different price points, so I think it's one example of a lot more that all of our brand presidents and merchants working with our design partners need to do is get us into categories like this that our customers absolutely want and then we could actually take our aesthetic, our positioning, and be successful at it.

I think Athleta and GapBody today in terms of their market share is so low that we are just, as you heard earlier, we're going to push this Athleta, get eight to 10 stores this year, open up in new markets, have even a bigger year as would be our plan in 2012.

We really see the potential of that stand-alone business, which is so much more than athletic pant.

Obviously, the Athleta business is much broader than that.

But I think that the team in here run by Mark Breitbard who now runs all of merchandising for North America and our international merchants now have to start pushing the designers to go, what's the next act after we do these pants that we've done and have gone well so far.

Brian Tunick, JPMorgan.

It's actually Ike calling in for Brian today.

Just two quick ones.

On the marketing spend, not anniversarying the TV advertising this Q4, taking the dollars down $20 million.

How should we expect marketing dollars in Q1 and for the remainder of 2011 to kind of play out?

And then, on your EPS guidance for the full year, can you talk -- can you tell us how much buyback is assumed at the low and the high end of that range?

Yes, regarding the marketing spend, we don't guide to the full year.

Our plans aren't even fully baked, as Glenn said.

I wouldn't expect any dramatic changes in the overall profile of our marketing spend.

With regard to Q1, it's probably flat to up slightly.

And we do reallocate our marketing spend to where we think we're getting the best return, so you're going to see more of that go to our international businesses and our online businesses.

With regard to earnings per share, we haven't put a specific assumption in there because we, for many years, have had the philosophy of approaching our share repurchases opportunistically, so it is difficult to predict how much share repurchase we will get done in any one quarter, but we certainly report it out every quarter.

Operator, we have time for just one more question.

Lorraine Hutchinson, Bank of America.

Lorraine, you might want to try unmuting your line.

All right, operator, let's go on to the next.

Marni Shapiro, The Retail Tracker.

[On a] (technical difficulty)

Operator, again?

We are experiencing some technical difficulties.

One moment, please.

Okay.

Operator, actually since we're beyond our time and we're having technical difficulties, maybe we should end the call there.

Okay, and at this time, I'll turn the call back over to Mr.

Webb for any closing remarks.

That concludes today's conference call.

Thank you, everybody, for listening, and as always, the IR team will be around after the call to take questions.

Thank you.

Ladies and gentlemen, this does conclude today's conference call.

You may now disconnect.