蓋璞 (GPS) 2011 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen.

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

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

Fourth Quarter 2011 Conference Call.

At this time, all participants are in a listen-only mode.

(Operator Instructions)

I would now like to introduce your host, Katrina O'Connell, Vice President of Investor Relations.

Good afternoon, everyone.

Welcome to Gap Inc.'s Fourth Quarter 2011 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 23, 2012, 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 Katrina, and good afternoon everybody.

In a few minutes I'll hand the conference call over to Sabrina, who will take you through 2011 highlights, and also talk to you about our guidance and some key metrics for 2012.

Before we get to that, I want to take you through a couple thoughts I had on this past year, and also talk to you about where I see 2012 in terms of the Company's strategic plan, and what investments we see ourselves making in the upcoming year.

In spite of 2011 earnings being below last year, we actually did make quite a bit of progress against our strategic plan.

So we have two key initiatives that Gap Inc.

has been pursuing for the last four years that make up our strategic plan.

The first key initiative is to reduce our dependency on our North American specialty bricks and mortar business.

We did accomplish quite a bit on that front in 2011.

First off, we grew our online business of penetration to our total sales by two percentage points.

Second thing we did was we reduced our specialty square footage by over 4%, while at the same time growing our outlet square footage domestically by 4%.

We closed 65 stores domestically and we opened up eight Athleta stores -- very successful, I may add.

That makes us feel very good about our future for 2012 and beyond.

The second area which we made quite a bit of progress is our move to expand our brands internationally.

At the beginning of year, we operated in 31 countries, combination of franchise- and company-owned stores, and we ended 2011 by operating in 39 countries.

In China we opened 10 stores.

We finished the year with 14 stores and feel very good about the progress we're making in China, particularly in Hong Kong.

In 2012, we have a plan right now to open 30 stores.

Our franchise business, where we opened 50 stores, and good performance, we're seeing our franchise business -- I think we grew total year 2011 at greater than 40%.

We see an opportunity to open at least 50 stores in 2012.

We added global outlet into Italy, in Japan, in the UK, and we'll be taking our outlet business to China in the fall of 2012.

Lastly, Banana Republic opened up in Paris on the Champs Elysees in a beautiful store.

That will be the beginning of Banana Republic expanding into France.

As we come into 2012, our goal clearly is to advance our strategic plan in this fiscal year, while at the same time improving our sales and earnings profile of the Corporation.

In order to ensure success, one of my key mandates through 2011 was to make sure the business took appropriate corrective measures in some key areas to make sure we can deliver on that latter goal of improving our sales and earnings profile in 2012.

There's four areas that we've been focused on in the last fiscal year -- product, our assortment, our marketing, and our supply chain.

Let me first talk about product.

Probably the biggest change we made throughout the year in 2011 was the creation of the Gap Global Creative Center in New York City.

That was the bringing together from a domestic and international perspective design, marketing, and production to create one amazing hub of creativity in New York City for all of our stores around the world.

Really, the first output from that team just showed up in our stores globally two weeks ago.

I really like the progress I've seen that's come out under Pam Wallack's leadership in New York.

The other changes have been quite a bit of investment in people That we started to make through the year and continue to make going forward.

The first one that came out was the creation of this Creative Advisor role.

Tracy Gardner joined us about four weeks ago.

We just announced that Jill Stanton will be Creative Advisor at Old Navy.

Jill has an amazing background at Next, Marks & Spencer, and Nike, globally.

This is a new role, but it's critical to me to get to consistent product execution.

One of the conclusions we came to through the year is we need to add this role to work with our designers and great a nice bridge between the design teams and the merchandising teams.

Really quite a bit of development along product.

With everything we're doing, the goal is clear here.

We need to have consistent product execution every quarter, every year, across all our brands.

We focused on assortment at the latter part of 2011, probably driven by the spike in cotton pricing in value businesses.

We get a little off balance between basics and fashion, and also we got a little bit off between our opening price point product and our best product.

Those changes have been made, and Old Navy's assortment will be much better balance between the areas I talked about coming into April and May.

Marketing was quite a bit of work in 2011.

I'm really excited.

When I look at all of our brands, we are either starting year with a brand-new marketing platform or a modified platform, in order to make sure we get a great return for our marketing, and really drive brand equity and traffic.

So Old Navy, we modified the Funnovations Inc.

platform that we introduced in November.

The real modification is to make sure the product shows up better.

It's a great platform, it's so Old Navy, but the product doesn't show up as well as it should.

Those modifications are being made.

Brand-new platform at Gap came out two weeks ago -- Be Bright.

It's a global campaign, and we really think that we have a great idea.

Banana Republic, you'll see in the marketing that came out this spring, a real focus on what we're calling internally new work.

The marketing's about that.

It's showing up in the windows, it's showing up in-store.

How does Banana Republic, as it did a decade ago, re-define what work is.

Athleta came out with a brand-new platform called Power to the She.

Very appropriate for the Athleta business as we add from our ten stores we currently have, and add 25 new stores in 2012.

The campaign is going to be so important for that.

Lastly, we made some adjustments to our supply chain.

We brought our distribution and logistics team together and merged it with our sourcing team to create one supply chain team led by Colin Funnell, our Executive Vice President of Supply Chain.

Same time, we also changed how we go to market.

For years we've had a geographically-based hub structure, and we moved to category teams, and we've added a lot of new talent.

New leadership in India, new leadership in Hong Kong.

That 's critical to make sure that our supply chain efforts in 2012 and beyond really bring great value to the Corporation.

Lastly, as I do every year on the February call, I have to talk about the investments the Company wants to make in 2012, once again to support its strategic plan.

Our SG&A to me has two really distinct components inside of it.

There's a fixed component, which the Company needs to spend every single year, and there's a variable component.

The time we spend as a Management team is always discussing in advance of the new year, where are we going to place our bets?

Where are we going to invest money?

Not only to achieve our strategic plan, but to get a great return and to drive sales and earnings inside the business.

Examples of that were in 2010, where the highlights of that year were about China at about global online.

Last year we talked about opening up Italy and expanding our Athleta business.

So as we enter 2012, we're going to continue with our international expansion.

What you're going to hear a little differently is that we're going to have a focus on putting some money back into our domestic business in three key areas -- in product, in marketing, and in e-commerce.

On the product front, like a lot of other people in the industry, we expect to get some tail winds in our cost of goods in the second half of 2012.

We made some decisions that we're going to make some investments, very targeted, very specific in categories we know we can dominate on, where we can get a point of differentiation, and really the focus for me is categories, I believe, are assets of the Corporation.

That's been the filter we're using.

We want to make sure we get savings from the reduction in cost, but we're going to make some targeted investments.

That's really going to benefit our domestic business.

Key categories in Banana Republic, Old Navy, and in Gap brand is investment we're going to make in 2012.

We're going to put some money behind Gap brand marketing.

The time is right.

We really believe in our team at the Gap Global Creative Center.

We're going to be putting some money behind marketing for the new platform called Be Bright around the world, but a real focus here in North America.

I think Art Peck and his team have done a lot of work in 2011 to position them, not only to drive our brand equity, but to make sure we're out there telling customers about it, week-in, week-out, month-in, month-out, season-in, season-out.

That's very important for Gap rent.

Lastly, we're going to put some money, as we have really the last couple years, but even a stepped-up amount, behind our e-commerce business.

We opened up a new distribution center in 2011, so we're going to have those costs to carry forward for all of 2012.

The real investment is in mobile.

Our mobile platform has done extremely well.

We have a lot of new ideas, innovative ideas coming out from Toby and his team.

The last area, which has bode global, is we're going to create a brand-new global IT platform.

When you open up in Italy and China, and some of the other plans we have for the business going forward, you have to be strong in IT and you have to be strong in supply chain.

It's going to take us a number of years to get done to really create and build a brand-new global IT platform.

We enter 2012, everybody here at Gap Inc.

very focused on what we have to get done.

We know what needs to be done, and we're very motivated as we come into the year to make sure that we take all of our brands to a new level and perform well, domestically and internationally, across every brand, every channel, and every geography.

With that said, let me hand it over to Sabrina, who will take you through the financial highlights, and I'm going to come back after that and answer any questions from the analysts.

Sabrina?

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 2012.

Although 2011 was a challenging year, it's worth pointing out some bright spots in our performance.

Throughout the year, we delivered higher average unit retails, enabled by our disciplined inventory management.

While continuing to invest in our long-term growth initiatives, we tightly managed our operating expenses, which leveraged 30 basis points.

We generated $800 million in free cash flow, and finally we distributed $2.3 billion to shareholders through dividends and share repurchases.

Please turn to slide four for our earnings recap.

In the fourth quarter, net earnings were $218 million and earnings per share were $0.44.

Full-year net earnings were $833 million, and full-year earnings per share was $1.56, down 17%.

Turning to slide five, sales performance.

Fourth-quarter total sales were $4.3 billion, down 2%.

Full-year total sales were down 1% to $14.5 billion, and comparable sales, which include the associated comparable online sales, were down 4% for the year.

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

Turning to slide six, gross profit.

Since Q1 of 2011, we laid out our view that margins would contract significantly during the year, driven by the sharp escalation in average unit costs, especially in the back half.

Further, we also said that we would deliver average unit retails up, but not up enough to offset the increase in average unit costs.

The year did indeed play out this way.

For the fourth quarter, gross margin was down 540 basis points to 32.8%.

Merchandise margins were down 500 basis points, while rent and occupancy deleveraged by 40 basis points.

Gross profit was $1.4 billion.

For the full-year, gross margin was 36.2%, down 400 basis points.

Merchandise margins were down 370 basis points, and rent and occupancy deleveraged by 30 basis points.

Gross profit for the year was $5.3 billion, down 10%.

Turning to inventory on slide seven.

Given the high average unit cost this year, we managed our inventory units down, so that our total inventory dollars per store remained reasonable.

We're pleased that at the end of the fourth quarter, as indicated on our January sales press release, inventory per store in terms of dollars was about flat.

Please turn to slide eight for operating expenses.

Given the decline in our gross margin dollars, we responded to mitigate the impact to earnings by managing our expenses tightly.

Even as we continued to invest meaningfully in our international growth initiatives, we leveraged Q4 operating expenses by 60 basis points.

For the fourth quarter, total operating expenses were $1 billion.

These expenses include $166 million of marketing, up slightly to last year.

For the full year, total operating expenses were $3.8 billion, down $85 million from the prior year, and leveraged as a percent of sales by 30 basis points.

Full-year marketing expenses were $548 million, up $32 million to last year.

Please turn to slide nine for capital expenditures.

Full-year capital expenditures were $548 million, focused on international and the associated IT investments, global online and Old Navy down-sizes.

In line with our articulated strategy, in North America we continued to reduce our square footage through closures and consolidations at Gap brand, and down-sizes at Old Navy.

For the year, we closed 65 stores on a net basis, and decreased square footage by of 1.3 million square feet in North America.

Outside of North America we grew through both Company-operated and franchise stores.

On a net basis we added 33 international Company-operated stores and 49 franchise stores.

Total Gap Inc.

net square footage was down 2.6% compared to last year.

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

Regarding cash on slide 10.

We generated strong free cash flow, defined as cash from operations, plus capital expenditures of $800 million, and we re-purchased 111 million shares for $2.1 billion, at an average price of $18.88.

Our level of share re-purchase for the year was higher than usual, enabled by our capital raising in the first quarter of 2011.

We ended the year with 485 million shares outstanding.

Now I'd like to share with you our outlook for 2012.

Please turn to slide 11.

We expect earnings per share for fiscal year 2012, which includes the 53rd week, to be in the range of $1.75 to $1.80, and operating margin to be about 10%.

Underlying that guidance are the following priorities -- improving sales with healthy merchandise margins; investing in our business while maintaining discipline; and returning excess cash to shareholders.

With regard to improving sales and delivering healthy merchandise margins, it's our objective to drive modest top-line growth through the stabilization of our base businesses and a continuation of our global growth initiatives, which are focused on our online, outlet, and franchise channels.

Moving to margins.

Clearly cotton inflation had a significant impact on our average unit costs in 2011.

As is commonly known in this sector, spring 2012 costs are up, though up less than holiday 2011.

We are fairly confident that average unit costs will improve in the second half of 2012; however, we've just begun to purchase the back half and are still finalizing our assortment and re-investment decisions.

Therefore some uncertainty exists regarding precisely where costing will land.

Our second priority is investing in our businesses while maintaining discipline.

As Glenn discussed, after five years of extremely disciplined expense management, coupled with a focus on international growth, we are going to be investing more in our domestic businesses.

As a result of that, it's unlikely we will leverage operating expenses in 2012.

We'll obviously temper the level of investments depending upon our momentum and our likely returns, and we will update you as we proceed throughout the year.

With regard to inventory, we plan to continue to manage inventory units in a disciplined manner, and expect inventory dollars per store to be about flat at the end of Q1.

Our third priority is returning cash to shareholders.

As I mentioned, our 2011 share re-purchases were higher than usual due to our capital raising.

In 2012, we expect to return to a more normalized pace of share re-purchases, and today we announced a $1 billion share re-purchase authorization.

In addition, we plan to increase our annual dividend by $0.05 to $0.50 per share, representing a payout of nearly 30% of net earnings.

Please turn to slide 12 for a summary of the guidance I just provided and some additional full-year 2012 metrics.

Regarding Company-operated stores, net of re-positions, we plan to open about 125 stores and close about 115.

Store openings are weighted toward international and outlets, while store closures are weighted toward Gap specialty stores in North America.

We expect net square footage to decrease by about 1%.

We expect capital expenditures to be about $600 million in depreciation and amortization to be about $475 million.

Finally, we expect our full-year effective tax rate to be about 39.5%.

In conclusion, as we enter a new year, we are committed to growing earnings per share while strategically re-investing in the business.

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

That concludes our prepared remarks.

We'll now open up the call to questions.

We'd appreciate limiting your questions to one per person.

(Operator Instructions)

Christine Chen, Needham & Company

Thank you.

I wanted to ask as you think about your -- the improved product and your inventory levels, how are you going to balance trying to regain market share and attract traffic, versus promotions and the margin hit?

There was a lot in there.

What I would say is that we talked in the opening comments about a number of things.

One, we are making some investments in our product.

Again, we are being selective, we're being targeted.

We're making them in some key categories across all of our brands.

Then what probably wasn't clear in the opening comments, then if you do that, that's part of the driver as to why you're seeing us put a little bit more marketing money in our domestic business, because if you're going to do that we have to go out either through the windows in store, through social media, through other tools to let people know that we have either done -- made some investments in key categories like suiting at Banana Republic, and there's a list of categories we believe in across all of our brands.

I believe that's going to generate some attention from customers and turn into traffic for our stores.

That's just one area in which we're doing that.

In terms of promotional activity, I think that we're always challenging our teams.

Last year was not necessarily our best your on this front, we were much better at this in 2010, is finding the innovative, really differentiated marketing value proposition to bring people into the stores.

If you look at something Old Navy started in 2012, it was called Super Cash.

I think ideas like that, that Gap can have a version, Banana Republic, Athleta, and of course Old Navy, and our outlet stores need to always find what's innovative, what's unique, what does a customer really respond to?

I think those two things in combination should be enough to at least give us an improvement on the traffic trajectory that we were disappointed in, in 2011.

I guess all I'd add Christine is on the inventory front, as a mentioned in my remarks, we do want to deliver modest top-line growth with healthy margins.

That means we really want to watch our inventory and keep it tightly managed.

We'll continue to do so as the year progresses.

It will be a great thing if we end up having to chase some inventory because demand begins exceeding the inventories we have, but we'll see how that goes.

The intention is to definitely deliver healthy margins and keep the inventory tightly managed.

Then I guess just what I've noticed in the stores, it seems like you're backing off on promotions for the broader audience, but for card holders the promotions seem to be a little bit more compelling?

Or is that just my biased view because I have your card?

I don't know if they're more committed.

Probably what you're seeing, if you're a frequent buyer in the Company, you're probably seeing more money being spent directly to talk to others through e-mail or through CRM.

Again, that's part of the marketing investments that I was talking about in the opening comments.

There's an overall move we've been going through at a pace that maybe I'd like to see us accelerate in 2012, which is a little bit more towards person-casting and less about broadcast media.

That takes a while, and there's tools out there -- we've actually developed our own proprietary tools in some cases, to be able to speak to people directly, and not just rely on broadcast media.

That also may be affecting your bias.

Great.

Thank you, and good luck.

Michele Tan, Goldman Sachs.

Great, thanks.

Sabrina or Glenn, I was wondering if you could put a little bit more numbers behind, or ranges behind, the kind of marketing investments you're thinking about making over the course of the year?

Is it up low-single-digit in terms of budget, or are we thinking bigger investment offset by other areas of savings again?

Then Sabrina, if you could just give us, if you can, a depreciation number for the year?

The depreciation and amortization was $475 million, Michelle, and it's on the slide there.

I meant for 2012.

Is that the --?

Yes, that is the number for 2012.

Now with regard to the rest of your question, I guess what I would say is we're trying to be helpful by signaling it's likely that we'll de-leverage operating expenses for the full year.

The reason we're not articulating precise amounts is quite frankly because the amount and pacing of some of that spend is really going to flex and depend on our momentum, and our confidence in the product, and the momentum of the business, and that those investments will deliver a return.

A lot of this has yet to unfold.

I hope what you can count on some is to manage all of those levers responsibly, and our commitment is really around delivering on that EPS range we put out there.

Just to build on my last answer, some of the marketing we're putting in front to our customers is in some new media that we've probably have not put as much as much money behind in the past.

What we haven't decided to do just yet is make that a brick-in, brick-out investment.

Of course, if we can get through person- casting and through the new media work we're doing and some proprietary tools that we've built in the latter part of 2011, get the traction that we want to get, then we can forgo and reduce on some of the traditional broadcast media we've had.

We're going to see how that plays out, just like Sabrina said.

In Q1 in particular, since we're in this quarter, to be helpful I will tell you we are making those investments, and you should expect marketing to be up in the quarter, and it's driven by what Glenn outlined.

Great, thanks for the color.

(Operator Instructions)

Laura Champine, Collins Stewart.

My question is really on the fashion side.

Glenn, can you talk about what you're seeing that gives you some confidence in the new products that you've got launching this spring and later this year?

I can't comment directly on how it's performing inside the store.

What I can say is that -- and I can take an exhaustive answer here and go brand by brand -- but I was commenting at the beginning of the call on product.

The change we made in New York City was -- that was a seismic shift for us, because it really is bringing together the domestic design teams, the international design teams, under one full global design team in New York City for Gap.

That team worked for about 10 months together.

They worked through processes that we had to make sure were all aligned on global esthetic, and there was work being done.

We'd all agreed 2011 was not our best foot forward at Gap.

That work just showed up in the store on February 10, a little later in some of our global markets, but February 10 in North America.

There's a lot in there that I feel good about -- the work from in terms of the talent, and bringing together those two teams, then the addition of the Creative Advisor role under Tracy.

I'm starting to see at least a -- and I was in New York just recently, how they're working together, what decisions from a fashion and basic, the balance of the assortment.

The decisions those teams are making, I think they're really crystal-clear on the aesthetic going forward.

The Banana Republic team, they started going through not the same seismic shift that went on at Gap, but they addressed some of their concerns in women's, and obviously since that's a reported, that helped the Banana Republic team have a 6 comp in January.

I believe they've been on top in making the changes they needed to make about six months ago.

There's some similar changes going on at Old Navy.

All in all, with the trends in the marketplace, which are really highlighted by a real focus on color and demand of color; given our brands, what the American aesthetic they stand for, and the work that we've done to take corrective measures.

We keep saying internally that anybody can have a good month.

We don't want to perform well and above where we've been, which is our commitment based on the fact that we're just lucky on a trend.

We want to actually make changes in the business that affect our business performance.

Got it.

Then just as a follow-up.

When you talk about investing in the product this year, is that on -- would you expect that to happen more on the fashion product or on the basics side?

The focus is really on what do we feel good about from a category perspective we could dominate on, we can differentiate in the marketplace?

The word I always use is -- what are the assets of the Company?

One of the examples that we're going to be putting, because we've tested some of these things, we haven't just done it starting this year, and it's going to happen throughout the year, is Baby Gap -- clearly an asset of the organization, cannot be commoditized, and where it makes sense in key categories, our design teams have put the case forward that they can get paid for it, which is another filter you have to go through in my book, and put the investments behind it.

There's different ways to judge the success of product.

One of them is just are the fabrics right?

Is it actually in keeping with where you look at your competitive set and will your customers actually notice it?

Most importantly, with they pay for it?

Just a reminder to callers, with the limited time frame, if you could please limit your questions to one per caller, that would be great.

Thank you.

Roxanne Meyer, UBS.

Thanks, good afternoon.

My question is regarding the international business.

It's obviously a key strategic priority that you're clearly excited about.

Huge global opportunity.

Can you help us appreciate some of the metrics that you're seeing with your international business -- how it's performing, how some of the comp classes have been doing, for us to really get excited about the promise as we move throughout the years?

Well Roxanne, I'd say 2011 was a bit of a mixed bag, so if I start at the top, we feel very good about our franchise business.

We opened up in eight new countries in 2011.

We had greater than 45% growth, 50 stores, and as Sabrina mentioned in her comments, we'll do at least 50 stores in 2012.

I feel really good of the franchise team, our franchisees.

That's one piece.

China I also feel very good about.

14 stores operating, 30 more stores to open in 2012.

Open in Hong Kong in November has been a very successful opening for us.

Open in two other cities, Xin Tian and Hongxu, so now we're in five cities in China, five more cities to happen -- we'll close 2012 with 10 cities which we're going to operate in, also feel very good.

The Japanese business is difficult for us to gauge, given the incredible disaster they faced in March 2011 last year, and we have a big business in Japan.

I'll have a better sense of that coming into later in the spring and in the summer.

I like what the team is doing, I happen to know the work being done in the Gap Global Creative Center is resonating well with the Japanese team.

Some of the product has not got to our customer yet, but our team likes with they're seeing.

Our Banana Republic business is going to probably expand by a few stores in 2012.

That's been on hold for a few years.

I think that's good news, and we'll open up Old Navy Japan on July 15 just outside of Tokyo.

That leaves us with Europe.

Our European business, like a lot of other companies' was soft in 2011.

We're -- the team there is very aware of it.

We have a small business in Italy.

So really what we're talking about for us is France and the UK.

Austerity measures were tough, but we just were not good enough in 2011.

The product globally at Gap women's that hurt our overall global Gap business, particularly hit our business in Europe hard, did not register at all with the customers -- again, women's product in the European markets which we operate.

Too soon to tell.

That's going to be a tough market.

That's a wait-and-see for us.

We're going to be very careful on capital, be very careful on investments.

We still believe in Europe, but we're going to be watching it quite closely the next 12 months.

Okay thanks for all the color.

I appreciate it.

Ed Yruma.

Thanks for taking my question.

This will be the least amount of square footage growth, or excuse me, the lowest amount of square footage declines you've had in some period of time.

Is it fair to say that at this point you feel that your store closure program is largely complete?

If you provide a little bit of color specifically on Old Navy, and are you tweaking the format there, and shrinking some of those stores, and maybe some of the performance there, as well?

Thank you.

Hi Ed, it's Sabrina, I'll take that.

We're very much on track with the strategies we've laid out the last couple of years.

Just as a reminder, the strategy around Old Navy is to down-size a lot of our stores as we remodel them into the new remodeled format, and we're making good progress there.

2007 we had 20 million square feet.

We ended this year 2011 with 18.1 million square feet.

We'll be shedding about another 400,000 square feet in 2012, so we should end around 17.7 million.

That's really on track with what we laid out back in October to get to 17.5 million in 2013.

With regard to Gap specialty, same.

Right on track.

We said we wanted to get to 700 stores by 2013.

We'll be closing about 85 stores in North America specialty in 2012 to get us down to about 750.

At the same time, important other side of the strategy, is to grow the Gap outlets in North America, so we'll be opening about 20 of those.

Net-net we're right on strategy, and then we have the international stores coming up, and that's why the square footage decline isn't as great

Great thank you.

Jeff Black, Citi Investment Research.

Yes, a couple things.

Just a clarification, Glenn.

When you say you're -- now is the time to invest in marketing, do you think a lack of marketing was in some way a hindrance to last year's comps, or are you saying you think the product is just better, and could benefit from better marketing?

The question on sourcing is, where our lead times?

Where are you in terms of using your hub strategy a little differently?

Are both of these things better set this year so a little tail wind might be turned into a significant tail wind, and we get some even lower AUC then you guys are projecting?

Thanks.

Jeff, on the marketing side it's definitely the latter, where the time is that we -- as I tried to say in an earlier answer -- just because we have maybe one season that sits in a showroom and is about to be produced again to a store, that would never get us what marketing behind product.

We've worked very hard, as we should have, given our performance in 2011, worked really hard on the product front in getting clarity in each one of our design teams, whether that's addition of talent, whether that's just a better focus, and part of that was the GC -- the Gap Global Creative Center in New York City.

The confidence has picked up to the point where some marketing -- I want to make sure I'm clear on this -- some marketing will go on the Q1.

The investments I'm talking about will have to be one, earned.

They'll have to be -- they will happen at probably, if our business performs, at a higher rate through the year.

It's driven by, if you're going to making some change in product and get it right on to the customer in which we need to attract to our stores, we've got to go tell that story.

We have a lot of marketing in the business.

I want to make sure I'm clear about that.

This is a Gap story, mostly, in domestic, mostly in North America.

Old Navy has plenty of marketing.

Their issue in 2011 was it wasn't effective.

That as we've said a number of times on these calls, maybe being as transparent as we are, we were not happy with our marketing up until November when the new platform came out.

On the sourcing, the team is just being put together now.

We were very pleased with our geographical hub structure up until 2011.

Could have made the change then to a more category structure, which is aligning all the way through our business from design to merchandising, to production, to sourcing by categories.

Given the spike in cotton, we decided to not do it at that time because we had enough disruptions going on, and enough stress in the business to try to manage our way through that challenge.

We're in the early days Jeff.

Let's see, this is the month of February.

The team that's been put in place from a category perspective, their first impact in the business will probably be in our holiday buying, which we haven't even begun just yet.

They'll probably have some impact on holiday.

The real benefit to me of the category hub structure, it allows us to build much deeper relationships with mills upstream, which we do not have today.

That's a missed opportunity in our sourcing.

We do deal with mills, no where to the degree we will going forward.

A category structure gets the category leader relationship with the mills much stronger.

I think some of that benefit that I hope will be materialized could come on holiday, but most of that will be 2013.

Got it.

Thanks, good luck.

John Morris, BMO capital markets.

Good afternoon.

I wanted to ask with respect, Glenn, to the domestic re-investment that you're talking about, the emphasis on that in the three areas -- marketing, product, and e-commerce -- will one of those be emphasized more, or would be balanced?

Sabrina, on the topic, it sounds like a lot of that would be coming from some of the recaptured savings from the lower AUC in the back half.

Would you say that most of that potential differential, that delta, is going into that domestic re-investment?

I can probably, I'll try to handle both of those, and I'll pass it on to Sabrina for some further comments at the end.

I'd say John, it's difficult to be absolute about this, because we have flexibility.

Product is the one area we're going to invest in.

Again, it is going to be very targeted in key categories that we can dominate in selected brands.

That's the one with the longest lead time.

I would say that one as I know today will likely be the most amount of pure dollars will go into that area.

We also -- we've done some tests ahead of time in some categories to make sure we know it can resonate with customers.

It will be notice and we'll get paid for it.

We we'll be watching it through the year to make sure that those -- that that outcome actually happens.

Marketing would be the next one in line, but that has much more flexibility, much shorter lead times.

E-commerce, I talked about the new Phoenix distribution center we got full up and full operation in the fall of 2011.

There's some mobile investments we're going to make, there's some investments in people that goes into that business as well.

It will probably be the lesser of the money we're spending, as we do every year.

As I said in the beginning, we're always deciding what variable SG&A we want to put in the business to deliver on the strategic plan, but also to the framework of the economic model the Company needs to have.

In terms of what percent were billed, here's what I'll tell you.

We're at best just finishing our fall buy right now, at best.

We haven't even started anything on holiday.

We had choices like we have across all of the cost centers in the business.

One, negotiate as hard as we can, which we're going to do regardless, and get savings through the assumption of tail winds in the back half, to put all that money into the bottom line of the business.

Also, we had a choice, sit back and go, where do we believe we can actually get a win in certain key categories across brands, and give our designers and merchandisers a little bit of license to put some more money back into the product?

Just one last point on that.

When you think of product, to me it starts with fit, which costs no more money.

You just want to have great fit and consistent fit.

Then it goes to color.

It doesn't cost any more money.

You've got to have the right color for the season.

Then it goes to style, which can be print and pattern as well, doesn't cost any more money.

Then it gets to fabric.

So our designers and merchants know that in order to have excellent consistent-grade products season-in, season-out you have to deliver on all four of those.

All we're trying to highlight today is there in some areas, putting some money back into fabric does make strategic sense to us.

That's great.

Thanks very much.

(Operator Instructions)

Stacy Pak, Barclays Capital

Operator, should we go to the next caller?

Richard Jaffe, Stifel Nicholas.

Glenn, just a quick follow-up on the sourcing change, and then a question for the franchise goal longer-term.

First, for the sourcing, obviously the hub-and-spoke strategy is an old one, and one that's well- entrenched within the Company.

The change you've suggested, this category or more of a vertical by product initiative.

It sounds like that's going to be at least a year-long process, our multi-year process to get that fully implemented?

Is that correct, or is it in place today and just a question of timing to get the product in stores?

No, what I was saying to Jeff, and I'm actually going out to all of our sourcing offices next month and I'll have a much better feeling then, Jeff, when I go out.

Our teams will be in place, and will be actually executing our holiday buy through the category structure we have in place.

My point to Jeff was that the full benefit, the full value unlock for the Company of going from design all the way through the continuum of our product all the way to sourcing, and then our sourcing team working with a better balance of mills and vendors, that will probably -- that value unlock, will probably take place more in 2013.

The team executing our product sourcing and negotiations and vendor relations will be on a category basis starting this holiday.

Glenn, will that include 2013?

That is to say, will that include taking fabric positions, or commitments on fabric?

We're actually -- we do some fabric platforming today.

Not as much as I think we should.

We have some work to be done there, and not only under Colin's leadership, which is a fresh set of eyes, but two senior executives that he's brought in as part of the new team he's put together.

I believe all of them have been having many conversations over the last three months with mills, with our own in-house teams about the benefit of fabric platforming, the long-term, the cost benefit, the speed benefit -- which is really what I want to get, because that's where the gross margin comes, if you can get a fabric platform in on speed.

In terms of the franchise business, we presented -- it must have two years ago, that we planned on having 400 franchised stores by the end of 2013.

We're definitely on track for that.

We feel good about that goal.

Steven Sunnucks and his international team, or Steven in particular representing the international team, will be available in October, like he is every single year, to give an update on everything international.

I suspect that he will be able to give an update on the number of stores in the franchise business at that time.

Does that include the southern hemisphere?

No, that 's ex-Brazil, ex-India.

Any thoughts on that hemisphere or those countries?

We've had many trips to Brazil.

We like the Brazilian market and the capacity there is very difficult.

Capacity in terms of square footage available is difficult in Brazil.

I'm actually going for the sixth time to India this March.

Besides the sourcing team, I'm spending time with the Indian team, so I'll get a sense of that.

Those are two markets that of course we will be targeting down the road.

Steve, once again in October, can give an update on what our thoughts are in the two big markets.

Thanks very much.

Stacy Pak, Barclays Capital

Can you hear me this time?

Yes, okay, good.

Sabrina, my question's really for you.

What does the guidance imbed in terms of AUC recapture in the second half of 2012?

I heard what you said about you're not sure exactly what you're going to get, but what are you embedding in your guidance?

I'm assuming you have some recapture in there, and if not, why not?

Should we sort of assume there is?

Also, what does your guidance imbed in terms of share re-purchases?

Something similar to Q4 run rate, is that what's in the?

Yes.

I'll try and be helpful.

Obviously, we put out a range, Stacy.

We do lots of scenarios, and the range we've guided to is the best reflection of what we believe are the most probable outcomes with the info we have today.

There are a range of scenarios for both AUC, and just as a reminder, what I said was we are fairly confident we will get costing improvement in the back half.

There still is uncertainty because as we said, and Glenn just reminded, we just started buying the back half, and there's lots of decisions, not only the variables that are macro factors like cotton and labor and all of that, but there's also just our merchants who are making decisions about the mix of the assortment, where they'll reinvest.

All that said, we said we're fairly confident that costing will improve in the back half, and our range includes scenarios with improvements.

With regard to share re-purchase, we also have embedded a range of share re-purchases.

I think it's important that I just underscore again, we're trying to signal that we are absolutely committed to cash distributions, as we have been for many years.

Nothing in our principle has changed.

Definitely 2012 will be a more normalized, what we consider normalized year share re-purchases.

If you look back over the last, whatever, six seven years, we've sort of averaged $1 billion, $1.3 billion per year.

The timing obviously matters about the share re-purchases and how accretive they are, if they're back-half weighted, front-half weighted, et cetera.

Right.

Just a follow-up, Sabrina, on the AUC, is part of what you've been talking about in terms of investing in the product, upgrading the fabric, is that taking away some of the AUC benefit that you would otherwise see?

Well, obviously re-investing means that you would get less than doing exact like-for-like AUC, definitely.

Now what will also be important to manage during the year is we would like to see getting paid for those investments.

That's why we're taking our time and making them very carefully, and in areas that we really believe are really important to the brand.

Once again, suiting is something Banana Republic stands for, and that's an area we'd would look at.

Similarly denim, that's an area we stand for at Gap, and that's an area we'd look at.

Okay, great.

Thank you so much.

Paul Lejuez, Nomura Securities

Thanks guys.

Just tied to that last question, as AUC comes down, how are you thinking about the AUR side of the equation, and how does that differ by brand?

Then just second, can you comment on how much credit helped you this year, and if you expect that to be a tail wind or a head wind in F12?

Thanks.

I'll do the second question first, Paul, and then I think Glenn might chime in on the first one.

With regard to the credit card, I think you guys know, we've had a private label credit card for about 15 years, so really long time.

Then we've had a co-branded credit card we added about five years ago.

Nothing's really changed with regard to how we report that.

We've never given specific numbers, but we do imbed in our 10-Q some qualitative flavor that is helpful to our expense management.

We did get a nice increase in 2011, and we wouldn't expect that same kind of increase in 2011 in 2012.

The reason is, 2011 seems to be a really unique year.

With balances of our customers sort of growing, I guess that's maybe a sign that people are getting more confident as the economy improves and stabilizes.

But the loss rates have stayed pretty low.

I think that's fairly unique circumstances, so we're not counting on the same level of growth in the program in 2012 as we got in 2011.

The relationship between AUC and AUR, as we've been speaking for a number of years on the call, we've worked hard to disaggregate those inside the business as much as possible, because they really are independent decisions.

They come together to formulate a gross margin rate to the senior merchants, but they should be independent decisions, AUR, AIR, based on competition, and what you want to do by categories.

The AUC piece is just making sure that our sourcing and production teams can get us the best cost and leverage the size of the Company.

I will say, Paul, that in 2011, given this unique year, particularly in the back half, as we spoke about the significant increases in our cost of goods, our teams were much more aware of AUC -- those who had to price AIR, those who had to make AUR decisions were much more aware of it.

Coming in 2012, there's two components that are changing based on my opening comments.

One, from an assortment perspective at Old Navy particular, we felt that we got a little bit off on the spreading of our price points under a good, better, best strategy.

We got a little too far up in the best category, and that's going to be managed back to a better balance inside good, better, best.

That's one change that is certainly happening.

Then our value businesses, our outlet business and at Old Navy, because of the significant increases that really impacted them in 2011 in the back half, there's a few areas we crossed thresholds with customers.

Those adjustments are going to have to be made.

We're going to go back to how we operate the business in 2010, which is really making sure the merchants are 100% focused on the value proposition in the business, and then the production team getting the best cost possible, but not having the relationship be so directly affected one to the other as we did in the back half of 2011, given the huge increases.

Glenn, what do you think your competitors are going to do in terms of when they get the AUC benefit, do you think most will re-invest in the product and the fabric as you might be doing in some cases?

We heard from another retailer today, a big one that seemed to indicate that they'd accept a slightly lower merchandise margin and really go for share.

What do you think about the landscape in how everyone treats the AUC benefit?

It's way too early to know, and I think everybody's going to be doing different things.

I'm sure there's people out there who felt that maybe they crossed some thresholds, and they're going to have to make some adjustments.

We watch our competitors very closely.

There's going to be people who may felt during the significant pressure in the back half of 2011, maybe took too much out of their product.

Ours is less about going back to where it was, we tried to hold our product as best as we could.

Ours is just strategically trying to put it in key categories, they're going to be grouped like that.

I'll remind everybody this is a category that's had very little inflation for the better part of 20 years.

This is the first time we've seen some inflation, and the market leaders on price will be dictating a lot of this.

The people who control the floor will be sending signals through everybody whether they believe the price levels and whatever inflation was allowed to come through in 2011 should sustain itself in 2012.

I think time will tell.

Cool.

Thanks and good luck.

Ike Boruchow, JPMorgan.

Hi everyone, just a quick question, I'm calling in for Brian.

I know it's been harped on, but the SG&A, Sabrina, you guys have done such a phenomenal job the last five years, I don't think you've grown expenses more than half a percent.

I don't know if you can help us with the expenses, and a little more color, break out advertising versus other investments.

Is it back-half weighted, front-half weighted?

Any other color would be helpful.

It's just something we haven't seen from you guys in a long time?

Yes, I don't want to -- I don't think it's an enormous piece of our story going forward, so I want to make sure we're taking that into perspective.

I think because of our history, you can count on us to continue to manage that very responsibly.

We just also wanted to be transparent to your very point of after five years of really good management of expenses, even as we were making really big investments internationally, we just want to put some investments in our domestic business as well, and that's likely going to have us de-leverage.

Once again, the way that will shape up, as Glenn said, our philosophy together is that we need to earn the spend.

We need to continue to see momentum, we need to feel confident we're going to get the return.

The shape of it will take form over the course of the year, but we do want to signal that it'll likely de-leverage, and we'll continue to manage responsibly.

Good luck.

Thanks.

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

As a reminder, our earnings press release, which is available on gapinc.com contains a full recap of our Q4 and full-year results, as well as the forward-looking guidance that was included in Sabrina's remarks.

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

Thank you.

This does conclude today's conference call.

Thank you for your participation.

You may now disconnect.