蓋璞 (GPS) 2012 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen.

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

At this time I would like to welcome everyone to The Gap Inc fourth-quarter 2012 conference call.

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 2012 earnings conference call.

For those of you participating in the Webcast please turn to slides 2 and 3.

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 28, 2013, 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 welcome, everybody, to the Company's fourth-quarter earnings call.

I want to talk a little about the fourth quarter and give you some color around it.

I think it's important when you end a fiscal year for you to hear what I think were the accomplishments for Gap Inc in 2012.

In the fourth quarter, we were pleased with our sales.

We had a five comp, 10% total sales, yes, the 53rd week was in that, but at the end of the day when you back that out, we had a market share gaining quarter.

And that's what is important to me.

Not only for us to have good execution to gain customers, to put the product in front of customers that is right for each one of our brands, but to grow and actually gain market share.

One of the areas that is worth highlighting is our online business was up 28%, and that was a very good performance by, as everybody knows, a critical part of the Company's long-term growth strategy.

We had a $0.73 in earnings per share, and that was a 66% increase over the year before.

So on the surface, those are very good looking numbers for Gap Inc.

With that said, we believe there's a lot more business to be had for us in December.

When I look at the business and dissect it, and spend time with the teams after the holidays, we still have quite a bit of opportunity available to us and value to unlock between Thanksgiving and Christmas.

Now, the consumer patterns are really shifting, and you have this big amount of business being done around Thanksgiving and Black Friday and a lot of business being done the last three days before Christmas.

We've got to figure out the three weeks in between.

Now, we have an opportunity to do that, because we have multiple brands.

Because we can play the online channel, and the outlet channel, the specialty channel, differently to make sure that we capture as much business as possible and unlock as much earnings as we can possibly get in that four week period.

The last thing I should mention about Q4 is the acquisition of Intermix.

That's something we are just very pleased with.

We love that business.

There are a lot of talented people at Intermix.

We're going to help them when it comes to their integration strategy; what could be their long-term growth.

Early days, but we feel even better about the decision we made today than we did six weeks ago.

Let me turn to 2012, and from my perspective what were the key accomplishments for Gap Inc in the last fiscal year?

It starts for me and ends with product.

I've been very pleased with our merchant teams, our design teams, and how they brought product to life that's absolutely right on what the brand stands for, the customers they need to gain, the aesthetic, and consistently doing that season after season.

Part of that were the investments we made, again, they were targeted.

They were in key categories.

Where can we make an investment that a customer's going to notice, and it is done in a category that is so quintessentially associated with that brand, that we know we can build a business from?

We added our creative advisor role, which was new for us, to make sure that our teams were given every single chance and as much talent as they needed to be successful.

We married that up with the investment in marketing, and the marketing investment was mostly in Gap brand.

It was mostly made domestically.

And that was all about getting the brand back to relevance, getting people to see the incredible equity in this iconic, American, casual business.

The Be Bright campaign was launched 12 months ago, it's been a very good platform for the business.

One of the key focuses, and where some of the investment went for Gap brand, was to get new customers in their stores and on online, and the way they used social media.

Some of the unique relationships and partnerships that Gap had, I think was a big contributor to their performance in 2012.

China continues to do very well for us.

We opened up 30 stores in China in 2012.

We brought the outlet business into China.

So now in China we have our specialty business, our online business that opened up day one when our stores opened, and the outlet business.

What I've been really impressed with is the team we've built, from basically nothing, 2.5 years ago.

We have an office in Shanghai, we have talented people, a mixture of people who know Gap, who decided to relocate to Shanghai, and some incredible people that we've hired locally.

That team is building a business for the future.

China is a cornerstone of future growth for Gap Inc.

Our awareness in China continues to grow.

Part of that is the stores.

A big part is the marketing we're putting behind that business.

If you don't build a brand in China, you are not going to make it.

Too many new entrants, too much competition.

If you put the right marketing and stand for something and differentiate yourself, you're going to have a long-term, successful, profitable business.

We put some new growth irons in the fire in 2012.

We opened up our first Piperlime store in Soho, to try to find the right marriage between that online business which is digital, and the physical expression of Piperlime.

We launched e-commerce in Japan across Gap brand and Banana Republic.

And one of the biggest accomplishments of the year for us was taking Old Navy, outside of its domestic domain where it's been in for almost 20 years, and taking it onto the international stage by opening our first store up in Tokyo.

And the team did an incredible job.

The customer response has been great, because what's missing for so many customers in Tokyo, is this family brand, based on American aesthetic, with a value proposition.

I think that combination has resonated very well, and I will talk about 2013 later on.

Let me give you the update on our existing growth initiatives, and you all know them.

Our Franchise business went into 9 new countries, opened up 85 stores.

Our outlet business, that is now a global business, had the most store openings they've had in the last five years.

Our Athleta division added 25 brand new stores, and our online business just continued to grow, globally.

So when you think about it, we're doing the right thing for customers.

We're bringing new customers into The Gap Inc portfolio and family of brands with Athleta.

We're using our channels to provide access to our customers online, outlet, and specialty.

On the other side of the coin, moving these businesses so they become a bigger and bigger part of our total revenue is great for return on capital.

So this is, strategically, the right balance between what's right for the customer and what's right for our economic model.

Lastly, in October we completely restructured our business.

We felt very strongly the customer has changed, and the customer is looking for a seamless experience.

They see everything we do as one single brand.

So in order to make sure that our structure and our strategies match up to where customers are, and where customers, more importantly, where they're going, we went to a new structure of global brands.

Three global brand presidents, across every geography and every channel, leading our iconic brands, Gap, Old Navy, and Banana Republic.

That was such an important change.

That was a critical part so it introduced speed into the Company.

Looking at a single customer through one lens, and what is the right way to get more share of wallet from that customer when you have all these different choices, and one single team can do that for us.

And here we find ourselves in the first month, of the first quarter, of a brand-new fiscal year.

We've been spending a lot of time talking to our teams about, where is the customer today?

Where is the economy?

That's important for us.

Because now with the new global platform we have choices.

Where do we think that the biggest potential is for us?

And the consumer, at the end of the day -- we are looking at the consumer and saying, we have to continue to give her reasons to buy.

More excitement.

Just think of some examples last year.

When we launched the Rock Star jeans at Old Navy, that was provocative.

That gave her a reason to buy.

When Gap came out in the fall with our marketing campaign called, Icons Redefined, that gave her, her reason to buy.

If you're going to win in this environment, doing the same thing all over again is not a winning strategy.

We have to bring more and more uniqueness, differentiation, and excitement to the business.

So beyond that, some big priorities for us as we look forward.

One is the growth.

You know, as we look at our Company.

We're looking at Old Navy Japan, let's put 15 or 20 stores in there in 2013.

Build on that one successful store.

And then I'm asking the team, led by Stefan Larsen, where to from here?

Not this year, going forward?

We're going to answer that question this year.

China, we're going to open up 35 stores in China in 2013.

At the same time we're going to ask our self the question, what's the next brand going in China?

When?

How are we going to put those into the China marketplace?

How's the team going to operate that?

We're going to have those answers done this year.

The Franchise business is going to add around 75 stores, building on a very good year last year.

More global outlet growth, more online growth, and Athleta is going to add around 30 stores.

It's a step-up from previous years.

If you look at the Company in the last five years, this is the most new square footage we've put in since 2007.

As a matter of fact, we are going to grow square footage for the first time since 2007.

And the driver of that is what I just took you through, but also, this is the last year of our five-year real estate plan.

Five-year real estate plan was put forward in 2008 to do what?

To cut back on domestic square footage through closures, consolidations, and getting rid of square footage where we just did not need.

This is the last year.

So here we come now, in 2013 with the most openings, much more thoughtful, we're going to have less closures in 2014, as we complete the five-year strategy this year.

So I'm pretty excited, as you can tell, about what the future holds for us when it comes to new square footage, and the other area of focus for me is omnichannel.

You're going to hear a lot about that from a lot of other companies.

Here's all I care about.

Can we get a competitive advantage?

There is probably five or six components to it, that just everybody's going to get done over the next three years.

What are we going to do different?

I really am just highly motivated by Art Peck, who took over our growth, innovation and digital team, with the restructure we made in the fall, and the ideas they're coming forward with, the talent they've brought in, and how we're going to approach the marketplace so the customer participates in the brand seamlessly.

That's so important.

Seamless experience.

We have some really good ideas that are going to be launched in 2013, which we'll talk about down the road.

We have to have this to win long-term.

Now, those two key initiatives, the work on omnichannel and the step-up in our growth, and that sits on top of a foundation of steady growth with consistency in our product delivery, marketing, store execution, all those components that allow the foundation of the business to positively comp in 2013, as it did in 2012.

So with that said, we know that our customers have expectations of us, and our shareholders have expectations of Gap Inc in 2013.

Nobody puts more pressure on themselves than we do as a Company.

We really were proud of what we did in 2012.

We know we can do more.

We know we have to do more.

We know we have to make sure a lot of things I talked to you about today get executed flawlessly.

We know where it starts, with product, and we know we have to be very good at some of the other initiatives and innovation we need to have in the business in order for us to win.

So, with that said, I look forward to giving you updates throughout the year on our performance and how we're moving forward on the strategic plan.

Let me now hand it over to Sabrina to give you an update on our financial performance for '12 and to provide you guidance for 2013.

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 2013.

Please turn to slide 4. We are very pleased with both our fourth-quarter and full-year performance.

We achieved our stated 2012 objective, mainly increasing sales with healthy merchandise margins, prudently investing in our business, and growing earnings per share.

Here are some highlights for the full year.

Net sales grew 8% to $15.7 billion, with comps up 5%.

We invested in products, marketing and payroll, which drove successful results in North America.

In addition, we made investments to support our strategy of expanding through new channels and geographies.

Even with these investments, we expanded our operating margin 250 basis points to 12.4%.

We delivered earnings of over $1.1 billion, and grew earnings per share nearly 50% to $2.33.

And finally, we distributed $1.3 billion of cash to shareholders through share repurchases and dividends.

Please turn to slide 5 for our earnings recap.

In the fourth quarter, operating income was $602 million, up $230 million, and net income was $351 million, up $133 million.

Fourth quarter earnings per share increased 66% to $0.73 per share.

Turning to slide 6, sales performance.

Driven by solid product acceptance, fourth-quarter total sales were $4.7 billion, up 10% including the 53rd week, with comp sales up 5%.

Full year total sales were up 8% to $15.7 billion and comparable sales were up 5% for the year.

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

Turning to slide 7, gross profit.

For the fourth quarter, gross profit dollars grew by 26% to $1.8 billion, and gross margin was up 480 basis points to 37.6%.

Our merchandise margins were up 370 basis points, driven by decreases in average unit costs.

Rent and occupancy leveraged 110 basis points.

For the full year, gross profit dollars grew by 17% to $6.2 billion, and gross margin was up 320 basis points to 39.4%.

Our merchandise margins were up 200 basis points driven by improved product acceptance, especially in the women's businesses across all of our brands.

Rent and occupancy leveraged 120 basis points.

Turning to inventory on slide 8. Inventory dollars per store were up 5% at the end of the fourth quarter, in line with our comp performance.

Please turn to slide 9 for operating expenses.

We noted throughout the year that we planned to invest more in our business during 2012, and highlighted that we would deleverage.

In line with that framework, for the fourth quarter total operating expenses were $1.2 billion, up $141 million from the prior year, driven by store related expenses and marketing.

As a percent of sales, total operating expenses deleveraged by 70 basis points.

For the full year, total operating expenses were $4.2 billion, up $393 million from the prior year, and deleveraged as a percent of sales by 60 basis points.

Marketing expenses were $653 million, up $105 million to last year.

As a reminder, our incremental marketing investments for the year were focused on Gap brand and CRM.

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

For the full year, capital expenditures were $659 million.

With regard to Company-operated stores, for the full year we opened 28 stores on a net basis, and ended the year with 3,095 stores.

Square footage was down 1% compared to Q4 2011, driven by down-sizes in our Old Navy business and consolidation of our Gap store base in North America.

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

Regarding cash and share count on slide 11.

For the full year, free cash flow was an in-flow of $1.3 billion, and we ended the year with about $1.5 billion in cash and short-term investments.

Two noteworthy points regarding our use of cash during the year.

First, you'll recall we repaid the remaining balance on our term loan in Q3 for $360 million.

Second, we acquired Intermix for about $130 million in Q4.

For the full year, we distributed $1.3 billion through share repurchases and dividends including $563 million on share repurchases in the fourth quarter.

We ended the year with 463 million shares outstanding.

And now I'd like to share our outlook for the coming year.

Please turn to slide 12.

In 2013, we will use a balanced approach to deliver on our financial goals.

Specifically, we'll focus on growing sales with healthy merchandise margins, managing our expenses in a disciplined manner, and delivering operating margin expansion and earnings per share growth.

And as always, we remain committed to returning excess cash to shareholders.

With regards to growing sales with healthy merchandise margins, our objective is to deliver modest positive comps on a full year basis in our large existing base.

In addition to our comp base, we plan to drive increased revenue through our new brands, channels and geographies; for example, Athleta, Gap China, Old Navy Japan, franchise and global outlets.

We remain committed to disciplined inventory management and expect inventory dollars per store at the end of Q1 to increase in the mid-single digits on last year's 7% decrease.

Our second priority is managing our expenses prudently.

Assuming we achieve our goal of revenue growth, we would naturally expect total expense dollars to increase.

As a rate of sales, however, we expect operating expenses on a full year basis to leverage.

Given our balanced approach to delivering shareholder value, expense leverage will be a component of achieving operating margin expansion.

And that leads to our third priority of operating margin expansion and earnings per share growth.

We expect to grow operating margin from about 12% in 2012 to about 13% in 2013.

We expect earnings per share for fiscal '13 to be in the range of $2.52 to $2.60.

Our guidance contemplates some of the impact of foreign currency headwinds, specifically the weakening yen.

As a reminder, we operate wholly owned stores in eight countries and are therefore subject to the economic and translation impact of foreign currency movements.

To be helpful, the average rate in 2012 for the yen was about 80.

Current spot rate for the yen has weakened by about 15%, which means our yen-based sales and earnings translate to fewer US dollars.

When we issue our 10-K in a few weeks, we expect to report sales in Asia of about $1.3 billion, the vast majority being yen-based sales.

Although contemplating currency fluctuation is not new to how we set our guidance, we're calling out the impact this year due to the rapidity and magnitude of the recent move of the yen versus the dollar, while other currencies have remained much more stable.

Regarding returning excess cash to shareholders.

As evidence of our commitment to this principle, over the past three years we have repurchased about 240 million shares for about $5 billion or at an average price of about $21 per share.

In addition to share repurchases, we're increasing our dividend for the fourth consecutive year.

In 2013, we intend to increase our dividend 20% to $0.60 per share.

As a reminder, we also announced a new $1 billion share repurchase authorization in January.

Please turn to slide 13 for some additional full year metrics.

Regarding Company-operated stores, net of repositions, we plan to open about 160 and close about 80.

Store openings are weighted toward Gap China, Old Navy Japan, Athleta, and global outlets while store closures are weighted toward Gap North America.

As we continue to optimize our North America fleet and build on our strategy of expanding through new channels and geographies, we expect square footage to increase by about 1%.

This is the first time since 2007 that we're growing our square footage.

We expect capital expenditures to be about $675 million, and depreciation and amortization to be about $475 million.

And finally, we expect our full year effective tax rate to be about 39%.

In conclusion, we're pleased with how we executed against all of our 2012 objectives.

As we enter 2013, we're focused on a balanced approach to achieving our financial goals and driving further value for our shareholders.

Thank you.

And now I'll turn it over to Katrina.

Thank you Sabrina.

That concludes our prepared remarks.

We'll now open up the call to questions.

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

Betty Chen, Wedbush Securities.

I was wondering, Glenn, if you can talk a little bit about brand building.

Certainly it sounds like the team made a lot of effort and progress in 2012.

If you can run us through where each brand stands, in your mind, in terms of how much additional opportunity is left both domestically, and especially you talked about how important it is to build that in China.

Where do you think they've made progress on that front, and how does that relate into what we should expect for marketing expenses in 2013?

Thanks.

Betty, I'll answer the first part, then I'll hand it over to Sabrina on the second part.

There's two parts, from our perspective, when it comes to the reasons why we spend marketing at all.

So there's always a fixed part of marketing, inside of our budget, store signage, windows, and then there's a variable component which are choices we make that we expect a return from.

I'd say there's no need for any marketing domestically on awareness, whereas in China, most of our marketing and the tactics and the tools we're using are all about driving awareness.

In the US, let me just focus around Gap.

I think we started to gain some confidence about 18 months ago on New York City and the creative center, what the team was putting together, how we thought product was going to come to life in spring 2011, we brought a brand-new CMO in who was going to be in charge of the globe.

He developed a very good platform, and that's the reason we decided to put some money, almost exclusively, in our domestic Gap business.

While awareness has really not moved, in, I don't know how far back, certainly since I've been here, the issue was about relevance, and building equity, and being much more current, to the customers that we were targeting in our domestic business.

So from my score card there's no such thing as the perfect outcome when it came to the marketing we invested, but we felt good with what the Gap team did.

We felt it was, again, the platform was authentic, was appropriate for the brand.

I think as I said in my opening comments, the choice of media was also smartly done.

Finding the right mix.

Not everybody should run towards social media.

Some of those tools don't really have a great return right now, but there was a great balance in how the team approached it.

And in China, which I spend a lot of time in, I'd say the awareness -- I've been very impressed.

We have in China, a balance between the global marketing that comes out of New York that gets used by the team in China, and we have a unique agency we use in China to speak, to augment the message, and to build the brand.

Especially when you're opening stores, as we did last year in five new markets.

So you can never assume that -- because we know what our awareness is coming in, then we choose different marketing content to go into these new markets we're going into and make sure people know, A, we're American.

What does Gap stand for?

And why you should embrace the brand?

These are stories and marketing messaging has nothing to do with the value proposition, it has everything to do with the brand.

As I said in the opening, that's what long-term success, as far as we're concerned, in China is going to look like.

It's all about brand building.

So we've actually, again, felt good in 2012.

Was it perfect?

No.

Are we encouraged by the progress on the scores we look at?

Yes.

We're going to continue to spend some marketing in 2013, but obviously nowhere near the step-up we talked about in 2012.

And just to add to that, we don't specifically guide to marketing spend and we do that purposefully, because we like to keep flexibility throughout the year, as to monitoring the marketing effectiveness and actually making decisions about how much we want to invest given the business environment.

So not a lot to say on the full year.

To be helpful in the first quarter, what I'll tell you is, we have no plans to cut marketing expense versus last year for the first quarter.

Thank you.

Very helpful.

Best of luck.

Kimberly Greenberger, Morgan Stanley.

Glenn, I was wondering, if you could just talk about how you managed through the balancing the need to improve product execution and come up with some of those big ideas that you were talking about on the merchandising side?

How do you balance that while managing the risk in the business?

And what sort of management tools do the merchants and the designers have at their disposal to manage that as well?

Thanks.

I think you know that our business is not based on perfection.

It's based on precision.

It's based on history.

It's based on talent.

Trust me, we have more than enough tools, which I'm not going to take you through, Kimberly, but we have more than enough tools that the team can measure in hindsight, in market, to get a sense, the decisions that we're making.

The most important thing for me, that the team has developed over the last couple years, which we never had before, was to get a very early read at the beginning of a season from product that goes online, which tends to go on first before a product gets in the store.

And we used to look at that result and use it more to cheer the accomplishments we had in that given season.

In the last couple years we use it to read very quickly, what are we learning from that online?

How do we affect the upcoming season, or how do we affect product in that season that's going to last longer than 12 weeks?

So, this is not, again, this is not, again, a revolutionary move for us but our ability for us to chase into good ideas.

And to make sure the merchants, because the design team has done their job now, the merchants and the inventory management team, and the sourcing team, and the supply chain team are working in tandem.

We've redesigned that whole process.

Whereby the minute the read comes out, and we see an opportunity, we can move on that very quickly, which really accomplishes one of the goals that Sabrina and I have been working on since we started together, which is to reduce some of the volatility in the business.

So I would say that is the most important thing that I have seen.

Now, to I would say bigger ideas.

I think that is a risk-reducing strategy because we've been tightening up our assortment, slowly and thoughtfully, across all our brands for the last couple years.

We're never going to become just a straight item business.

Collections matter.

Wardrobing matters.

But, looking at the total assortment, I think the team has recognized that in some cases, in categories that matter to us, less is more.

And I think that does reduce the risk.

I've always internally said to our inventory management team, even though I can be their biggest critic, when I defend them, it's very difficult to do the job when if somebody's buying 24 of something, when the customer only wants 12 or 15.

You can have a huge, big idea on 12 or 15 colors of a skimmer bottom that launches in the spring, and that could still be a very big event, big idea, can drive traffic and be brand-right, and create some excitement around the business, and the incremental 8 or 10 colors really don't drive any gross margin dollars for the business.

So in some ways, the focus that each one of our brands is taking, to different levels across different categories, I think provides a little bit of de-risking of the assortment.

That's very helpful.

Thanks so much.

Janet Kloppenburg, JJK Research.

Congratulations everyone.

A great year.

I had a question.

I'm excited about your announced expansion plans and about the fact that your store closing program is going to conclude this year, at least that's my understanding.

I'm wondering then if we should look for --- I think we should look for the differentiating point between total sales and comps to begin to widen.

I'm wondering if, in fiscal '14, if we could look for that differential to become even broader, as the store closing program becomes much smaller.

Just so that we can model out our sales.

And if you could touch on your opportunity for AUC opportunity this year that would be helpful as well.

Thank you.

I would say, Janet, that that's certainly directionally correct.

We've been working on the total growth of the business, and it starts with a very strong base, and that's what's most important to us.

That's where our volume is.

Let's call that domestic stores, within the domestic brands, including some Europe, including Japan, that make up our comp pool.

This year, having done a five comp, which the business felt good about, that was not only gained market share from a comp perspective, but that's the health of the business.

Now, we have one more what I'd say big year, which is 2013.

There's always going to be in the fleet of 3,200 to 3,300 stores.

I'm just throwing a number out.

There's always going to be 30, 40, 50 stores that you've got to reposition or close, because the consumer's going to dictate that.

But at the end of the day, our massive change, and it's really significant what we've done the last five years, starting 2008, with one more year to go, but what that's going to help is that our spread, which is what you're referring to, the delta between our comp store sales and our total store sales, there's been a drag on that spread with the fairly sizable number of closures we've had inside the business, mostly at Gap brand, but there's been some sprinkled across different parts of the world as well.

But I think it is one of our goals.

It's not the most important goal in the business.

But we look at some of our global competitors in 2012, who also had a five comp and in some cases they had double-digit total sales.

So do we think this year's number which was three, but in fairness was helped by the 53rd week, do we think that number should widen over time as the real estate program comes to an end?

Do we get to just normalized amount of closing and consolidations?

And then the new store program picked up, now we have six brands to choose from.

Obviously the first three matter the most.

I think that's absolutely a goal.

And one question that I answered at the last call was what I'm most excited about that with the new economic model that Sabrina and I put together, is that those incremental stores come at a much better contribution to our operating margin than the last time we went through this, where we were putting the third or fourth store in the United States in a market that we've since had to go and close that store, where the market only dictated two stores.

So now as you start adding Athleta, that's all pure, raw, new contribution, and I think will be good to operating margin over time.

Same with Athleta.

Same with our franchise business.

Same with our outlet business.

Those are all great -- that incremental dollar hits our P&L in a way that's much more accretive to the overall business over time than it would have been the last time we tried to grow our fleet which was, call it 2002-2007.

The only thing I'd add to what Glenn said is, that's all absolutely true, assuming currencies hold constant.

So for example, in 2013, the point we were trying to make is obviously that's spread between comp, because comp is FX neutral.

The spread between comp and total sales will be impacted by the foreign currency headwind in Japan.

So that's just something to watch.

And then with regard to the AUC opportunity, I would say for '13, Janet, Q1 is the last quarter where in 2012, we were still facing headwinds.

So we have a little bit of benefit there in Q1.

After that, I would say it's normalized.

It becomes a non-issue.

We're just going to manage through without the big swings up or the big swings down that we had in '11 and '12.

Thanks, best of luck.

John Morris, BMO Capital Markets.

My congratulations as well on a great year.

Glenn, can you talk a little bit about the progress that you're making at Old Navy under the new team?

What can customers expect to see differently this year?

Because I think we'll see more from the new Old team.

What will they expect to see differently compared to the old, Old Navy.

How will the point of view, in terms of the product, et cetera, evolve?

Well, I think the first thing that's worth noting is that Stefan has been here just under six months, and when we brought him in it's because he believed in the brand, and most importantly, the brand positioning, which was a nonnegotiable, and the customers that Old Navy goes after.

Mostly in that it's a family brand, and we didn't want to have to revisit the notion that people can come in and put their own impression on the brand.

The brand is what it is.

Stefan has come in to improve it and evolve the brand.

I would say what customers are going to see is, even before Stefan was involved, the team that was there previously, I'm willing to say that they were making improvements in this first quarter in terms of product assortment that was better than the quarter before in 2012.

Now, it's our job to translate that into greater sales and greater earnings, but they were already making improvements.

I'd say he's going to have two impacts that should be noticeable to our customer.

I think he's been working vigorously with the team on the assortment.

And a little less, as I was saying to Kimberly, a little less about tightening it up, although I'm sure that's going to be one of the outcomes.

I'd say he's very big on building dominant categories.

I think he's helping with the fashion part of the business that is right for Old Navy, because this is not a fast fashion business.

But making sure we get credit for the fashion that's in Old Navy.

Because at the end of the day, what we provide is every day fashion essentials to the family.

I think he's really driving that point home, and he's bringing some discipline into the assortment planning, and that's something he's very skilled at.

The other side is that we were very excited this week, that Ivan Wicksteed joined us, who's our new CMO.

I don't think his impact will be felt immediately, but we brought him in, given the incredible track record and experience he's had, and I think our customers will start to enjoy his hand print on the marketing messaging in the business in fall and holiday.

And I've just been very happy with how he's come into the team, working with our merchant team, and working with the design team and all under Stefan.

So Stefan didn't come in to turn the brand upside down.

He came in to move the brand at a pace that I'm comfortable with, but let there be no doubt, he's come in to improve the business.

That is what he's asked to do.

Glenn, are you close to releasing some of the marketing dollars for Old Navy as well?

I know you were thinking about that as recently as the previous quarter.

They've got all the marketing dollars any brand would ever need.

Great.

Thanks very much.

Lorraine Hutchinson, Bank of America.

The SG&A's been very tightly managed for years.

I know you spent a little bit in 2012, but as we look out over the longer term, are there any big investments that we should be thinking about, whether it's e-commerce, or omnichannel, or any of the other new programs, or plans that you're expecting?

Yes, we're focused on our 2013 guidance right now, Lorraine, and we can talk probably more about the longer term at Analyst Day.

I would say that we're being very measured about the pace of our investments.

So you have observed that we've raised capital spend from probably an average of $475 million, $500 million per year, up to we spent over $650 million in '12.

We just guided to $675 million.

So, we are definitely focused on the long term and in propelling the long-term growth and in making the right investments and putting the dollar behind that.

But beyond what we've guided to, there's nothing radical that we intend to shift within those dollars we've guided to.

We feel really comfortable that we've appropriated enough to those strategically important projects like omnichannel, like Gap China, like Old Navy Japan.

I think we're learning and teaching the business very well, that in some cases there's a lot of initiatives or variable expense we're using in different areas of the business, that we either can't afford or is not necessary anymore.

So brick in, brick out in terms of state of mind is something that's very important in our business.

Now Sabrina mentioned China.

For us to have a really, long-term, viable business in China, there's some money we have to invest, whether it's in people or whether it's in marketing.

We're challenging the teams internally, especially the new three global presidents, to look at their portfolio.

Because we're going to hold them to a certain level of return and expectations on return on sales and return on capital.

What I like about the new structure -- it gives them a chance to look at where the most -- the best opportunities globally, where they should be investing their time, and their energy, and their capital to get the highest return.

But we will always have new initiatives.

If we're not innovating and bringing new initiatives forward, the Company's just going to go backwards.

So we're pushing the team really hard on both fronts, but we're telling them very clearly, as they work the one side of the growth story they have to go back into their P&L aggressively, and carve out money that's no longer needed or that's not getting a return.

That's how the two of us are trying to manage the business.

Thank you.

Adrienne Tennant, Janney Capital Markets.

Let me add my congratulations for the year.

Glenn, can you talk about the DTC opportunity?

It obviously looks like it's about 12% for 2012.

Philosophically, how do you think that's evolving across the sector?

How aggressively do you want to grow that piece of the business as a percent of sales?

And do you have any targets in mind for us?

Thank you.

Well, we don't put out targets.

We certainly have some numbers internally.

What I would say is, I would take it up a notch and say if we just look at the customer first, where we're moving and have moved a little bit in 2012, we'll take a bigger step in 2013, is this notion of easy buy anywhere.

At the end of the day, to be quite honest with you, I don't care where that unit goes.

The unit is going to go where the customer wants it, and we can get the highest return on that one unit.

If that's online, if that's specialty, if that's international.

Our online business is obviously growing, that's a channel of choice.

We've been working very hard to make sure that our website is attractive, that it's fast, and that our delivery time to the consumer, that we over-exceed their expectations.

So I look again -- what's going to happen here is that the customer will eventually dictate whether 12 goes to 15, whether 12 goes to 18, where it settles out.

We are not going to stop it.

We're not going to put any constraints on it.

But as we move and make a big move in 2013, to have really a seamless approach to this.

What's going to happen at one point, my view is that we don't want to get anybody should be thinking about getting credit for the sale.

If you think of 2012, prior to the restructuring, we were set up that somebody owned the P&L online.

Somebody owned it in outlet.

Somebody owned it in specialty, domestic, and somebody owned it internationals.

There was four different P&L owners.

They had agendas that ran through Sabrina and myself, and we were in charge of coordinating those agendas, and making sure we were doing the right thing for the Company and the right thing for customers.

Now you have three global brand presidents, and their job is to say that I have a customer who chooses to shop in three different channels across multiple countries.

How do I maximize that as best as I can?

If you take that kind of approach, and think of something as simple as order online, reserve in the store, it doesn't matter who's P&L that goes under.

It's going to go under the Gap global P&L.

I think that the teams now\ are working much better together, once we broke down the natural barriers, because I was a believer in the previous structure we had, of course.

Now I'm a bigger believer in the go-forward structure.

It just takes everything out of the way, and we always try to do the right thing.

And if that means feeding more inventory into online, we're going to do that.

If that means feed into another country, we are going to do that.

But the key thing here is that it's just going to become more and more seamless.

So we're going to let it go as high as it can, and as I said in my earlier comments, any unit that goes through purely in our online channel has a better return on sales, and of course, a better return on capital, than anything in our stores.

Now that we have a reset real estate, we were thoughtful in 2008, we didn't anticipate exactly where the online business or the outlet business was going to be, but we were thoughtful.

We don't need this number of stores.

We certainly don't need this size of store.

With the re-engineered fleet we have in place, now I think we can make sure we move that inventory and satisfy customers, because access and convenience is becoming that much more important, and I think with our fleet and strong online site, we can meet the customer demand.

Thank you very much.

Best of luck.

Brian Tunick, JPMorgan.

I'll add my congrats as well.

I guess maybe for Glenn.

It seems like The Gap North America brand sales are 30% smaller than where you peaked a couple of years ago, and I guess the assumption is much of that has been a decline in women's market share.

So we were curious how you rank maybe which categories Gap North America on the women's side has the biggest opportunity to regain share and move the needle over the next year or two.

Thanks very much.

I'd say, Brian, without getting into the category strategies, where you are correct is that our kids and baby share is larger in that universe than our adult share.

As we told investors a couple years ago, it builds on the issue of, why did we re-engineer our real estate?

One of it was because there was a time where we had 450 stand-alone kids and baby stores.

We really strategically thought that if there were customers that we did not -- were not able to attract or satisfy, make them loyal to Gap brand five years ago, as their lives evolve, how do we get them engaged again in the adult business?

One way to do that is the cross-shopping that exists inside of a 12,000 square foot Gap store, where you could pass through between kids, and baby, and adult.

Now that real estate is almost completely done.

That's going to be a big opportunity for Stephen Sunnucks and his team, and much easier to use the strength of kids and baby, and the market share, and the natural draw, to get some, in this case women, shopping in the adult section.

But there are key categories.

Nothing's going to change in terms of the strategies.

And I'm not here to give out where we aren't equal to our total share in adult, and where are we above, and where are we below.

At the end of the day, this is a business that is grounded first and foremost in denim, in the adult business.

And our team in LA has done a great job.

We're seeing the results of that again this spring, with some of the work they've done.

And that's -- there's probably three or four adult categories that are really important.

That would be number one.

And the team is very focused on how do we make sure we continue to gain share, continue to be innovative, continue to be current and relevant in the denim business.

That's where I know the merchants and designers are putting most of their energy.

Oliver Chen, Citigroup.

Congratulations.

In terms of some external factors, could you brief us on the environment for product cost inflation and also payroll taxes?

Do you think that certain of your banners will be more impacted than others, and what are the competitive, proactive stances you can take in light of that?

And if I could just ask a modeling question.

Should we be more encouraged on the upside from the SG&A margin or the GM as we think about your Op margin expansion guidance?

Thank you.

Let me try and hit those three topics really quickly.

On the average unit cost front, as I said, Q1 is pretty much the last quarter that we get tailwinds, because we were still facing increases, although nothing like the back half of '11, we were still facing increases in AUC in the first quarter of '12.

After the first quarter it really moderates and there's really no significant story around average unit costs.

That will just be managed in its normal way, and we'll manage through our mix and making select decisions around where we invest and not.

With regard to the payroll tax, it's really hard to split out the impact of any of these moves.

But I think it's fair to say that our consumers now, after so many years of a tough economy, are getting probably thicker-skinned about any of these moves in particular.

There's certainly some that are impacted more directly than others.

But overall, can we claim a large direct impact of that?

I would say, not overall.

Obviously, if there's going to be an impact, our customers at Old Navy are going to be more sensitive to it than the others.

Finally, with regard to how we're approaching our year, and I'll interpret your question by saying, how do we get to operating margin expansion.

I would say we want to be very balanced about that.

We know that 2012 was unique because we could invest so much, given that we were getting the benefit on merch margins, not just from great product, but also from average unit costs.

2013 we're going to use all of our levers, the three big ones of course are expense leverage, rent and occupancy leverage, and merchandise margins, and we tend to approach those in a very balanced manner.

Thank you.

Best regards for the year.

Jennifer Davis, Lazard Capital Markets.

Let me add my congratulations on a great year.

My question is really on gross margins.

At the end of 2011, merchandise margins were down I think 440 basis points from 2009 levels.

This year you recovered 200 basis points, so you're still about 240 basis points below peak.

I would argue that the merchandise is significantly better now than it was in 2009.

My question is, first, can you give us some sense of your full price or planned promotional selling now versus 2009?

Secondly, have you seen any benefits yet from the changes you've made in your sourcing structure?

And then I'll try to throw one more in and that leads to the real question of, is there any reason why gross margins can't exceed prior peak levels?

It seems like there's more room with merchandise margins and with the rationalization of the store base, you should get some more buying and occupancy leverage, not to mention the fact that international and direct are becoming a bigger part of the mix.

I think I understand your question, so let me try and hit that, Jennifer.

One of the important things to remember is that 2009, for Gap, was a very unique environment in terms of costing.

The underlying cotton was certainly lower in 2009 than it was in '12, and than we expect it to be in '13, so you've got an underlying commodity that's lower.

You have labor that was certainly lower in 2009, than we certainly expect it to be now with labor pressures in Asia in 2013.

So you had a very different costing environment for certain.

I'd also point out in 2009, despite our high gross margin rate, we were negative comping.

So obviously it is important for us to balance delivering a very healthy rate, which we are focused on, with driving healthy comps and gross margin dollars.

Now, that all said, we do have levers and we are focused on delivering healthy gross margins, and as you said, first and foremost with positive comp performance.

We feel confident that we'll leverage rent and occupancy, so that's a lever.

Regarding our merchandise margins, with all the effort we have put against delivering strong product assortments, we have opportunities to move the needle in more reg selling.

Certainly still promotions.

We'd love to draw back a little, either in frequency or depth, and then markdowns, also, with better assortments, we might have an opportunity there to not go as deep off the markdown itself.

So we are focused on it but very different than 2009.

Great.

Thanks and best of luck.

Richard Jaffe, Stifel Nicolaus.

On a farther ranging topic, sourcing.

You have undertaken a dramatic change in your sourcing policies and practices, trying to enhance speed to market, obviously to manage the vagaries of the market place, cotton last year.

I am wondering how this multi-year initiative is going, where you stand today, and what kind of promise is in the future?

I would say we're probably in the third or fourth inning, and the big driver, the unlock for us is, we may have mentioned this in past calls.

For the longest period of time we were very focused on our vendors and some of the stuff Sabrina was just referencing, when our margin rate was pretty high in 2009, that was when we were at the peak of the recession.

We were making tough choices in our business.

The choices we made back then was to really focus and negotiate, and use the leverage of the Company to get what is known as our cut and make costs down, the actual making of the garment.

That was a big focus of the business.

As speed came in and speed became more important, as I was talking earlier about chasing more rapid response or just actually the whole fast pipeline, which is putting new styles to work inside of a season, what the team on the new structure turn to is really fabric platforming and working upstream with our mills.

So, for the longest period of time we'd worked directly with vendors.

That was 99% percent of our relationships.

Now we have a stronger relationship with mills and fabric, first and foremost.

And the way we -- again we are only in the third or fourth inning, but the way we've got our merchants and designers to understand it, is if you want speed and you understand the gross margin upside of speed, and the customer satisfaction that comes with that, the only way you're going to do that is have fabric that is ready to go.

So just one example.

Last year we had a very good year.

When somebody was asked about categories earlier, in denim, at Old Navy, one of the categories there was something we introduced, called the Rock Star Jeans.

The Rock Star Jeans is a fabric that we developed.

We platformed it, and then the team and sourcing goes and negotiates as many years out, to get as low a cost as possible.

It's not colored.

All the team has to do is make sure we're giving in the moment, daily information to the vendors to make sure we are getting the right color and the quantity to come in to fill the pipeline.

We weren't able to do that two or three years ago.

I think that was, I might have said this two or three years ago on a call, that was as much cultural, as anything else.

As the culture has changed and evolved, I think now people are appreciating that we have to work directly with mills, work aggressively, narrow the number of fabrics we have.

Because a fabric can be treated in so many different ways.

So less fabrics, work with the mills directly, have them available there as a platform opportunity, create a toolbox of fabrics, and therefore really push the speed part.

Because, while I'm happy to get gross margin dollars both ways, which is lowering our costs and driving more cost sales at reg and getting more dollars coming through on the AUR side, the real benefit of speed is AUR.

And that's why I think the team can hopefully, down the road, get the benefit of both, which is managing our average unit cost through the fabric platforming, but more importantly, putting more and more of our units on a faster pipeline, which all three brands now have, and drive a higher cost sales reg.

Glenn, just one follow-on question.

Are you making a financial commitment to the mills for fabric, or is it more of an understanding, a handshake if you will?

We don't get into the details of it, but I think, let's just put it this way, that mills understand that they have so much capacity, and they look for companies to obviously eat up that capacity.

So we work with our mills more than we have before, to make sure there's so many yards that we need of fabric, and I think that we built really good relationships.

A lot of the new team members we brought in know that side of the business very well.

As a matter of fact one senior person came from that business, and it's what some other companies have done.

We're trying to not only catch up, but then eventually go past them, in instituting this new process in the business.

Great.

Thanks very much.

Great.

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

And as a reminder, our earnings press release, which is available at Gapinc.com contains a full recap of our fourth-quarter results, as well as the forward-looking guidance 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.

We thank you for your participation.