蓋璞 (GPS) 2014 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen.

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

At this time, I would like to welcome everyone to the Gap, Incorporated Second-Quarter 2014 conference call.

(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 Second-Quarter 2014 Earnings conference call.

I would 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 the reconciliations or descriptions of measures we're 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 subsequent filings with the SEC, all of which are available on GapInc.com.

These forward-looking statements are based on information as of August 21, 2014.

And we assume no obligation to publicly update or revise our forward-looking statements.

Before we begin, I also want to mention that Sabrina will be using slides to supplement her remarks, which you can view by going to the Investor Relations section at GapInc.com.

Joining us on the call today are Chairman and CEO, Glenn Murphy, and Executive Vice President and CFO, Sabrina Simmons.

Now I'd like to call over to Glenn.

Thank you, Katrina.

Good afternoon, everybody.

Before I hand the call over to Sabrina, who will take you through the Q2 financial highlights for Gap Inc., I thought I'd just give you my customary take on the quarter and also give you a few highlights of the upcoming quarter in Q3.

Q2, internally, we've been thinking about the quarter as a quarter in which we made some progress.

Some progress from the first quarter, which we needed to make on a number of different areas.

But it's progress nevertheless.

And we are committing to making further progress as we look towards the back half.

First, Sabrina will talk to you about progress on margin rate, obviously an improvement from Q1, which we needed to make.

So I think that's a sign of some of the changes that we're making as a Business to improve that very important line item in our P&L.

We definitely made progress at Old Navy.

That was really, a very strong second quarter, with a 4% comp on top of last year's 6% comp.

That is market share gaining in really the most important sector that we compete in, the value sector, with the most competitors, where ingenuity and innovation matters the most.

So I'm very impressed with the Old Navy team.

We opened up three stores in China for Old Navy.

So now we have four stores.

We have at least one more to go this year, maybe a second one.

So that's a big milestone move for us.

As we look at the China market, as everybody knows, critical to the future growth for Gap Inc.

We will end this year with 110 Gap stores, still on plan; up to six Old Navy stores.

And I think that combination of the two of them in the China market is going to be very strong for us.

Our omni-channel initiatives continue to grow.

We really saw some step-up in our reservations on a daily basis at Banana Republic in Gap stores.

So I feel good about what that means for the second half.

People are time-pressed, and this reserve-in-store is unique.

It's a competitive advantage.

So I think that's really going to shine for us in the second half.

More importantly, we tested order-in-store.

As everyone on the phone knows, that's the ability for somebody to come into our store.

We have the device with us that's connected to Wi-Fi.

And we can actually complete orders.

When something is not available in the store or something is in a flagship store but you are not in a flagship city, we can get you that product.

That has been in Banana Republic, Gap, and Old Navy being tested.

We're going to roll that out to 1,000 stores in the month of October.

We've been testing a loyalty program.

What we've been doing at Gap Inc.

for a number of years now is continually trying to find different ways and voices, something creative when it comes to talking about our value proposition.

Let's face it; there's a bit of a promotional merry-go-round in the marketplace.

To the companies who are willing to be bold, to be different, to try something that's different in terms of offering value to people but not in a way that's predictable, those are the companies who are going to win.

I believe this test we're doing in only 25 Banana Republic stores could become the basis of something we can use down the road to present a different twist on our value proposition.

Lastly, we have spent an incredible amount of time the last three months getting ready for the second half.

And getting our preparatory work ready not only on product, but on merchandising, on marketing, on digital communication, on innovation, on customer messaging, you name it.

There are a lot of lessons the Business learned in 2013.

We've addressed those as we come into the second half of 2014.

Some quick thoughts about the third quarter, which we're two weeks into before I hand the phone call over to Sabrina.

Last week at Banana Republic, we launched a new marketing campaign called the New Look.

It's the beginning of enhancements in product and marketing digital content from now right till the end of the year and beyond.

And I think it was a nice start for the team.

I think they really made a change in terms of this path that Banana Republic has been on from too conservative to more of a contemporary product appeal.

I'm speaking mostly here about women's product.

Our men's business has been strong.

This is mostly about women's product.

What you're going to see going forward is a step-up in that messaging in the months of September, October, and into the holiday season.

In the month of September, you're going to see a similar change go on at Gap brand, which is much needed.

It's going to be a combination of first product put together by our merchant and design team of Michelle DeMartini and Rebekka Bay; brand-new marketing campaign from Wieden & Kennedy; a big change in our online site to match up.

So it's a fully integrated communication plan.

I just want to be clear that the store business in North America has not been as strong as Stephen wants it and I want it so far this year.

While we are both pleased with what consumers are going to see in the month of September, it's just the beginning.

But at least it positions us in a much better way as we look forward to September going into the fall going into holiday season.

Some other updates for Q3.

The team feels a lot better about our inventory position on a per-foot basis across all of our markets, which will bode well in terms of the health of the Business for the back half.

In second half of this year, you're going to see the Company push much harder into personalization.

This is on our mobile devices, on our desktops, on iPads.

And we believe there's a huge opportunity here to personalize home pages, personalize content, more than we ever have before.

We've been testing that in the first half, and this is the ultimate definition of the use of big data.

This week, we relaunched Piperlime.

We don't talk about Piperlime much.

It only has one physical store, and it's an online business.

While it's easy to look at Piperlime as a small part of the Gap Inc.

portfolio, what I will tell you is we use it continuously as a site where we test a lot of ideas.

Ideas that could work for that business because that's what matters first, but then can be taken to our other brands.

I believe the relaunch of their site provides for a lot of innovative ways to present our online business to customers.

Just a quick update on our franchise business because the Company operates in about 50 countries.

It's been a unique year, with some franchise markets clearly showing some declines -- like in Russia, Ukraine and Israel.

But we've been very pleased with some long-term future markets, like Brazil, Mexico, UAE, with strong growth midway through this year.

As a matter of fact, as I'm speaking to you, we're putting out a release today that says we're going to be opening up stores in India in 2015.

We believe the Gap brand has very strong brand awareness and looking forward to adding it to our franchise portfolio.

In closing, I just have one comment to make.

Today is the 45th anniversary of Gap Inc.

This was the day in 1969 that Doris and Don Fisher both spent $21,000 each of their own money to start this incredible Company.

What I would like to say is on behalf of the 140,000 employees and the millions of people who have worked in this Company, a big, big thank you to the Fishers.

This incredible couple who founded this Business, who make us proud every single day.

It is a testimony to the strength of our brands, of our people, of our creativity, of our commitment to the customer, that this Business has been around for 45 years and continues to move forward and to blaze trails and be a formidable force in the apparel business.

We have one goal and one goal only.

And I think Don Fisher, who passed away five years ago in September, would appreciate this.

It is to become the number one global apparel Company in the world.

If we keep not being afraid to take risk and push forward in the Business, we will achieve that goal.

With that said, let me hand it over to our CFO, Sabrina Simmons.

Thank you, Glenn.

Good afternoon, everyone.

As we begin the second half of the year, I would like to take a moment to reiterate the priorities we set at the beginning of the year.

We continue to focus on a balanced approach to driving long-term value.

As a reminder, our financial priorities for the year are growing sales with healthy merchandise margins; managing our expenses; delivering earnings-per-share growth; and returning excess cash to shareholders.

As I describe the financial results for the quarter, it's worth noting that all reported numbers include a $39 million gain on asset sale that we've reported with our July sales.

In Q2, we made progress against several of our financial priorities.

Specifically, we grew net sales by 3%.

Expenses were managed very tightly, with operating expenses down $44 million, including the gains.

We delivered earnings of $332 million and earnings per share of $0.75 versus $0.64 last year.

Year to date, we've generated free cash flow of $668 million.

And we've distributed $802 million through share repurchases and dividends.

Regarding sales for the second quarter, total net sales were $4 billion.

And comp sales were flat for the quarter following last year's 5% comp.

Totals sales and comp by division are listed in our press release.

Moving to gross margin, the second-quarter gross margin was down 110 basis points to 39.4%.

This is an improvement in our trend from Q1.

Merchandise margins were down 90 basis points for the quarter, driven by elevated promotional levels at Gap brand.

Rent and occupancy deleveraged 20 basis points.

As a reminder, we need positive comps to leverage rent and occupancy.

And in the threshold for ROD leverage is higher this year, given our mix shift toward international markets like China that have higher ROD costs.

Regarding SG&A, second-quarter total operating expenses were $1 billion, down $44 million from the prior year.

Operating expenses versus last year benefit $39 million from the gain on sale.

Marketing expenses were down $6 million to last year at $142 million.

As a percent of sales, total operating expenses leveraged 180 basis points versus last year, to 25.2%.

Regarding the balance sheet, we are pleased that we are meeting our goal of better aligning inventory with sales in each period.

Inventory dollars per store were up 2% at the end of the second quarter.

We ended the quarter with about $1.5 billion in cash; and used $364 million to repurchase 9 million shares, resulting in a quarter-end share count of 434 million.

Regarding capital expenditures and store count, year to date capital expenditures were $328 million.

Year-to-date, we opened 36 Company-operated stores on a net basis and ended the quarter with 3,200 stores.

Square footage was up 1.6% compared with Q2 2013.

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

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

Our full-year operating outlook remains unchanged; however, we are updating our full-year guidance to reflect the gain on sale, worth $0.05.

Therefore, our full-year guidance range has increased from $2.90 to $2.95 to $2.95 to $3.

At its midpoint, including the gain, this represents growth of approximately 9%.

On a constant currency basis, the growth rate is estimated to be 5 percentage points higher, or a solid double-digit growth rate, over last year's 18% growth rate.

Underlying this guidance is the expectation that we maintain tighter inventory levels that are more in line with sales.

At the end of the third quarter, we expect year-over-year inventory dollars per store to be up in the low single-digits.

Regarding expenses, it's important to note that there is no change to our full-year goal of achieving leverage.

However, as we mentioned last quarter, we expect full-year leverage to be very modest, given the shift of about $160 million of income out of expense into merchandise margin, as we discussed in depth on the Q1 call.

We achieved 1 point of leverage in the first half of the year in the face of more challenging sales and traffic trends.

In the second half of the year, assuming we meet our sales goals, this dynamic will likely change as we lap difficult comparisons from expense savings last year and as we invest to support marketing, especially at Gap brand.

We expect marketing expenses in the third quarter to be up about $25 million versus last year.

For the full-year, the following guidance metrics remain substantially unchanged.

We expect operating margins to remain flattish on a reported basis.

We continue to expect square footage to be up about 2.5%.

We still plan to open about 185 Company-operated stores and close about 70, net of repositions.

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

We expect capital expenditures to be about $750 million; and depreciation and amortization to be about $520 million; and our full-year effective tax rate to be about 38.5%.

In closing, as we commence the second half of the year, we'll continue to focus on the levers that we control, while we work to deliver compelling product and marketing.

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

(Operator Instructions)

Oliver Chen, Citi.

Thank you.

We had a question related to the Gap division and what do you think the next major hurdles are there for what we should watch for as you look to further move along with merchandise execution?

And just as a quick follow-up, could you talked briefly about supply chain and how you're feeling about fabric platforming and test read and react?

Thank you.

That's two questions (laughter).

Kidding aside, the Gap business, as I talked about in my opening comments, we can, if we wanted to, we could rationalize a way the first quarter, which was a difficult quarter for a business that has a strong US-based division.

That's been the division that clearly has been underperforming the most for Gap brand.

Of all its global presence, the US has been the business that we're most disappointed in.

Second quarter was a bit of a carryover from the first quarter.

A combination of product and other issues, [they've done] in the second quarter.

They've made a lot of changes.

And people in the call and mostly our customers who are going to be shopping that business on their device or in one of our stores around the world.

They are going to see a better face of the brand from a product perspective starting the first week of September, much better communication.

I don't want to get into the full integrated plan.

You are really focused on merchandise, and I think you see some changes in the product.

And you start to see now what the benefit is of teamwork between a very strong and talented designer and a commercial merchant, not a product merchant, a commercial merchant, in Michelle DeMartini who partners with Rebekka Bay.

We see how that works over at Old Navy and it is producing the results we're seeing now, as we've redefined the role of merchant to make it much more commercial, somebody who drives the business and doesn't necessarily just pick product.

And we are seeing that in the early days of the relationship between our Banana Republic twosome of Julie Rosen and Marissa Webb.

You will see a change in the merchandising, but as I said in my opening comments, it's the beginning.

Gap had a very nice run in 2012 and 2013, first two quarters, I said that you could explain them.

I'm not happy with them; you could explain them.

And now you'll see the beginning of the change the first week of September, take us all the way through holiday, and actually, I've seen spring.

And they continue to do what any good brand should do, is deliver a better and better assortment every single season.

This will be just the beginning on this fall launch.

On supply chain fabric platforming, I'm really impressed with how much progress we've made.

It's taken us a while to get there, as we shifted our relationship from vendor-based relationships to mill-based relationships.

But we will have a significant amount for us of our assortment on fabric platforming in the second half and that's going to help us a little bit with cost of good compared to the first half.

That's the whole intention behind it.

It's not only the platform to run our response of supply chain tools off of.

You can't run the tools without a significant amount of your assortment on fabric platform, but also as you consolidate your fabrics and create much more tight library of fabrics and negotiate directly from the mills, that allows you to get the benefit of cost of goods.

Thanks a lot.

Best regards for the holiday season.

Matt McClintock, Barclays.

Hi.

Yes.

Good afternoon, everyone.

Glenn, I was just wondering, you've outlined a lot of very strong digital initiatives.

You've talked about reserve-in-store, ordering store, and you also talk about personalization.

Yet overall, the digital growth rate for revenue has actually decelerated meaningfully from the run rate last year.

I was just wondering, could you maybe speak to that a little bit?

I'm not trying to poke holes in a double-digit growth rate because clearly that's very strong, but the deceleration itself, what are you seeing in that business that's driving that, and when can we potentially expect a reacceleration?

Thank you.

Well, a couple of comments on that, Matt.

One, I would say that inside of that double-digit growth rate in the second quarter was poor performance at Gap brand.

Some of the reasons I was just explaining to Oliver earlier, they are just a matter of record now, when one is happy with our assortment in North America in particular, or the US in particular.

But it was an 11% on top of the 27%, so it was a two-year of 36%, so that's 18% per year.

Definitely market share gaining over two years.

But I won't disagree with you.

I thought we should do better than 11%.

Now, order-in-store drives business in the store.

It's only being tested in 30 stores right now.

Reserve-in-store, that has stepped up in the second quarter drives business to the stores.

So even though those tools are there, you get the eyeballs from online, but the sale goes to the store.

Personalization, what I tried to say in my opening comments possibly wasn't clear.

We are just testing it.

It's been about six month we have been in beta test, but we now believe that personalized content and personalized promotions, eventually, on our homepage, in our emails, in our messaging will definitely help online business going forward.

But overall it was good performance online over two years.

If the market is growing between 10% and 12%, maybe I'm being generous when it comes to apparel.

Two years of back-to-back 18%s is good, but I had my eye on 11%.

I won't deny that.

That was a number we circled at the end of our P&L because we know every part of our Business has to fire at all cylinders for us to reach our goal and the online business did a decent job in the second quarter, but we are always looking for strength, especially given your point, the investments we're making.

Thank you very much, Glenn.

Simeon Siegel, Nomura.

Thanks.

Can you provide any color on the trends at the outlets, per broader challenges across that channel?

It is a business that when the core brands are strong, they do very well.

There's just this incredible relationship between the specialty business and our outlet business.

Our outlet business did very well in 2012 and 2013 because our core business was stronger at that time.

So if certain malls around the country, mostly B malls and maybe the odd C malls start to act promotionally like an outlet mall that's 10 miles away, it's more difficult to drive traffic to the outlet mall.

Over time, especially in our business, this is maybe a macro comment about the specialty mall business in general, as it becomes and needs to become more innovative, as it puts product separation between its outlet business and its specialty business, which is critical, as it speaks and engages customers in a way that's not so dependent on just pure discounting, the outlet business is in its rightful home and within our portfolio is a critical part and a very important channel inside our Business.

For that reason, Jack Calhoun and Stephen Sunnucks are really focused in the back half, to make sure the specialty business gets to the right position on the continuum of our portfolio, from Old Navy on the left-hand side of the portfolio, value-based to Intermix on the right-hand side on the portfolio, which is luxury.

For our outlet business, even though traffic ebbs and flows, for it to be really successful, we need strong specialty business, strong brand -- our brand recognition is there -- but strong brand acceptance, and a value proposition that is less baked in a percentage off as a tool to express your value, which is really the tool of the outlet business.

I'd say the last comment is there's been some new real estate lately.

It's the only place that we're seeing real estate growing and square footage increasing is in lifestyle centers either being converted to power centers or being converted to outlet centers.

We participate in those.

We think it's right.

But for the most part, our investment for the last couple of years have been in inner-urban locations, street locations, and power centers, as we try to make sure we stay in only the best outlet malls, but look at where the customer is going and where traffic is.

There's a lot of street locations we've gone into in inner-urban occasions where there is no crossover between a specialty store.

We've dropped in one of our factory store businesses there and done very well.

So we are being careful not to just react like we did years ago to new square footage, but be thoughtful and strategic on how we spread our outlet stores across the country.

Kimberly Greenberger, Morgan Stanley.

This is Amber Turley on for Kimberly Greenberger.

As you think about moving into fall, and this promotional merry-go-round that you talk about, what kind of steps are you thinking about in terms of easing up the promotions, but still maintaining a shopper?

Or are you thinking in terms more of developing the fabric platforming such that the cost of goods decreases and maintaining the promotions to keep the shopper interested.

What sorts of lessons did you learn from last year that you'd like to implement this year?

Well there's lots of lessons from last year have already been implemented.

These are in no order of importance, but ourselves, and my opinion is, a significant amount of rest of the apparel market is in a much better, leaner inventory position than they were 12 months ago, coming into the back half.

That drove a lot of the depth of promotions that we saw in 2013.

The consumer is feeling slightly better, which we think is good for the overall industry, but whether the consumer feels slightly better about apparel comes up to how well all of us, but I'll speak for Gap Inc, how well we bring product that they love, because that what it needs these days, the incredible marketing that reaches out to them through all the different tools we have to speak about our brands.

We, as I talked about earlier, I think it was Matt's question, are going to talk quite a bit about the convenience in the back half and using our tools of reserve-in-store, omni-channel -- sorry, reserve-in-store, order-in-store, other tools we have, so we can talk about much more than the, let's say, the more traditional definition of a value proposition.

The marketing we're invested in is because we do believe we've made some really good decisions in the back half.

Our marketing is much better.

So I look at it as a step between product channel execution, led by online, supported by stores, into great marketing, into unique innovative ideas like our omni-channel tools, which are unique to [other] people in the marketplace, and better inventory.

Work your way up, and we're trying to avoid and only when necessary have to play a more traditional game of communication with customers as was more predominant last year.

At the end of the day, we are ready for whatever outcome develops in the marketplace.

That's why we have Old Navy, to go out on behalf of the portfolio, gain share, as it did in Q2, with a 4% comp over a 6%, be aggressive and that's its role in the portfolio.

That's to a previous question why outlet is so important to us.

We have those three businesses.

Old Navy, Gap Outlet, Banana Republic Factory Store, those are the businesses that go out on behalf of the Gap Inc.

portfolio and become more aggressive and play more of a promotional game.

The other brands are to be positioned differently.

That is the work of the work that Gap and Banana Republic need to execute on in their specialty business in the back half.

Great.

Thanks.

Lorraine Hutchinson, Bank of America Merrill Lynch.

Thank you.

Good afternoon.

Glenn, now that Old Navy has rolled out in China, can you take a step back and just talk about where you think you have the greatest opportunity there, whether it's full-priced Gap stores, the outlets, or the Old Navy concept?

That's a good question Lorraine.

It's so early.

I was there three weeks ago when the fourth Old Navy opened, so I'm probably just a little bit tainted just because it was a big to do, it is our fourth store, second one in Shanghai.

The first one is off to a tremendous start and this one, so far so good, after just a few weeks.

I would say that my instinct, sitting here today, was Old Navy will have a chance to go deeper into the country than Gap will.

The number of stores to be determined.

Obviously here in the US, we have 50% more Old Navy stores than we have Gap store specialty.

I don't see any reason why that couldn't play itself out in China over time.

Some people may have a different view, but what matters right now, sitting here, is my view, and I'd say I could see that playing out in China.

But definitely we will be able to go deeper.

Gap right now is in some, let's call them, for argument sake, Tier 4, Tier 5 cities, doing well.

Everything in China we've uncovered so far is customers love fashion.

It is a big family play, which obviously fits for Old Navy and for Gap.

Value proposition, but not discounting, just being money, not overpaying for quality, which is a good definition of value, which is important to the Chinese.

As we look at that and add it all together, we are super happy to have both brands and our outlet business and a strong online business in China.

But if I looked out over the next five years, I could see where we would have more Old Navys going deeper into the country, as we plan out our real estate strategy.

Thank you.

Jennifer Davis, Buckingham Research Group.

Hello.

Good afternoon.

I was wondering if you could talk a little bit about Athleta, give us some color on how that's doing and maybe any metrics that you're willing to share around the stores?

And then, Glenn, it's good to hear you talk about starting to utilize some of the big data?

Thanks.

You know Sabrina is here too, right?

(Laughter) Hi, Sabrina.

Anyway, look, we feel good about Athleta.

Nothing has changed.

The team has done a really good job taking a business that was very solid.

Will get to and we were joking the other day, it's amazing how quickly we got to 100 stores.

So we will get 100 stores by the end of this year.

What I like about it is it fits in all types of real estate, which is very important for our brand.

Can you work in a mall?

Can you work in street.

Can you work in a strip center?

And we've proven all of that.

Its online business is doing really well.

We have all the metrics that say we go into a trade area and we do not have a store, when we drop a physical store in, the multiplier on the pool of online business we do is very attractive.

It's in multiple activities.

We continue to push that.

This is not a one-dimensional business.

I've also said many times that our key competitor is Nike.

I know there is other competitors who get a lot more air time, but at the end of the day, Nike is the big player here in the person we look at the most and where the share is going to come from for Athleta.

But its metrics and its store productivity, sell-through and rank, which is something we continue to push inside of our other businesses, store productivity, sell-through and rank, service scores in terms of the people and the quality of people we have, the relationship, because it's our only business, as we move to a seamless inventory model here over the next couple of years.

Athleta already is a seamless inventory business.

One team oversees all of its inventory between an online catalog and a store business.

So we really get a lot of benefit out of that.

I said at the April analyst meeting, and still believe it, it is going to be our fourth global brand.

It's earned the right to be considered for that.

We haven't decided yet, but it's earned the right to be given consideration.

Lastly, what every business wants, but especially a business in the [appear] in apparel is the trend is their friend.

The business they are going after, performance is their friend.

The new way of dressing is their friend.

Streetwear, everything that is happening right now, the women who are coming forward, the Millennials, so many things are going in their direction, so we're very happy with it and love the team there and their leadership.

We're going to continue -- Sabrina and I got a very nice can return on capital, which always makes the two of us happy, so we're going to continue to invest behind them.

All right.

Great.

Thanks.

Best of luck.

John Morris, BMO Capital Markets.

Hi.

It's actually Janine Stichter on for John.

I was wondering if you could talk a little bit about your product testing and your rapid response initiative.

I know you had some pretty big wins at Old Navy earlier this year, so just if you could give us what percent of the assortment of each brand is being tested right now, and what are the learnings, and how you see it rolling out go forward?

Thank you.

We talked in April at the analyst meeting, at the end of the meeting I had Q&A, John was there, that I really was hoping that testing at a minimum, but also another important tool for us, rapid response, would be a little more developed for the back half.

Most of the benefit from the testing will come in the first quarter, [def] same with rapid response.

We had a little bit of benefit come in the second half.

That wasn't the original plan, but the fabric platforming work we've done should help us on the gross margin in the back half of 2014.

I'd say I've seen -- every week, I get a report in all the tests we do.

We just finished doing a number of tests across all the businesses for the first quarter.

What it tends to point to, it helps us with the range bound of inventory and how big a buy it is.

This is not a test about whether the designers know what they're doing.

We trust our designers.

This is whether is something is 300,000 unit buy, 350,000 or 400,000.

Then within that, it helps us with the CC component of it.

Most times what it tells us is you have a style or a program with 10 CCs, you don't need 10 CCs.

So we have got to keep working on that.

Sometimes multiple colors is an advantage, especially for Gap, but it is helping us very much understand the size of the power of the buy of that style and within that style, it could be unique attributes within each style, but mostly it could be color, print, and pattern.

All the results I've seen are very helpful for the team.

And we always got to apply commercial judgment and how do we gain market share to drive it, but the tests are certainly validating some of that and getting that big opportunity to Gap Inc's P&L, which is, what I just told you was Athleta's towering strength, which is units sold at regular price.

This is going to help quite a bit in 2015 on that metric.

Great.

Thank you.

Susan Anderson, FBR Capital Markets.

Good evening.

Thanks for taking my question.

I was wondering if you could give us an update on how Athleta is performing and maybe just any updates on growth trajectory?

And then if you could also maybe talk about the landscape a little bit.

It seems like a lot of players are trying to enter it and if you're seeing any increase there at all?

Whenever there's -- I was just saying to a previous question -- whenever you have, what I described as, the trend is your friend, a lot of people try to jump in on this business.

In fairness, Old Navy has been at it for -- with their active line -- for about three plus-years.

Gap have Gap Fit, they have had that over three years also.

So we look at it that Athleta is a standalone business that focuses on women's performance products and that is the first attribute, but it's performance that also has a fashion component to it.

So we look at it from a Gap Inc portfolio.

We are dominating per share with Athleta because it's a standalone business.

There are a lot of people getting into the category, but that doesn't mean they're going to be successful.

We really like how Athleta is performing.

We like very much the decisions the teams have made recently, whether that's on marketing or whether that's in the assortment strategy, whether that's on real estate.

And it's got a beautiful split in its business between online and in stores.

That's, for those of you who have been following Sabrina and I for the last seven-plus years, we untangled some of the store decisions of the past, so we definitely promised to ourselves, we would go into China, when Old Navy goes international, if we buy something like Athleta, we are going to take those lessons with us and make sure that out of the gate, we see how customers want to shop and find a better split between our digital business and our physical business.

Athleta certainly has a beautiful split in its business.

Great.

Thank you.

Paul Lejuez, Wells Fargo.

Hello.

Just wondering if you could talk a little bit about cotton prices.

Are you starting to see a benefit there?

If so, when might you expect that to become a tailwind in the P&L?

Thanks.

There's always a little bit of a lag because we place orders from months before obviously they show up in stores, Paul.

So it's great news to see cotton coming down.

Because of the lag effect, we would expect some small benefit probably in spring, but assuming the prices stay down as they have been, you'd see a much more pronounced effect in summer, which is obviously good news as we look forward to 2015.

Thanks, guys.

Good luck.

Barbara Wyckoff, CLSA.

Hi everybody.

Could you talk about the potential for store closures end of this year.

How many leases are coming due this year and next?

Last quarter you talked, Glenn, about Gap maybe being a place you might be looking at versus the others?

Thanks.

We're fortunate in some ways.

The best map to apply is we have 2,500-odd stores in the US, so about 500 leases come up every single the year.

That phenomenon plus the recession is what allowed us to do the work we did over the last four or five years.

Going forward, Barbara, we're a little less focused on closures, although I'll admit to you, there's always opportunity to look at stores that could be less about untangling this web that we inherited in 2007 and more about strategically looking at every single market and does it make sense from a physical presence.

With our omni-channel tools, the ones I talked earlier about, especially with reserve-in-store and order-in-store, we're much more now focused about a physical presence does matter, but what we're challenging is the size of the store.

We definitely did that at Old Navy and took out a lot of square footage in the last five years, but now we are turning to Gap and to Banana Republic.

Won't talk about on this call but in the February call, we can definitely talk about some of the ideas we have for testing a different kind of physical space.

We are working with our team here and bringing the digital and physical teams together, working on a store going forward, that allow us to have a high touch store, lower square footage, and applying the current plus many more omni-channel tools to that store.

I'm hoping that will be a success for us and something we can deploy as we look at our real estate going forward.

But the great thing about the way our real estate team operates, we have lots of flexibility.

Great.

Thank you.

Brian Tunick, JPMorgan.

Thanks.

Good afternoon.

Hoping to get an update on denim trends and how you are planning inventory there.

What is denim as a percentage of sales in the two big brands, and how does that impact your thinking on the timing of seeing positive comps at the Gap brand in the second half?

Thanks very much.

Here's how I'd look at it Brian.

I'd say that denim, when you run [all of] the business in a portfolio full of American brands, and you are referencing, obviously, Old Navy and Gap, those are heritage foundational categories for both of those businesses.

To me, this is where commercial merchants earn their keep -- obviously, understating trend, understanding their brand, understanding customers and competition.

Let me just highlight one example.

We've had a team together of Jill Stanton and Jodi Bricker at Old Navy now working together, one a creative director, a commercial executive, and one a commercial leader on behalf of the business.

And Old Navy did a 4% comp in Q2 on top of 6% last year, with denim across the marketplace, negative comp.

I'm not saying their negative comp, just across the marketplace.

What did they do?

They knew that indigo denim was underdelivering in the marketplace.

They played a different color game.

They introduced, really worked hard on their fit pant, which is their active pant.

Really invested in that, got behind it, double exposed it, gave it a lot of space online and digital content.

Introduced the Pixie pant, introduced a redesigned fabrication on their chino pant, and now were the first of our brands to embrace soft dressing.

When a commercial merchant works with their partner in design and figures out exactly that there's trends like we've lived through, skirts versus dresses, we've lived through knits versus wovens.

It's going to happen.

Now you have got indigo denim and there's a little too much of it in the marketplace.

If you can't understand the market, understand your customer, and take advantage of it to gain share, then we probably don't have the right commercial merchants.

In the Gap business, in fairness to them, Rebekka Bay, who is creative director, who I have a lot of confidence in, didn't have a partner for the first half of this year.

The first part of the relationship between Rebekka and Michelle is going to be introduced when our September product comes in.

That our mistake, by the way; that's not Rebecca's fault.

That's my mistake; that's Steve's mistake; we should have made sure day one, she had a solid partner with her.

But she went six months with people she worked with, but not a partner to the caliber of Michelle.

So let's see how they have figured out how to navigate.

But this is what they do for a living, whether it's sweaters in holiday or outerwear, always understanding where they're going to gain share, is that where the customer is at, how do they beat their competition, ultimately how do we win.

So we demonstrated that in one business; in the other one, not as well, because that's why we're disappointed in our performance so far, but it's explainable.

I think you'll see hopefully an improvement in the back half, as that tandem comes together.

Thank you.

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

As a reminder, our earnings press release, which is available on GapInc.com, contains a full recap of our second-quarter results, as well as the forward-looking guidance included in our prepared remarks.

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

Thank you.

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

We thank you for your participation.