Gap Inc GPS
Q1 2013 Earnings Call Transcript
Transcript Call Date 05/23/2013

Operator: Good afternoon, ladies and gentlemen. My name is Amber, and I will be your conference operator today. At this time, I would like to welcome everyone to The Gap Inc.'s First Quarter 2013 Conference Call. All participants are in a listen-only mode. As a reminder, please limit your questions to one per participant.

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

Katrina O'Connell - VP of Corporate Finance and IR: Good afternoon, everyone. Welcome to Gap Inc.'s first quarter 2013 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 which is available on These forward-looking statements are based on information as of May 23, 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.

Glenn K. Murphy - Chairman and CEO: Thank you, Katrina, and good afternoon everybody. Before I hand the call over to Sabrina, who will take you through the Q1 financial highlights, I want to take you through how we as a business are looking at the first quarter and also I want to give you an update on our key initiatives for 2013.

The one thing that comes to mind when I think about Q1 was the consumer; that we've been operating pretty much for the last five plus years in a very challenging environment, and this is the first quarter in a long time that I think the consumer to us felt like they were moving in a positive direction. Things are still challenging, but they're starting to feel a little bit better for a lot of reasons that I'm sure we've all read about or know about. So, I'd like to think that, that's a good sign as we look forward to the rest of the year.

Obviously the new story is that we were able to get a two comp in Q1 2013, on top of the four comp we had in 2012, also known as comp the comp. Last year was obviously a good performance for the business, to have applied the investments we made in product and in marketing. There was a little bit of weather help in 2012 and there was a color trend, but I think our teams came out very strongly in this first quarter, and I think it's nice to see across all of our businesses good two year comp performance in our three key brands.

Now, to me the big driver of that continues to be our product. We continue to have good product momentum. Now, comp is an outcome, and all our merchants and designers and marketers and our brand presidents know it takes good strategic thinking on where we're going to dominate and where we're going to differentiate in each one of our categories that builds up to a comp. So when I look at the quarter and I look at the categories that Banana Republic and Gap, and Old Navy the ones that drove over and above performance were the categories that were putting a lot of time, effort and money behind. Because we think we can get market share gains. We can get an edge. We can get more customers to engage with our brands by showing that these are the categories whether it is suiting, whether it is bottoms, whether it is dresses, these are the categories are going to differentiate ourselves against our competitors.

Lastly in the quarter, just one more number I want to talk about was online had a 27% gain in revenue and that's key to us. Everybody who knows our business, the multiple channels, outlet, specialty, franchise and particular online is really a key strategic initiative. It's at 27% while the majority of that base is in the United States, we're seeing really strong growth in Canada, Europe, China, and now in Japan.

So, let me just pivot for a second and talk about our strategic initiatives. First and foremost, it's about growth, how the Company is going to grow, what new initiatives we have going on. We've been clear about where we're putting our investments. In our February call, we reiterated that in our Investor Meeting in April. Franchise store count is on track. We feel good about the countries we're going to enter. We feel good about the balance between Banana Republic and Gap. Our global outlet openings, everything is coming together on that front. Again multiple country openings; openings here in Canada, in Japan, in Europe and I was just in China to see the fifth store open. That's a good opening for that very important channel in this most important of countries.

China, everything is going well. That team just continues to impress me. They have an aggressive agenda for 2013, for one they are prepared and the consumer and the environment is just right for us in China. So I think there is all systems go. Old Navy Japan we opened nine stores in Q1. So unlike most real estate it has been my experience, in the years I've been doing this, real estate tends to be backend loaded. So I was very proud of the team that they opened so many stores up in the first quarter and I'm going to be going there at the end of June but from all intents and purposes a look at the numbers, the customer feedback, the launch strategy that's really impressive to see that. That really gives us great confidence going forward.

Intermix is on track and Athleta openings are on track. They are absolutely executing as we would expect in these two developing brands. We feel good about the prospects for the rest of year.

The last thing from our strategic initiatives, I do want to touch on is, omnichannel. In the quarter we launched ship-from-store for Old Navy. All of Gap is now on ship-from-store. Banana Republic was in 2012. We are easing our way into getting more stores and more categories on but the launch has been smooth. The store execution has been great, so this whole idea between a customer now going online and seeing that everything is available. As we have talked about many times the psychological impact of short and out of stock online, the majority of our customers when they see an out of stock online, something not available, not in their size, not in the right color then they assume it's not available in the store.

So that is just from a marketing perspective huge value to us, but also the ability now to use our pools of inventory seamlessly and to take something from a store and ship it to an online customer, it's really just a preliminary step on this amazing continuum we have for the omnichannel. We will be launching reserve-in-store next month. That's in Banana Republic and Gap, it's a pilot. But again the ability for a customer to seamlessly engage with our business, to go online, see something that they love, reserve it, get down to the store, hopefully buy more, have an amazing customer experience, I think is good for loyalty. The next step along our path to get to a true competitive advantage and differentiation in the marketplace by acknowledging that the way to win these days is with great product, compelling marketing and giving customers access to your business anywhere they want, that's what we call it easy-buy-anywhere.

With all that said, as I said in the press release, we're pleased with our first quarter. It's nice to get off to a good start. The first week of every month, the first month of every quarter and the first quarter of every year are very important. So, it's good that we got off to a good start in this first quarter of a new fiscal year. I'm going to hand it over now to Sabrina, who will take you through the financial highlights. Sabrina?

Sabrina Simmons - EVP and CFO: Thank you, Glenn. Good afternoon, everyone. Our first quarter performance represents meaningful progress against our 2013 financial goals, which include growing sales with healthy merchandise margins, managing our expenses in a disciplined manner and delivering operating margin expansion and earnings per share growth.

Please turn to Slide 4, for our earnings recap. Our earnings per share for the quarter were $0.71 versus $0.47 last year. However, it's important to note that if the 51% earnings per share growth in Q1 about half was due to the benefit from the calendar shift and from the favorable resolution of tax issues. That said, we are pleased with our underlying operating performance for the quarter. Here's some highlights, net sales were up 7%. Comparable sales were up 2%. Operating income increased by $135 million or 34% and operating margin, expanded by 290 basis points to 14.2%. Net earnings were up $100 million or 43%.

Turning to Slide 5; sales performance. First quarter total sales were $3.7 billion up 7% with comp sales up 2%. Total sales in comps by division are listed in our press release. Of the 5 percentage points spread between total sales growth and comp sales growth, about half was due to the impact of the calendar shift created by the 53rd week in fiscal year 2012. As a reminder this year's first quarter dropped a small week in February and added a much larger more full-price selling week in May. The translation of foreign revenues into dollars negatively impacted our reported net sales by about $45 million in the first quarter. This translation impact was primarily due to the weakening of the Japanese yen versus the U.S. dollar. In fiscal Q1 2013 the average exchange rate of the yen was roughly 18% less, than for fiscal Q1 2012 or JPY80 last year versus JPY95 to the dollar this year.

Turning to Slide 6; gross profit. Gross profit dollars grew by 12% to $1.5 billion and gross margin was up 200 basis points to 41.4%. Our merchandize margins were up 160 basis points, largely driven by decreases in average unit costs and rent and occupancy leveraged 40 basis points.

Please turn to Slide 7 for operating expenses. First quarter total operating expenses were $1 billion, up $34 million from the prior year. Marketing expenses grew modestly by $4 million to $143 million. As a percent of sales, total operating expenses leveraged by 90 basis points. Expense leverage also benefited from the calendar shift in the quarter. Therefore we would caution against extrapolating this magnitude of leverage to future quarters.

Delivering on our goals of sales growth and expense leverage resulted in net earnings of $333 million up 43% to last year. As I have mentioned, our earnings in the quarter included about $0.04 of benefit related to the favorable resolution of tax issues in the first quarter. About $18 million of the benefit is reflected in interest and the other $0.02 of benefit to EPS are reflected in the tax rate.

Moving to the balance sheet on Slide 8; inventory dollars per store were up 3% broadly in line with our comp sales growth. The plus 3% is on last year's 7% decrease in inventory dollars per store. For the quarter free cash flow was an inflow of $205 million, roughly equal to last year. We ended with about $1.6 billion in cash and we distributed $128 million through share repurchases and dividends. Our quarter end share count was 466 million.

Please turn to Slide 9 for capital expenditures and store count. First quarter capital expenditures were $151 million. With regard to Company operated stores we opened 10 stores on a net basis and ended the quarter with 3,105 stores. Square footage was up 0.3%, compared to Q1 2012. Store count and square footage by division are listed in our press release.

Now I'd like to share our outlook for the rest of the year. Please turn to Slide 10. As we said in our April sales recording, our first quarter operating performance was broadly in line with our expectations at the time we provided our full year guidance in February. Therefore, nothing has meaningfully changed in our full year outlook, and we are reaffirming our full-year earnings per share guidance of $2.52 to $2.60. To be helpful, there are two important considerations for the remainder of the year. First, as we told you on our Q4 call, our full-year earnings guidance contemplated some of the impact of foreign currency headwinds, specifically the weakening yen. Since, we provided guidance in February, the spot rate for the yen has weakened by about another 10%. The average spot rate for the yen last year was about 80, current spot rate is about 103, or it's about 29% depreciation. This depreciation negatively impacts our reported sales and earnings as our local currency results translate into fewer dollars.

Second, as we've noted several times, the fourth quarter this year, has one less selling week than the fourth quarter last year. Additionally, the fourth quarter of 2013 drops a large fall selling week, therefore, just as the first quarter benefited from the calendar shift, the fourth quarter is expected to be negatively impacted by an amount that is at least as large as the benefit we saw in Q1.

For the full year, the following guidance metrics remains substantially unchanged. Operating margin, about 13%. Square footage, up about 1%. 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 towards Gap North America.

We expect capital expenditures to be about $675 million and depreciation and amortization to be about $475 million. We expect our full year effective tax rate to be about 39%. We expect Q2 inventory dollars per store to be up in the mid-single digits.

In closing, we're pleased with how we executed against our strategies in Q1, in particular, driving a positive comp and revenue growth on top of last year's strong performance. Of course, now we're focused on delivering our goals for the remainder of the year.

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

Katrina O'Connell - VP of Corporate Finance and IR: That concludes our prepared remarks. We'll now open up the call to questions. We'd appreciate limiting your questions to one per person.

Transcript Call Date 05/23/2013

Operator: John Morris, BMO.

John Morris - BMO: Congratulations, everybody on a great start to the year. I guess and maybe Glenn you talked, really effectively you and your team, when we had the Investor Day about the seamless inventory initiative, which you touched on this morning in your prepared remarks. It sounds like its rolling foreword maybe a little bit faster and into place than some of us might expect, which is great. Wondering, if you can talk a little bit more about the performance contribution potential you might see coming from that? I know it's hard to predict, but maybe it's helpful to think about it relative to some of the global competitors who have some of those initiatives already in place that you would probably know about?

Glenn K. Murphy - Chairman and CEO: John I'd say there was really two parts that we talked about in April. So, I will just from a terminology perspective, the seamless inventory and the idea behind that – that's going to take a little bit longer. That's more of a midterm opportunity for the Company. The idea behind seamless inventory is right now as a Company and this is true of almost every single apparel company with likely the exception of Inditex. That we have inventory, that is either in a country and then what is inside of a country like Japan than its inside of a distribution center that's online, inside of a distribution center that could be for stores and that's inside of our 150 stores in Japan. So the idea behind this is how do we – and with the systems we are putting in place now and some changes in process, how do we make sure that our inventory becomes seamless when it leaves a factory for the vendor that a 100,000 unit PO that was agreed to weeks before that, just before it leaves and goes to the most appropriate country where it makes the most sense. Where we can maximize our sales and maximize our gross margin dollars because its matching supply with demand and then when it gets inside of the country, again how do we make it seamless between – and that's assuming it's at a single distribution center and that would make a big difference for us. Then when I guess inside of that distribution center how do we make sure it's seamless between the online channel and the stores. So that's a project that we have already done some work on. We are building the phase and I think that's going to be more of a 2014 and beyond opportunity. The other part that could be, I guess be viewed as seamless inventory is what we are calling a more responsive supply chain. That is really, us as a business. This is something that in hindsight I probably should've pushed a little more aggressively inside the Company but we have told people in the past that our supply chain needs – in order to become more responsive it needs to be built on having much work fabric platformed inside of all of our mill relationships. Once you have fabric platform, then you could be a lot quicker on basic inventory, seasonal basic inventory to get a read and respond, and we've done some of this and there's some of that going on the Company today, but I guess, if I was to characterize it, if we consider to be world class we are probably in the second inning – from a standing start we're probably in the second inning right now of actually getting to a more responsive supply chain. Some of that will happen in 2013, a little bit, but again, most of the benefit from changing how we operate – changing the brand's operating model to be much more in a responsive supply chain will happen in 2014.

John Morris - BMO: Glenn, are those potentially contributive in the hundreds of basis points over time, just order magnitude benefit?

Glenn K. Murphy - Chairman and CEO: It's tough to quantify. Always said John before is that the people with the highest operating margin in our industry are in the high teens and we are in the, call it for argument's sake the mid-teens and some of that difference, not all of it, some of that difference is that they have embraced a more seamless inventory management operating model and their business was built on a responsive supply chain. So, we're different businesses. Then, the leader is when it comes to operating margin, but I think there's definitely some application for us that we're – some of it's in place now, but a lot more to come, but it certainly doesn't explain the whole delta of 400, 500 basis point difference between ourselves and the leading Company in our sector, but I think there's some differentness. Some of that could be explained through the fact that we haven't embraced ourselves, those two opportunities. So, more to come and we'll see if we can get it in place for 2014, but there's certainly value attached to it. I just can't quantify for you today.

Operator: Kimberly Greenberger, Morgan Stanley.

Kimberly Greenberger - Morgan Stanley: I'll add my congratulations as well to a really terrific quarter. Glenn when you think about the operating margin opportunity from some of these strategic goals, maybe you could just rank order them in terms of, where you're seeing the greatest profit opportunity upside might be. Is it the seamless inventory or the more responsive supply chain? Over the next sort of year or two, do you think you've got an opportunity to further lower your average unit cost or are you sort of seeing some stabilization there with perhaps some wage pressure creep into either late 2013 or 2014 costs?

Glenn K. Murphy - Chairman and CEO: I guess its two parts. If I focus exclusively on average unit cost, the opportunity clearly for us is to use less fabrics in the business and have people – our vendors are becoming more and more sophisticated and they are spending money on equipment and they are able to take a fabric now and do multiple things through washing and then treating it that they couldn't have done five years ago. So, I think that having fewer fabrics inside each one of our brands and committing for a longer period of time, let's call it for a year or more to that fabric, I think still gives our designers and our merchants, huge flexibility to do the right thing on product. We're not going to sacrifice anything for efficiency to not give them the ability to do the right products in all the categories I talked about earlier. But I think it's clear to us now that we can reduce that, give our sourcing team an ability to go work with the mills, by having less fabrics and going for longer commitments. So, I think there is value in that to be unlocked inside the Company. Whether that value can offset wage pressures and everything else that's going on in everybody's supply chain, that's to be determined. I'm just happy that, as I stated probably five years ago, I am just happy we still have lots of opportunities to improve the business from – either from a cost perspective or from an earnings perspective. Because what I am identifying here from an AUC is something that we do today. We just don't do it as much as we should. The Company has always had lots of priorities. The great thing about Gap Inc., is we are rich with opportunities and this is just one we talked about before that I believe we can do a lot more with this and our vendors agree. I know this. I was with all of them. I spent 10 days in March in Korea and China and India. So I was speaking to them about how much more we can do, explained to them our plan, trying to quantify the value of that. So our team is working aggressively to get that one component done. On your first question, it's tough to rank them Kimberly. What I'd say there is three opportunities we spoke about at our Investor Meeting in April. I apologize simply the (indiscernible) wasn't there. But we talked about the omnichannel opportunity which I think there is value unlocking it for sure and we are pretty far ahead and there is lots of components to the omnichannel that should generate real value. The value looking for is in the sales line and in the market share opportunity. Then as the two that I just talked to John. So, ranking them is difficult. I think all three have contribution and value to be unlocked between the three of them. The only thing I would add to it is not much difference between the three. So the reason that one is worth a lot and the other one is just a marketing term that we are using, because we want to look like we have opportunities. All three have opportunities and value to be unlocked. I'd just say they're all equal for now until we actually get them in place and get a read from our customers and see what it can generate in terms of earnings – incremental earnings for the Company. So we are fortunate to have all three of those opportunities available to us.

Operator: Matt McClintock, Barclays.

Matthew McClintock - Barclays: Congratulations on outcomping the comp. So, essentially I have one question, you talked about 27% online growth and that really is outstanding, particularly given the size of the overall business, and I was just wondering if you could drill into that a little bit more. How should we think about that growth rate being representative of the omnichannel investments that you've been making relative to maybe more traditional e-commerce traffic and growth drivers? Then you also touched upon China e-commerce growth and other regions. How does your omnichannel capabilities set you apart from your competitors in these other regions – these international regions?

Sabrina Simmons - EVP and CFO: Matt, I'll just start and I'll turn it over to Glenn, but just as a reminder, on all of our sales in the first quarter, including our online sales and we are really proud of the underlying growth, but it definitely benefitted from the calendar shift. So, we talked quite a bit and I said it again, that this first quarter dropped off a small February and added a May, so, all of our sales including online benefitted from that, and now, I'll turn it over to Glenn.

Glenn K. Murphy - Chairman and CEO: The only thing I'd add to that Matt is, well, I think it's easy to go to the omnichannel initiative than point to the online number. There's some truth to that. It's still early days for us and I'm not going to – I probably don't want to have too many baseball analogies today, but it's still early but there's some contribution as Sabrina said, it was calendar shift, and probably a little bit of omnichannel but the underlying businesses has been healthy for a long time and we've been gaining market share online for a number of years. That continued in this quarter. I think when we think about it, we're going to have to figure out how to help you and the other people on the phone identify the value of omnichannel but one of the big unlocks is obviously, as more and more people experience the brand through online and our traffic becomes at some point, I could see this coming sooner rather than later where more traffic begins online than actually go – than starts in the store. Then with the different components of omnichannel, a big part of this is getting people to experience the brand but get them into the store. So that won't show up in the online number, it should show up in the traffic number. It should show up in the generation of earnings from our four-wall contribution. So, while the early parts of omnichannel are helping a little bit on the online and more to come, the big win that I'm waiting for is getting people who are more comfortable starting online to experience the brand, be inspired by what they see, and then get them into the store. Internationally, if we had what we don't have today, but there is obviously a roadmap we've put together, when can the North American components of the omnichannel make their way internationally, certainly in a market like Japan and China that would be leading-edge. I think a lot of the omnichannel work, and I travel around the world a lot, seems to be coming out of North America and particularly United States. In Europe, we'd like to get it in there. There are some very good retailers in Europe and they are very innovative and I think some of the – they are already advanced in some of these areas, not necessarily in our sector but in some other sectors. So, I think that the sooner we can get some parts of our omnichannel total package into the European business I think that'll help our European brands compete and also allow them to gain some market share.

Operator: Oliver Chen, Citi.

Oliver Chen - Citi: Regarding, Glenn your comments on the customer sound quite encouraging. What gives you that conviction? I feel like in previous conference calls, we've been hearing the mixed signals in terms of caution from other management teams on volatility in the marketplace? Secondly could you comment on looking forward for Old Navy? Some of the comp last year was driven more by units. What do you think about going forward, for the opportunity to comp there on the (union) versus AUR side?

Glenn K. Murphy - Chairman and CEO: Well look we don’t have more of a crystal ball than anybody else and what I try to quantify in the following is that the environment is never going to go back to the way it was in 2006 and 2007, at least we don't see that anytime soon. We wish. But I did find this first quarter, we have our own research we do. Obviously we talk to customers a lot. We get feedback. When you couple that with good macroeconomic tailwinds, which are starting to develop whether that's on the job front may not satisfy a lot of people but it still is good to see. Whether that is in people's wealth that's tied up in their homes or in their 401(k)s, I think all of those things are positive signs. So we are certainly not predicting that the consumer sentiment levels that were in place six or seven years ago are going to return anytime soon. But we don't – we look at a number of different metrics but one that I am particularly, as I have studied it for a long time, am a fan of is the Reuters University of Michigan Survey that comes out. I think that consumer sentiment has been moving nicely in the right direction for the last 12 months. Still a long way from its peak, but I think we are comforted by the direction it's taking. So I think that that's good news.

Sabrina Simmons - EVP and CFO: On the Old Navy piece Oliver, it's a good point. Last year when we were lapping 2011's high average unit costs when the average unit costs came down especially for Old Navy because we had pulled so many units out in '11 we were putting them back in '12. So a lot of our comp was driven by that re-infusion of units, but really just to get it back to a normalized level. So I would say, at this point, going forward, we're sort of at a position where AUC is stable. It's not a big story either, up or down. So, we will be managing the business in a more normalized fashion which is to say, we need to drive our comp with some increase in unit sales, but with the healthiest AURs we can achieve to meet our goal of delivering that comp growth with healthy margins.

Operator: Janet Kloppenburg, JJK Research.

Janet Kloppenburg - JJK Research: I wanted to ask Sabrina, if you could, let us know what your AUC benefit might be in the second quarter versus last year, and Glenn, given your discussion about the brand strength and the sourcing opportunities, I was wondering, how you felt about the promotional levels at Gap, maybe in the first quarter and if we could expect any change there in light of how you're feeling about because of consumer confidence?

Sabrina Simmons - EVP and CFO: Yeah, so with regard to AUC, Janet, what we did say was that the first quarter is really the last quarter where we get the tailwind from all of the movements up and then down on average unit costs that happened in '11 and '12. From this point forward, the AUC is really sort of a non-issue. So, the delta in AUC in the remaining quarters is not a meaningful change from the prior year. Then, I'll just start off on your promotion question, and let Glenn finish. Certainly this year, it has been well documented on other earnings calls before us. Certainly this year versus last year given the weather patterns in February and March, this year was less favorable for retailers overall in general just given those weather patterns. So for the quarter across the board we were probably more promotional than we were in 2012, but that said I think we're very pleased and you can see it in our merch margin performance and our overall performance. We're pleased with how the teams managed those promotions very surgically, so we were still able to deliver on our goal of getting that comp up with nice margins.

Glenn K. Murphy - Chairman and CEO: And when we think of the two brands that you mentioned, at the end of the day Old Navy is a brand in the value sector. So I think that as long as they're being creative and innovative and in a lot of ways aggressive that's what Old Navy needs to do given as we talked about at the investor conference that market share for us in North America is really one of our top priorities. I don't want excessive promotions at Old Navy. I don't want ideas tripping over one another so consumer gets confused, but if they come out in big weekends like we have this weekend and go out and dominate and show strength and drive incremental traffic into their business and gain market share then I think Stefan and his team are doing the right thing. For Old Navy, to me it's always the voice, it has a personality, if they're just going to be 40% off on Memorial Day weekend then I expect more from Old Navy to really come out and present its story and what the brand stands for. So, I encourage them to be aggressive because that's why it's a member of the portfolio because it's in the value sector and its aggressiveness is one of its traits. At Gap, well I completely agree with what Sabrina said in the first quarter I think that we've put some more marketing into that business. We're feeling better about our product. We've put some money into stores in some of the key cities around the U.S., in San Francisco, in New York, in Toronto, in Chicago. So we are actually expecting that as they continue to improve upon their product, their assortment strategy, the marketing continues to be driven strongly in the back half of the year. I don't feel good sometimes with our promotional level at Gap. I mean that's an iconic brand and yes, you need to talk with your value proposition and that doesn't mean they are going to void of promotions, that's just the world in which we operate. But I think that I would expect as long as those three other components I spoke about earlier continue to strengthen and get better that their need as their brand health and the relevance in the marketplace grows and it is growing from the research we have. That they would have to be less dependent on some of the promotional decisions we have made in the past and find a better balance.

Operator: Adrienne Tennant, Janney Capital Markets.

Adrienne Tennant - Janney Capital Markets: Glenn unit normalization strategy obviously it has been very successful at Old Navy. I was wondering, what if anything would make you consider possibly building units at the Gap brand? Then for Sabrina, a clarification question. The $2.52 to $2.60 does that exclude the $0.04 benefit and when you said that it comes out of the fourth quarter is that the $0.08 shift?

Sabrina Simmons - EVP and CFO: So why I don’t start with both of them quickly and then Glenn can follow-up. On the units just to be clear, our units – our goal Adrienne is as we are driving comp as to balance units with AUR. So I will tell you unit sales across the board for Gap Inc., were up. Beside I want to leave you with the impression that we are pulling units out of Gap brand, that's not true, we are actually marching to that same balance so we are increasing units at Gap Inc., across the board and no brand is a standout in that. So everybody is kind of up and managing their AUR. With regard to the guidance, so the way to think about that is there's $0.04 of tax benefit, $0.02 are in the rate, and the rate piece is really just a timing difference, because the full year rate is still 39%, but the $0.02 that came into interest, that is a one-time benefit that does flow through, but the range is an $0.08 range, and there's lots of plusses and minuses. So, just as it's legitimate to bring that $0.02 from the interest on tax through, there's other offsetting items happening as well and I called out one of them, which is the yen. So, with the yen moving, I kind of think of them together like, one's going up, the other one's hurting us, will be the degree to which it does.

Operator: Ike Boruchow, Sterne Agee.

Ike Boruchow - Sterne, Agee & Leach: Glenn, question on the marketing side of the business. I know you guys don't give guidance on what you're planning in terms of dollar growth or anything like that, but just when we you look out for the remainder of the year by brand, where do you see the most investment and are you planning on doing new things, especially around the holidays?

Glenn K. Murphy - Chairman and CEO: Well, it's a little early to tell. We're just finishing up the holiday product story lines and the assortment strategy from the team, but I think Sabrina and I've been very consistent on marketing. We feel that with the additional marketing we gave and allowed our brands to use in 2012, mostly Gap brand, where we put some money at a home and focused on our top 10 DMAs and we got some benefit from that. That's why we didn't pull it back in 2013. We didn't add to it. We didn't pull it back. So, we saw some benefit from the Be Bright campaign and that was resonating with people. So I think that we've always felt that there's an ample amount of marketing for our brands to differentiate themselves because our storyline has always been that Gap Inc. is a portfolio owner of six American brands and we don't run stores, therefore there is always a need for some marketing to be able to make sure that people understand what Old Navy and our Gap, and Banana Republic and our other brands stand for, what differentiates them, how are they going to win. So, the marketing is a key part of that beyond just what it can do for traffic. There is a story and I'm feeling better about some of the stories coming out from the team, but the money and the investment, I'm actually – I don't see a need to put much more money into the brands. Now, the Brand Presidents want to make their own decisions and we will guide them and we will advise them, but I think they're also content and have come to a place, that they realize they have more than enough money. The challenge from us is, are they putting them through the right channels, are they putting them into the right mediums, are we getting the right mix? I'd like see us do more and more on the social side. I think we've done quite a bit. I'd like to see us do more and there are certain points that we're bringing forward and some data that we're sharing with them in order for them to make the right decisions, but so far, no need for more money and we've never taken anything off the table. If Gap wanted to do anything different from holiday, all of the sudden they thought television made sense which I'm not saying it does, or they're even contemplating that, as long as it's within the total budget that we've agreed to and they want to do something else that's their decision to present to us, but right now I don't see much different from 2013 in terms of the playbook besides that creative is going to be different, the story is going to be different.

Sabrina Simmons - EVP and CFO: Just to be a little helpful, Q1 was up $4 million. Q2 as Glenn said in spirit there's no huge changes planned, but we're certainly not planning on bringing it down in Q2. So, directionally he was talking about Q1 and Q2.

Operator: Lorraine Hutchinson, Bank of America.

Lorraine Hutchinson - Bank of America: My question is around the operating margin expansion potential for the rest of the year. What (comp can you) to leverage your fixed expenses? Then where do you see some of the bigger opportunities for gross margin expansion going forward?

Sabrina Simmons - EVP and CFO: Yes. So, on the leverage, Lorraine, because about half of our total expense base is related to stores and over that half of that is variable to sales. The way we think about it is we will manage our expenses in order to leverage our expense base because we have that much that is variable. So it's quite natural that we could use the levers to deliver that, while still investing in our business, which is why we say, you should expect a nominal dollars expenses to increase before increasing revenue. That we are always watching for that leverage. So we sort of reverse engineered it if you will, to make sure that we can deliver that. With regard to the margin rate we – Glenn talked about the levers that we still have opportunities too with the great product assortments with the opportunities that will be coming in the future around seamless inventory, et cetera. We are always looking to improve our profile with regard to regular price selling, the depth of our promotions, the depth of our markdowns. So that's obviously a very important lever. Then on the gross margin line, of course we want to be leveraging our rent and occupancy which we feel confident we can do on a positive comp.

Operator: Jennifer Davis, Lazard Capital Markets.

Jennifer Davis - Lazard Capital Markets: Glenn I think I am going to take you back to a baseball analogy. You referred to this a little bit, I think it was in response to Janet's question. Where do you guys stand in terms of putting money back into the stores and maybe increasing some of the store payroll and kind of help there. I think, you still maybe have an opportunity there. The merchandize looks good, but some of the stores maybe aren't running quite up to the level they should be. Then Sabrina thanks for the clarification around the calendar shift. That was really helpful. Just wondering, how we should think about the second quarter and the third quarter? I know the shift won't be as big, but will you see a little shift between there?

Glenn K. Murphy - Chairman and CEO: I've been doing this for a long time, and what I know is that, unfortunately on any given day, something can go bump in the night, in the store and conditions and the standards, the service can be below our expectations. What I will tell you is that, two things, one, we started to put more money back into our business in last year's P&L as we became a little more comfortable with product and as the teams decided that there was a service model – customer service model opportunity. One thing they've done a really good job of is recognizing, if you have a fleet of 1,000, when it comes to Old Navy, or you have a fleet of 700 stores when it comes to Gap, but there are certain stores, where you can actually get a return for that investment. So, they've been much more thoughtful on what stores – where does the investment need to go. So, in Banana Republic's case, the return is in the fitting room. In Old Navy's case we put more labor in, and that's a replenishment. In Gap's case, we put more labor into their businesses, it's on the floor and actually engaging with customers. So, we understand our brands very well. We know what our customers want and we know where labor, at times needs to go, because we have either tested it or we just understand our business well enough, what kind of return we can get. I'm disappointed obviously, if you're telling me in a backhanded way as you've been to some stores lately and had liked the product, but didn't like either the conditions of the store or the service level and maybe you could tell Katrina where that was and we're happy to look into it, because we want to run a good business every single day and I know we just had our field conference here in San Francisco of all our store managers and really got them not only motivated and pumped up about the opportunities going forward, but they understand the role they need to play in the business to run great customer service, every single day. Now we track it, just (happened) in our Board meeting this week, our scores are up again. We've had good scores. But that said, Jennifer, my theory on retail is, you're only as good as your weakest link. If we have a single store in the chain that is not running a good business on a given day that hurts the overall brand and I know our field leaders understand that. So I think the money is there. Maybe that was just poor execution, which is not acceptable from the way we look at our business.

Sabrina Simmons - EVP and CFO: Then with regards to Q2 and Q3, our biggest notable shift due to the calendar, are absolutely in Q1 and Q4 as we've noted. I've heard people talk about Q2 and Q3 and we're really not seeing any meaningful impact from the shift in those two quarters. I think part of the reason maybe that unlike some of our competitors we have six brands, many of which don't play in back-to-school. Obviously Old Navy does, it is the biggest and Gap some too, but I think with the six brands and the fact that we're probably also much more geographically dispersed than some of the competitors that are talking about the Q2, Q3 piece are maybe the reasons. So, for us its Q1 and Q4 and very little in Q2 and Q3.

Jennifer Davis - Lazard Capital Markets: Glenn that wasn't a back ended comment it was just, I think that maybe you still have an opportunity to do a little better, but as you said with a big store base it's kind of difficult. Thanks.

Operator: Randy Konik, Jefferies and Co.

Randy Konik - Jeffries & Co.: So, the story we've been trying to tell is the story of transformation and sustainability. So when you think about the ability to obviously comp on top of comp and revenue acceleration after the Company has been in a kind of flat revenue environment for about a decade. How do you tell the market out there, how you believe in sustainability from a revenue growth perspective? How should we be thinking of that type of theme?

Glenn K. Murphy - Chairman and CEO: Well the reason I mentioned it on the opening comments is only because I think that was written about by most people that that was a metric that analysts and some investors would be looking for coming off an impressive and strong Q1 in 2012. So the fact that we backed that 4% comp up with a 2% comp is nothing that we are surprised about, it is something that we plan to do. As Sabrina said in her comments we are looking to have a business that comps. As I said at the Investor Conference, we are going to gain market share. It’s a short question that could take a long, long time to answer. It really adds up to all the different ingredients that I think we have put forward. But what I would say is that, in 2010, which was a year, that had not the consumer sentiment we are seeing in 2013 but it was coming out of the very difficult 2008, 2009, the business had a very nice comp, good top line and had record operating margins. That was the beginning of what the business, with the talent we have, the strategies and the hand we have to play that was really a turning moment for us. We started feeling the confidence and of course the cotton events of 2011 happened, we got distracted and then we had a good year in 2012. So we look at it and go, okay well you can explain 2008, 2009. Most retailers struggled in those two years that haven't kind of a heavy base rooted in the United States or in Canada, 2010, when conditions were slightly better, we did very well. 2011, I just explained 2012 conditions were more normalized, we did well. Q1 2013 conditions are more normalized, we do well. So, I think we're a team that's been through all of the different tests that you need to put a team through, whether that's macro tests, restructuring test, bringing new people into an organization, embracing change, cultural or physical change, as we've gone into China and other markets, this business and the leadership has proven to be incredibly resilient. So, we're not trying to say that this is any prediction going forward, but I think 2012, now into '13, as I mentioned in my consumer comments, we feel that the consumer is slightly getting better and now it's up to people to look at, as Jennifer was saying, by going into our stores and seeing the product, that I think that the team is starting to put back to back to back performance together with a lot more opportunity to come back to Janet's question on the operating lever and the changes to our operating model, which provide even greater efficiency and value to be unlocked. So, we understand what we have to get done. It's a very competitive market. There's a lot of people in our business, but our portfolio strategy and it takes us some value to luxury in North America and our international growth opportunity I think you put that together and there's lots more we can do, here at Gap Inc.

Operator: Brian Tunick, JPMorgan.

Brian Tunick - JPMorgan: Just curious if you've hindsighted or done any survey work regarding where did you lose your customer to over the last couple of years and sort of what are they telling you now, regarding where they're coming from and are you measuring both converging and traffic to try to gauge how you're doing on that trend? Thanks very much.

Glenn K. Murphy - Chairman and CEO: Brian we have more data than you can imagine here, but it's – I think the best information we have is, just when we talk to existing customers. We have a very strong existing base, who I think (with the) struggle with them when maybe our business was not as strong as we liked it to be was frequency. We had them coming in it was just frequency. Then we have a strong base of lapse customers, people who don't come in for an extended period of time but we know how to speak to them and obviously get them back and engage upon. They still feel very strongly. This is just at a very high level. But anyone of our brands, any lapse customer felt good about the brand didn't for a reason find – didn't have a reason to come in for an extended period of time. Now we're speaking to them more often in 2012 and continue to in 2013. What I would say is back to the opportunities available to Gap Inc., are the number of new customers we need to get into our business and people who maybe have never experienced the brand, maybe they are just coming of that age when it makes sense or we had a period of time where we were not as strong as we should have been, not as relevant from a product, from a marketing, from a store perspective and we just skipped a period of time where people were not coming in with the natural curiosity you get from mall shoppers. So I think that that's the work I'm certainly encouraging our brand Presidents is, you got to strengthen your strengths with your loyal customers. There's an opportunity with lapsed. I think some work has started on that front and now I'm very engaged with them on those new customers who we have more to offer, more to speak to them about and we have focused groups. When we get new customers together and take them through our business, take them through our product, they get engaged. I mean the response is definitely there. They know of the brand, it's not just a brand on their consideration list. We need to be on everybody's consideration list. So I think there is some good work going on that front but more to come. I think it's just early days on the new customer front.

Katrina O'Connell - VP of Corporate Finance and IR: I'd like to thank everyone for joining us on the call today. As a reminder our earnings press release which is available on contains a full recap of our first quarter results as well as the forward-looking statements included in Sabrina's remarks. As always the IR team will be available after the call for further questions. Thank you.

Operator: Thank you. That does conclude our conference. You may now disconnect.