Evan Price - VP of IR Glenn Murphy - Chairman and CEO Sabrina Simmons - EVP and CFO

Jeff Black - Lehman Brothers Dana Cohen - Banc of America Jennifer Black - Jennifer Black & Associates Barbara Wyckoff - Buckingham Research Todd Slater - Lazard Freres & Company Lauren Levitan - Cowen & Company Marni Shapiro - Retail Tracker Richard Jaffe - Stifel Nicolaus Christine Chen - Needham & Company Dana Telsey - Telsey Advisory Group Paul Lejuez - Credit Suisse First Boston Brian Tunick - JPMorgan John Morris - Wachovia Securities Jeff Klinefelter - Piper Jaffray

Good afternoon, ladies and gentlemen. At this time, I would like to welcome everyone to the Gap Inc. first quarter 2008 conference call. (Operator Instructions). The conference call and webcast are being simultaneously recorded on behalf of Gap Inc. and consist of copyrighted material. They may not be rerecorded, re-produced, retransmitted, rebroadcast, or downloaded without Gap Inc.'s expressed written permission. Your participation represents your consent to these terms and conditions which are governed under California law. Your participation on the call also constitutes your consent to having any comments or statements you make may appear on any transcript or broadcast of this call. If you have any questions regarding this policy please contact Gap Inc. Investor Relations at 415-427-2175. I would now like to introduce your host, Evan Price, Vice President of Investor Relations.

Good afternoon, everyone. I would like to welcome you to Gap Inc.'s first quarter 2008 Earnings Call. For those of you participating in the webcast, please turn to slides two and three. I would like to remind you that the information made available on this webcast and conference call contains forward-looking statements, including those identified in today's earnings press release which is available on gapinc.com, as well as other statements that express our expectations, anticipations, beliefs, estimates, intentions, plans and forecasts. Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause our actual results to differ materially from those in the forward-looking statements. Information regarding factors that could cause results to differ, can be found in our annual report on Form 10-K for the fiscal year ended February 2nd, 2008. Investors should also consult today's press release which is available on gapinc.com. Future economic and industry trends that could potentially impact net sales and profitability are difficult to predict. These forward-looking statements are based on information as of May 22, 2008, and we assume no obligation to publicly update or revise our forward-looking statements, even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. This presentation includes non-generally accepted accounting principle measure, free cash flow, which under SEC Regulation G we are required to reconcile with GAAP. The reconciliation of these measures to the GAAP financial measures is included in today's earnings press release which is available on gapinc.com. Joining us on the call today are Chairman and CEO, Glenn Murphy; and Executive Vice President and CFO, Sabrina Simmons. Now, I would like to turn the call over to Glenn.

Thanks, Evan. Good afternoon everybody. We appreciate you joining us today. As we stated in our press release earlier today, we were pleased with our first quarter performance, in what was undoubtedly one of the toughest retailing climates in recent memory. We here at Gap Inc., continue to be committed to our three financial tenants for the remainder of this fiscal year. Number one, driving a healthier margin business through a combination of tactics such as our commitment to solid inventory management, reducing and containing costs; it is obviously a critical tenant for us in 2008, and taking a more disciplined approach to capital spending in order to improve our ROIC. We believe that our unwavering focus to these financial priorities will service well going forward, as we see no signs of improvement in the psyche of the American consumer. Having said that, we recognize and acknowledge that a company like Gap, with a leading market share, that we need to internally advance the dialogue of how we will at the right time begin the stem and then recapture our lost market share. So, before getting to those conservations, and Sabrina and I are happy to answer some of your questions, let me just talk to you about what is going on in our brands in the last quarter. At Gap brand, Mark and his team know they are on a journey, and it feels good to all of us that our customers are responding positively to our renewed focus on color and modern classics. They are moving the brand in the right direction and we are delivering on driving our healthier margin dollars. At Banana Republic, some of our inside the four wall metrics have been positive, but to be honest our traffic trends have been a challenge. The direct competitors of BR have been uncharacteristically promotional, and we are watching the competitive landscape very closely, and Jack and his team are prepared to make the necessary adjustments to drive traffic, if this promotional level that we are seeing currently was to continue. Old Navy this quarter struggled. The women's business is certainly the issue and we are dialing back the mix of fashion items to more seasonal basics. As you would expect we have the right level of focus and certainly a sense of urgency has been applied in the division, but the bottom line here is we are not happy. Fortunately, our new faster pipeline will definitely allow us to reflect our product offering to our new refined consumer target, which is a young woman on a budget, who buys for herself, and she buys for a family. So, as we look at our business going forward, there is certainly a lot of work to be done inside all of our brands. We are clearly focused on those three financial tenants I mentioned earlier. I know Sabrina is going to come on in a second and talk to you about a breakdown of Q1, but I want you to know that we have reaffirmed once again our guidance for the full year. We will make all of the right decisions going forward to make sure we actually execute and deliver on that guidance. So, Sabrina, over to you.

Thank you, Glenn. Good afternoon, everyone. We are pleased that in the first quarter, we delivered on our strategy of achieving bottom line earnings growth, driven by our focus on healthy merchandise margins and cost management. I will begin today by reviewing the quarter’s result, followed by an overview of our guidance for the rest of 2008. First, highlights for the quarter. Net earnings were $0.34 per share or $249 million. This represents net earnings growth of 21% over the prior year, excluding last year’s loss from the discontinued operation of Forth & Towne. Gross margin increased 150 basis points to 39.7% versus 38.2% last year. Operating expenses decreased by $92 million and we repurchased 11 million shares for $216 million. For webcast participants, please turn to slide four, first quarter earnings were $249 million, which includes about $50 million of pre-tax earnings benefit from a reduction of interest expense accruals. This reduction was primarily the result of foreign tax events that occurred in the quarter. The effective tax rate was 39% and weighted average diluted shares were 736 million. Turning to slide five, sales performance. First quarter total sales were $3.4 billion, down 5% versus last year. Total company's comp store sales were down 11% in the quarter versus down 4% last year. The 6 percentage points spread between sales growth and comp was driven by net new stores and continued online growth. Online sales grew 21% versus last year to $236 million for the quarter. Please refer to our earnings press release for total sales and comp by division. Turning to slide six, gross profit. First quarter gross margin was 39.7%, up 150 basis points compared to last year. Merchandise margin improved 310 basis points in the first quarter, which was partially offset by 160 basis points of occupancy deleveraging. Gross margin dollars decreased slightly by 1% to $1.3 billion. Although we were pleased by our gross margin improvement, we also have a goal of growing gross margin dollars. Unfortunately, given the headwinds faced this past quarter, particularly at Old Navy, we fell just shy of this goal. Please turn to slide seven for operating expenses. First quarter operating expenses were $959 million, down $92 million versus the prior year driven by the following factors. First, lower store payroll, primarily related to the decline in sales. Second, remodel related expenses. As reflected in our capital guidance for 2008, we are executing fewer remodels this year compared to last year. As a reminder, the decrease in remodel is driven by Old Navy where we have chosen to put on hold additional remodels until we have solidified our store prototype [trend]. As a result of our lower remodel count, we are not incurring related costs like demolition, which are expensed. Third, we have lower marketing expenses. Marketing expenses for the quarter were $93 million, down $21 million versus last year, driven by the absence of television at Gap brand. I want to take a moment to put our Q1 expense savings in context. While we were pleased with the results of our cost management efforts in the first quarter, we would caution against taking this quarter's savings over last year and extrapolating it to the remaining quarters. Operating expenses can and will vary by quarter. For example, unlike the first quarter, we expect our marketing expenses in the second quarter to be fairly similar to last year's level of $88 million. Turning to inventory on slide eight. We ended the first quarter with $1.6 billion in inventory, down 14% versus the prior year. Inventory per square foot was $37, down 17% versus down 8% in 2007. Entering May, we remained comfortable with our overall inventory level. Let me provide more color on how we think about our inventory. One of our objectives is to drive gross margin dollar growth. However, we must balance this goal with the long-term health of our brand. By that we mean we want to achieve and maintain a certain level of regular price selling. Given current traffic trends and the broader macroeconomic environment, we believe buying higher levels of inventory increases the risk of more markdown sales and puts pressure on markdown margins, thereby putting at risk our goal around regular price selling and brand held. We continuously assess whether we are striking the right balance in inventory levels by analyzing key metrics, such as percent of goods sold at regular price, markdown margins and inventory turns. While we have seen some recent improvement in this metrics, we have achieved higher levels in our recent history. This indicates to us that our approach to inventory management is still appropriate. Please turn to slide nine for capital expenditures and store counts. First, quarter capital expenditures were $114 million. We open 33 stores and closed 23. Company-wide, we ended the quarter with 3,177 stores and net square footage increased less than half a percentage point. Regarding cash flow on slide 10. For the quarter, free cash flow defined as cash from operations plus capital expenditures was an inflow of $62 million compared with an inflow of $159 million last year. The difference was driven by higher bonus payout in 2008 related to our 2007 earnings performance. Please refer to our press release for our Reg G reconciliation of free cash flow. With regard to share repurchases, we repurchased a total of 11 million shares in the first quarter for $216 million at an average price of $18.88. We continue to utilize only excess cash to fund our share repurchases. We ended the first quarter with about $1.8 billion in cash and short-term investments. Turning to slide 11, our outlook for 2008. Though we are pleased with our ability to achieve bottomline earnings growth in the quarter, traffic patterns and topline results were challenging. However, since the back half of 2007, we have managed the business in a manner that we believe is prudent given the tough consumer environment. Therefore, we are reaffirming our guidance for the following metrics. Full year diluted earnings per share $1.20 to $1.27; operating margins, 8.5% to 9.5%; full year effective tax rate about 39%; full year capital expenditures about $500 million, and this includes about $130 million for new stores, $220 million for existing stores, about $100 million for IT and about $50 million for headquarters and distribution centers; full year depreciation and amortization about $550 million; free cash flow about $900 million. Please see today's press release for Reg G reconciliation of expected free cash flow. We are updating our guidance for the following metrics. Square footage, our store closure forecast has increased by 15 stores to about 115 for the year. The increase is driven by Gap brand. The number of store openings remains at about 115. These figures include 15 store repositions, which are reflected at both an opening and a closing. As a result, we now do not expect any net square footage growth in 2008. Please refer to our first quarter press release for a summary of store activity and gapinc.com for 2008 store guidance by division. Interest expense for the year, about $5 million, our prior guidance of $20 million is being offset by the $15 million of pretax benefit, related to the reduction of interest expense that was mentioned earlier in the call. We are providing our initial inventory guidance for the second quarter and expect the percentage change in inventory per square foot, at the end of the quarter, to be down in the mid-teens compared to last year. In summary, let me reiterate our strategy for the year. Drive bottom line earnings growth through healthy merchandise margins, maintain an ongoing cost discipline that is anchored on continuously looking for efficiency, while supporting the long-term health of the business, and continue to distribute excess cash to shareholders. Thank you. Now I will turn it back over to Evan.

That concludes our prepared remarks. We will now open the call up to questions. We would appreciate limiting your questions to one per person.

(Operator Instructions). Our first question comes from the line of Jeff Black with Lehman Brothers. Jeff Black - Lehman Brothers: Thanks very much. A couple of questions; one on the cost of goods benefits, Glenn have you made any progress there? It seems like the message was to assume that we get those sooner rather than later? Then on the real estate plan, what are your thoughts around additional foreclosures, I see we are going to go up to 65, it looks like at Gap this year. However, how far we away from the divisional analysis and what does that initially look like? Any light you could shed there. Thanks.

On the cost front, we certainly got a little bit of benefit in Q1. We have been working at it for the better part of six or nine months, so there was some benefit in Q1. We continue to work aggressively with the people in our regional hubs, as you know we operate in almost 50 countries. We have five significant hubs and the brands and the hub leaders are working together to make sure that we are coming to the market in an appropriate way, making the changes we have to make internally to guarantee we are getting it recognized for the cost that we, I would argue should not be paying historically, and we are making some adjustments in all fronts of our business to make sure we can deliver on. One of the priorities in our business is to get a reduced a cost base and one of those key areas of reducing cost is cost of goods. On the store front, I think what we have been and we will have a much better sense, Jeff, in the next two to three months, but one thing we have been articulating is, will there be some store closures, absolutely. My view right now is that we will be closing stores going forward, but at a decelerated rate. We are going to have a portfolio of about 3000 stores. Its natural every year, you are calling out some stores that just do not belong, some of those might be repositions or relocations. However, some of them are closures that we just do not feel good about any more. As we look at our strategy by market and by region. So, some more store closures are certainly in our future, over the next three years, but at a decelerating rate and the real opportunity for us is going to be looking at that square footage per store. Jeff Black - Lehman Brothers: Great, thanks.

Our next question comes from the line Dana Cohen with Banc of America. Dana Cohen - Banc of America: Hello. Thank you. Couple of questions; It looks like square footage growth was essentially flat in the quarter. So, can you talk about what is driving so much productivity in terms of spread to in comp total, because online is only about a point. Then, second, other than the marketing, is there anything in the SG&A dollars that we should think is non recurring in terms of lower payroll or the remodels, because you said marketing will be flat, what about the other items?

So, first question Dana on spread, there is lots of in and out, but I think the three primary drivers, the one piece is online and that you mentioned and noted, the other piece I noted was new stores, so we get some spread from the new store openings and there is 33 in Q1, but on the anniversary level there is actually 43 versus Q1 last year. Dana Cohen - Banc of America: What was square footage, up in the quarter?

0.3. So three tenths of a percent, and then foreign exchange, actually, is another piece of spread. So, as you know, we have businesses in Canada, UK, France and Japan. Against those currencies the US dollar weakened versus last year Q1 by about 15%. So, we got about $60 million in sales revenue from translation on those businesses. Dana Cohen - Banc of America: Then on the SG&A?

Then on the SG&A, there is lots of moving parts, I think there is nothing major to call out, in terms of any one-time, what I would tell you is, and I have mentioned this before, in any one quarter we do choose to make investments at certain time. So as example, we are growing our franchise business, we just announced our new business in Russia, with business partners. We are working to grow our franchise business. So they are simply as levers going up and down. Our objective is clearly to deliver expenses reduction. However, the degree will vary, because in certain quarters, we will make choices to partially offset that with investments. No particular one-time call out besides the marketing. Dana Cohen - Banc of America: Great, thank you.

Our next question is from the line of Jennifer Black, with Jennifer Black & Associates. Jennifer Black - Jennifer Black & Associates: Good afternoon. Congratulations on operating in a tough environment. Glenn, I wondered if you are ready to talk about your back-to-school marketing plans. Then I wondered if you could bring us up-to-date on managing your choice count by division? Thank you.

Well, it is a little premature to talk about back-to-school. What we mentioned in the last call and still holds true today, is we have been rethinking what is the message we are going to have to back-to-school, and the focus tends to be by brand, with Old Navy. So, as we have redefined our target consumer, being a young mom, who is budget conscious, who is buying for herself and for her family? That certainly we have focused with our marketing of Old Navy. It is going to be making sure that we deliver on what the messaging is appropriate for that target audience. We are making sure we get our right product and value messaging out, it will be certainly one of the focuses. Exactly what shape or form it takes, in terms of media, and how it is going to look that is still to be determined. The key thing for us is that we are much clear today on what we need the messaging to be, exactly how innovative, creative and "the spin" is to be determined. Jennifer Black - Jennifer Black & Associates: Okay. Any thoughts on choice count, by division?

On CC count? I think the Gap brand have certainly, under market leadership of the last six to nine months taken a fairly aggressive stand on what their CC count is going to be, and you have seen some reductions. As part of the work we have done at Old Navy over the last three or four months, I would never characterize it as a page out of a Gap playbook. We are looking at our CC count, a program count more importantly at Old Navy and I think you will see some of that show up a little bit in the fall. Certainly for the holiday season, maybe not to the same magnitude of reduction that Mark executed at Gap, but there will be some changes that will go down. I would say Banana Republic is pretty flat. Jennifer Black - Jennifer Black & Associates: Okay. Thanks so much and good luck.

Thanks.

Our next question is from the line Barbara Wyckoff with Buckingham Research. Barbara Wyckoff - Buckingham Research: One, could you remind us of the lead time in the product cycle Old Navy versus Gap, and then, second on Old Navy, the Old Navy store fleet, could you please talk about your ability, your willingness to exit leases on underperforming stores ahead of schedule? When you talk about rightsizing the box, what is the right size of the box? If it is a freestanding store, what would you do with the rest of the square footage, could you just talk about that a little bit? Thank you.

Yes, I will take, Barbara, on lead times. So, generally what we have said for Gap Inc., most of our divisions have been at about nine months from concept to in-store. So Old Navy fortunately has worked hard on their pipeline, and they have actually seen really nice decreases to that. So that is why we feel confident given the assortment issues we have now and some of the changes we want to make in women that we are going to see some real improvement by late fall, might be old days where we might be talking about spring '09. So that is a reflection of how we have been able to shorten the pipeline at Old Navy. With regards to the Old Navy fleet size, we are always analyzing the fleet. Every quarter we are looking at opportunities on lease actions. It is very rate that we would pay anything to break any leases, because nearly every single one of our stores is on a positive cash flow, positive contribution basis on a four-wall basis. So it does not really make economic sense given the profile of the stores to pay for breaks.

Definitely from a size perspective, the things that both Old Navy and Gap shares that they have an incredible range of different sizes. You think of some other retailers that you likely cover or are a student of the way we are, they tend to be very focused on some cases as close as one prototype size, but never further than three. I think the real opportunity at Gap and Old Navy is once we get crystal clarity on what the prototype size is going to be going forward, it will likely be two for each one of those brands, is then to run what our current portfolio is against that prototype size, and then make those adjustments. We obviously feel pretty comfortable in Old Navy's case that the quality of the real estate is very good and that we will have no problem on those A+ centers finding landlords who may want the excess space as we defined it or finding comparable or complementary tenants, who would likely reside in Old Navy and play off with that traffic. So, we are doing the work right now, and there will be simple math once it is completed. However, the message for today is getting away from the eight or nine prototype sizes and getting focused on a couple will certainly bring us benefit going forward. Barbara Wyckoff - Buckingham Research: Okay. Thank you.

Our next question is from the line of Todd Slater with Lazard Freres & Company. Todd Slater - Lazard Freres & Company: I was wondering if you could talk a little bit about the international franchise agreements that you have been signing. How much revenue are you generating from those? I know it is probably still small. How much should we expect this year? Then how does that flow through the P&L, does it hit the revenue line and then pretty much go straight down? Thanks.

We have been signing international agreements at a pace that we are comfortable with. We are currently on 13 countries and have over 70 stores. The agreements we have announced recently that will take us into 17 countries with most recent one this week being Russia. I think we are pretty excited about what we have seen so far. The countries we approach were very thoughtful, the ones we thought made the most strategic sense initially and we have been testing the relationship. We have never been in a franchise relationship historically; have a little bit of that background, not internationally but in North America in my past. I think that there is been some really good work done by the team here about finding the right franchisees, making sure our brands are represented appropriately, working with them on the right strategic real estate plans. Good that we are going through the work, we are going through right now in North America to make sure we do not replicate some of the missed opportunities in our real estate internationally as we have in North America. So I think we have a three to five-year strategy that we have worked on hard with the team here, figuring out which are the right countries to approach and when. We have three different models we can go to market with, which is our corporate model, like you see here in North America and that we have in the UK and France and Japan. A joint venture model is a model that some people consider and a franchise model is obviously the one that we selected to-date to put into these 17 countries.

With regards to the accounting, just recall that our model is that we sell the goods to the franchisee. So the revenue we received from directly selling our goods to the franchisee does get consolidated into our revenue. Todd Slater - Lazard Freres & Company: Okay, great. Thanks.

Our next question is from the line of Lauren Levitan with Cowen & Company. Lauren Levitan - Cowen & Company: Thanks. Good afternoon. Glenn, I am wondering if you could give us your thoughts on pricing strategy for each of the brands. I am particularly interested relative to your comments that you made about Banana considering responding to some of the promotional activity they are seeing. However, as you are getting some of these sourcing advantages from leveraging your strength at the vendor community, how are you thinking about how much of that might go back into an adjusted pricing strategy relative to going into higher gross margins for the company? Thanks very much.

Let me take the second question first. We have been really thinking strong and taking strong stands internally that we should as a business just aggregate AUC from AIR, which are average cost from initial retails, and that is a mindset that we, as a business, are looking at gross margin dollars per units as opposed to only focusing on IMU. So as a business, even if we are able and continue to do the work we are doing to reduce cost on our AUC side deal with out vendors, we still can make the right decisions, up or down, regardless of what the cost is. Now, the challenge for us is making sure we understand who our competitors are, how do we want to come to market on our initial retails, how do we want to promote to actually drive traffic, but also drive conversion.We are really taking a new cultural approach internally that it really does not matter what the cost is, that if for some reason we wanted to lower our retails, if that was a choice of ours, and some retailers make those choices in order to be competitive to who they believe are the direct competitors, then we better work our way down the P&L and take out costs somewhere else in order to make the numbers we have committed our self to make. Or on the other side of the coin, if you think there is opportunities to get higher pricing because the market is moving up, it should not be a determining factor just because you have got lower cost that you should be prohibitive from raising your retail. So from my perspective, it starts first and foremost, clearly who are your competitors, who do you believe that you need to target yourself against, whether its direct or whether its aspirational competitors, how do you want to target your pricing and come out in the market by category. Then the cost is a secondary component and they come together to create gross margin, and of course, somebody in every single brand is the keeper of the summation of the AUC and the AIRs. So it is really important work. I am sure every retailer will tell you that the people who control pricing of their business have a very serious role to play, as the people control cost. What we are trying a little bit in our business is to just aggregate those a little bit, and make good fundamental separate decisions. When it comes to Banana, I do not believe that there is anything uncompetitive with their initial retails. We have notices with their direct competitors; they have been much more aggressive on promotions. I mean stores, I think you know Lauren every Thursday, Friday and Saturday and I have just witnesses from where I first saw nine months ago and what I am seeing today. I am seeing some of Banana's direct competitors being much more aggressive on promotions. What I was trying to say earlier is that that means that we need to step up our promotional activity. Not necessarily lowering our initial retails, but being more promotionally conscious. Putting promotions in place that are right for Banana, its brand and its particular customer that we are trying to attract and we will certainly do that in order to defend our position. Lauren Levitan - Cowen & Co: It is helpful, Glenn. One follow-up on the first part of your answer, that cultural change that you described, how far along are you in that process? Do you feel like the merchants are today thinking about bringing in product, the way you have described and how is that pricing strategies that we see currently in place are they already reflecting that desegregation?

Not yet, Lauren we have certainly done minor structural changes within the brands, to make sure that the merchants have the right, experienced individuals working with them to help them on this cultural shift, and how we look at our price optimization and gross margin dollar per foot optimization. Maybe a little bit of benefit from that in the fall, but I think we more see it as a '09 opportunity. Lauren Levitan - Cowen & Co: Thanks very much.

Our next question is from the line of Marni Shapiro with Retail Tracker. Marni Shapiro - Retail Tracker: Hi, guys. Congratulations on a good job. Could you talk a little bit about full price comps versus markdown comps at some of the brands? Would you discuss with us the improvements on the markdown margins. Was that just at the Gap brand or did you see that across the board, because the inventories were pretty lean at Banana as well believe?

Yes, we down segment report, Marni, but let me try and be helpful. So, at the Gap Inc. level what we saw was we definitely had improvement in regular price margins. So, those expanded helpfully, even the bigger expansion was in our markdown margins. So, again at the Gap Inc. level our markdown margins improved and our reg margins improved. What I will say is not surprisingly and given the headwinds that Old Navy faced in the quarter. They actually had pressure on their AUR and their margins. The other brands, I think, it is fair to say overall, where the drivers to that improvement. Marni Shapiro - Retail Tracker: Great. May I just ask one follow-up? Where you able to cut back the inventories at Old Navy for the back half, given the shift and focus that you are executing right now?

Yes, that is a great call out and in fact, one of the drivers to the mid-teens Q2, on inventory guidance we have provide reflect the fact that we have brought inventories down further at Old Navy in line with the traffic they are experiencing, but also reflect the fact that we are working on their product as we speak. Marni Shapiro - Retail Tracker: Excellent. Great, good luck guys for summer season.

Thank you.

Our next question is from the line of Richard Jaffe with Stifel Nicolaus. Richard Jaffe - Stifel Nicolaus: Thanks very much. We say Stifel Nicolaus. Just a quick follow-on regarding the marketing efforts of the pullback we have seen in marketing and now, what looks like an opportunity particularly in the second half of the Gap division to ramp up advertising? Could you talk to that opportunity to use advertising to address the traffic problems by division?

We are certainly taking a look at couple of things, one is what is the best way to spend the money that we have last year, as we reported, we had $475 million in marketing. So, I think, for me its starts off versus do we have right medium, do we have the right message that is appropriate to are they delivering in some cases incremental traffic or in some cases higher conversion, more people are actually in the four walls of our store. Our view going forward is pretty simple, that if anyone of our brands can hit on the following areas, we are more than happy to spend marketing money as long as we can justify the investment, first and foremost the product is right and on target that is critical to us. Secondly, we believe the stores are going to represent and merchandise and actually provide the customer service model inside the stores when people show up, because of marketing we can actually deliver in the four walls of the store, that is the second part that is really important. Third, do you have message, what is the message, is it just something on a billboard or do you have something that is an imaginative, creative and makes absolute sense for that target consumer. Last is the consumer ready to respond to the marketing, what is the psyche of the consumer, how are they feeling at that moment. So, I would not say that we have to have all four of those perfectly aligned at any given model. We will spend marketing for the remaining of the back half of this year, that is a commitment we are making. We know we have to continually speak to customers, particularly in the time we are going through. My theory, and I think its shared by everybody in the brand precedence is we are more than content to step up marketing investment in order to get a return on that investment if the following four sets of criteria do exists. So right now the only brand that we have mentioned right now, that is getting close to hitting on those four cylinders, if you want to call it, is Gap brand. Richard Jaffe - Stifel Nicolaus: Right.

So that is a consideration but not a decision we have made, because the one thing you have to figure out is, is the consumer in a position in the back half to actually respond to that marketing message. So we are always having conversations here. It is some of the savings you saw, Sabrina talked to in Q1, the $20 million in less marketing at a Gap brand was a decision we made, because if that criteria was not in place. We could not justify the $20 million spend. So going forward, if it makes sense, we will choose the medium. We want to make sure again we are innovative and imaginative, we are happy to spend the money. Richard Jaffe - Stifel Nicolaus: How much wiggle room do you have in your spend versus the $475 million? I mean, is it 20%, 30% that you do not have to spend? How much is committed already? Or is it all uncommitted at this point?

I think it is a mix. There are certain things that obviously have longer lead times, as you commit yourself to. However, the back half marketing, some portion, and $475 million was last year’s number, we start looking at it. It is more of a Q4 opportunity. We will make those decisions. I think we obviously are already having conversations now about Q4, so most of retailers are. If we can see those four sets of criteria being aligned we are happy to, one spend the money or secondly not spend the money we can not see returned. Just to be clear, we are happy to invest more money to get the return if everything is lined up. Richard Jaffe - Stifel Nicolaus: Got it. Just a quick question on the improvement in pipeline. You talked about Old Navy, would that similar improvement be true for the Gap division as well?

I wont say Gap brand is about the same it was. Maybe a week or two better. Banana Republic is exactly the same as it was. Richard Jaffe - Stifel Nicolaus: Thanks very much.

Our next question is from the line of Christine Chen with Needham & Company. Christine Chen - Needham & Company: Thank you. I wanted to ask about the marketing campaign at Old Navy. This year the TV ads certainly are much more contemporary in nature than they were last year. As you continue to evolve the merchandise, how do you see the marketing campaign evolving?

Our view would be that the one television campaign that is starting tonight, Memorial Day weekend is certainly more appropriate to discuss earlier on the target consumer, particularly the message about the budget consciousness of the value component which is critical, again, value our way. Do I think that it is going to hit on imagination and innovation? No. With respect to earlier question, we had some commitments we would make. When particularly it comes to television, those tend to be longer term commitments. We have have been able adjust the creative. So it is a little more modern as you suggested and a little harder hitting this weekend when it comes to value message. I do not think you will really get a sense of the creative that we are are going to put forward for I would argue all three brands until into fall and holiday and making sure that the creative we put forward is completely reflective of what the target consumers for all three brands. Even though we know and we have known for a while who Banana Republic and Gap's target consumer is and how they should show up, all of our television investment is with Old Navy. Now that we have recently shifted and redefined that target consumer, I think you will see that closer to fall and the holiday season. Christine Chen - Needham & Company: Okay, great. Thank you and good luck.

Thank you.

Our next question is from the line of Dana Telsey with Telsey Advisory Group. Dana Telsey - Telsey Advisory Group: Good afternoon everyone. As you evaluate where you are today and where you want to be, do you foresee the opportunity to achieve perhaps the most recent peaks in '04 of a 39% gross margin and a 12% operating margin. How much do you see would be dependent on topline growth and how much do you think would come from internal efficiencies? Thank you.

Hi, Dana. Dana Telsey - Telsey Advisory Group: Hi.

It is Sabrina. I think that is a really fair perspective. What we are looking at is focusing on the improvement that we should be tracking to and we are looking at our recent history. So, recent history, last three and four years, we definitely hit operating margins, as you know, at the 12% level. We see reason that that this not a very good aspiration for us to have in the near-term. We have obviously guided this year to 8.5% to 9.5%. We will use both levers to get there. Those levers being both disciplined cost management, but as well and importantly growth in gross margin dollar, because for the long-term we obviously believe the bigger opportunity as we set out to gain back market share is in the growth margin dollar growth. Dana Telsey - Telsey Advisory Group: Thank you.

Our next question is from the line of Paul Lejuez with Credit Suisse First Boston. Paul Lejuez - Credit Suisse First Boston: Gross margin, is it safe to assume that in the back half of the year even though you come up against some improvements in merchandize margin that you achieved in the second half of '07 that you are still, in fact, forecasting higher merchandize margins? Then also on the margin line, can you talk about the leverage point on occupancy, whether it be from a comp perspective or a total sales perspective?

You cut, Paul, at the very beginning, but I think I understand your question is around second half merchandize margins. Paul Lejuez - Credit Suisse First Boston: Yes.

So, we have not guided explicitly to the merchandize margin. However, what we will tell you is it is clearly our objective to keep going in the direction that we have been going, where we are driving to healthy help the merchandise margins, and that is a key part of our strategy. We think our continued discipline in inventory management enable that strategy to become an achievement whether we do it or not. We will see how things turn out, but that is clearly the objective is to keep marching in that direction. Then the second part of your question was ROD. So on ROD I think it is fair to say with the current state of our fleet now where we actually have called out the most unproductive stores over the last four years, it is very difficult to actually leverage ROD on a negative comp. I will not say it is impossible at the low negative single digit but it is very difficult to actually leverage ROD on a negative comp. Paul Lejuez - Credit Suisse First Boston: Got you and just one quick follow-up to Dana's question earlier on currency. You mentioned what it did to your topline. How much did it help earnings?

I am going to say it is immaterial to earnings overall, because as it helps revenue, it also translates our expenses of our international subsidiaries at a higher dollar number, and also their rents and occupancy and depreciation. So when you get to the earnings level, it is pretty immaterial. Paul Lejuez - Credit Suisse First Boston: All right. Thanks and good luck.

Sure, thanks.

Our next question is from the line of Brian Tunick with JPMorgan. Brian Tunick - JPMorgan: Hi, thanks. Hi, Paul, Glenn and Sabrina. I was curious, I think, Glenn, you said before how you would like to see the stores playing a role in the winning and you trying to make the business be more localized. Can you just maybe update us, your past couple of months so far, if you have seen any progress there and when we could see some of that?

I think it is really early days. I think that we have first have to get some information to the hands of our stores they did not have before. That is completely our fault and we will take you through the gruesome details, but just suffice it to say that our stores really did not have the data they should have in order for them to be able to make some of their decisions. So that part is pretty much on its way in terms of get the information down, explain to them how they actually interpret the information to make better decisions. Some of our brands have taken portions of their zones and various responsibility and tested, given our stores a little more accountability and allowing them to make some decisions that we feel comfortable with. The fine line between having chaos in your business by giving stores full accountability, and then losing the localized flavor and feel for a mall or streetscape store in Seattle versus Miami, so I would say we historically erred on being much more controlling. We are trying to find the middle ground. The benefit of that, I hope, because I have been personally disappointed last November and December by seeing how vanilla and generic our stores were around the country. As the seasons begin to change, I am hoping that most of our brands will begin to see some of the benefit of better merchandising decisions at store level. That is round one. There are other things that we put on the list of potential opportunities our stores can be involved with, but it starts with them understanding of being trained and becoming confident. So, we are in the early days. Certainly, in my experience in the past, given the right set of guidelines and explanation and encouragement, we have got make the odd mistake every now and then to find out what is right. That is going to be a big opportunity for us in the future. Brian Tunick - JPMorgan: How about an update for the leadership at Old Navy?

Well, we have got Tom Wyatt in the seat. He has done a very good job so far on a number of different fronts. However, whenever you make a change, first of all somebody come in, has to stabilize the people who were there, and he has done an excellent job on that front, getting the team motivated. He led the discussion on the target consumer and in the first 30 days he got the team to look at where they have been, look at where they were going, and then make the decision, that I articulate today, where they think to have to go to, so credit to Tom and his team for doing that. We are looking, we have been very pleased. Number of people have put their names forward. I met a few and I plan to meet a few more. It is just, now I am trying to find somebody who I think can understand that brand, first and foremost. Have an appreciation of the value segment, have some good, rude merchant skills that can compliment my skills. That is obviously not my background, even though I understand the process and I appreciate I am involved, that is not certainly my background, and somebody who can fit inside of our structure and culture. So, we are confident that in the next number of months we will narrow up down and we will make a good decision. All the people at Old Navy are anxious for that. However, in the meantime to be honest, I think, Tom is doing a very good job over there, in the last 10 weeks that he has been filling that chair. Brian Tunick - JPMorgan: All right. Great, thanks and good luck.

Thank you.

Our next question is from the line of John Morris with Wachovia Securities. John Morris - Wachovia Securities: Thanks. My question would relate to I guess the Gap division in particular Glenn, and/or Sabrina. Patrick Robinson's influence, are we beginning to see that at this point to what extent, looking at the product, how would you describe that influence presenting itself? AND then from your perspective and understanding, how is that changing the initial relationship of working with Marka, how are two of them integrating, in terms of the impact of the store assortment? Thanks.

Well, I think Patrick, being as modest and humble as he is, we would say that he has had limited impact and what you are seeing in the Gap stores, which is summer, truth to be known, he has had very solid influence on what we see in our stores today, particularly on this latest delivery that came in last Tuesday, that we call internally summer two. His influence from concept, all the way to delivery, from the full nine months that is what Sabrina was talking about earlier, will really be felt in the fall. That is some of the products that he showed at Fashion Week, back in January, in New York. However, his influence right now has been felt. I have always said and I will continue to say it publicly and in these kinds of situations or internally in the office. Patrick's influence, obviously he gets pride of authorship, when he gets rewarded and recognized for the product that he designs and creates. His leadership skill inside the office and his ability to attract great talent is something that when Marka hired him, I am sure she did not know she would get a double win on acquiring Patrick. In terms of the relationship, I think it is great. AND you are forgetting one person, which is Gary Muto. John Morris - Wachovia Securities: Absolutely, yes.

I think the combination of Patrick and Gary in New York, who are an amazing team and obviously Gary is much more responsible than just merchandizing and design. He is a President of Gap Adult. Between, Gary and Patrick first and foremost under Marka's vision and leadership is the reason that we took a step out during the conference call and say that, we think customers are responding positively. We are starting to feel better by what we are seeing. We are certainly looking forward to Patrick's full line being presented. I think its mid August that shows up for the fall off season. John Morris - Wachovia Securities: Very helpful, thank you.

Thank you. Operator, we have time for one more call.

Our final question comes from the line Jeff Klinefelter with Piper Jaffray. Jeff Klinefelter - Piper Jaffray: Yes, thank you. Just couple of quick questions for you. One, could you just talk a little bit more about the relationship between comp sales and merchant margins, Sabrina, meaning, going forward if you continue to see this negative traffic trend, what margin can you deliver, given you have very strong performance in Q1? Then second is on Old Navy, other strategies you are considering for productivity enhancements, looking at other space utilization, even other brands, other category brands coming into the stores at this point?

Yes, I will start with first part, Jeff. I think it is really important to say that comp store sales are really important to us. We obviously want to get to a positive comp, we obviously want to gain market share back. Our past there though, we are first and foremost focused doing that with healthy margin. So, we are very careful not to fall into just buying comp by buying units and selling them at markdown. We are really holding firm on our inventory discipline to drive healthy margin percent. However, again, we now that to drive profit we need to drive healthy gross margin dollar growth. So, can we achieve both in the interim? I think it is is fair to say that it more difficult when to buy inventory as lean as we are buying, it is more difficult to positive comp certainly. I do not think it is impossible. We had in April, Gap brand with a flat comp when their inventories were down significantly. So we want those, but we are in the short-term focused more on delivering the healthy margins

At all Old Navy, I think first and foremost, we make decisions that are self-serving for us, which is one of the size of the box and the stores we are going to have going forward. I have mentioned earlier this likelihood of two prototypes sizes. Then the excess space, I think we have lots of options. I think we certainly want to work with our partners in the landlord community, and we always have co-tenancies that we find are appropriate to Old Navy. So I think those discussions are just beginning. We do not have full strategy done, but we have had preliminary decisions. When I look at our breakout of our portfolio of 1,000 stores, we have 700 of those 1,000 that are non-mall stores. So they are rather in power centers or really strong strip centers beside very good, attractive, long-term national retailers. So I suspect that landlords will have no problem putting somebody beside us that we feel is appropriate to complement our brand. In some cases we may decide, and this is certainly not a position that we are strongly today, but we may decide to work with somebody who could take out some of the space and actually be complementary to the overall traffic flow and build on the image, and certainly be again complementary to the consumer that we are now targeting. So lots of options available to us, early days, but I think we are going to complete the work in the next few months and then start to go into the execution mode. Jeff Klinefelter - Piper Jaffray: Thank you. That is very helpful. Just one other quick question. Q1 this year versus Q1 last year in terms of the composition of those transactions, was there much of a difference in terms of the bottoms, the tops ratio, year-over-year?

I do not think there is anything to call out, Jeff, probably a little variation by brand but no major call out. Jeff Klinefelter - Piper Jaffray: Okay. Thank you.

I would like to thank everyone for joining us on the call today. As always, the Investor Relations team will be available after the call for further questions. Thank you.

Ladies and gentlemen, this concludes the Gap Inc. first quarter 2008 earnings conference call. You may now disconnect.