Evan Price – Vice President, Investor Relations Glenn K. Murphy – Chief Executive Officer Sabrina L. Simmons – Chief Financial Officer

Janet Kloppenburg - JJK Research Jeffrey Black - Barclays Capital Stacy Pak – SP Research Dorothy Lakner - Caris & Company Richard Jaffe - Stifel Nicolaus Laura Champine - Cowen & Company Marni Shapiro - The Retail Tracker Jennifer Black – Jennifer Black & Associates Paul Lejuez - Credit Suisse Brian Tunick - J.P. Morgan Jeffrey Klinefelter - Piper Jaffray Kimberly Greenberger - Citigroup Dana Telsey - Telsey Advisory Group Adrienne Tennant - Fbr Capital Markets

At this time I would like to welcome everyone to the Gap Inc. first quarter 2009 conference call. (Operator Instructions) I would now like to introduce your host, Evan Price, Vice President of Investor Relations.

Good afternoon, everyone. Welcome to Gap Inc.'s first quarter 2009 earnings conference call. For those of you participating in the Web cast, please turn to Slides 2 and 3. I'd like to remind you that the information made available on this Web cast 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 our results to differ can be found in our annual report on Form 10-K for the fiscal year ended January 31, 2009, and today's press release. Due to 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 21, 2009, 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 the non-generally accepted accounting principal measure free cash flow, which under SEC Regulation G we are required to reconcile with GAAP. The reconciliation of this measure to the GAAP financial measure 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'd like to turn the call over to Sabrina. Sabrina L. Simmons: Good afternoon everyone. I will begin today by reviewing first quarter results, followed by commentary on our outlook for the second quarter. We entered 2009 prepared for a difficult consumer environment. Although first quarter earnings are below last year, we are pleased that our commitment to operational discipline, especially around inventory management and average unit costing, resulted in merchandise margin improvement. In addition, we are encouraged that our product and marketing efforts are beginning to show traction at our largest brand, Old Navy. Some highlights for the quarter: net earnings were $0.31 per share; merchandise margins increased by 100 basis points; operating expenses were $73.0 million below last year; and operating margins were 11.3%, equal to last year. For Web cast participants, please turn to Slide 4. First quarter earnings were $215.0 million, or $0.31 per share, compared to $249.0 million, or $0.34 per share, last year. Please not that last year's earnings included about $15.0 million of pre-tax earnings benefit from a reduction of interest expense accrual. First quarter effective tax rate was 39.1% and weighted average diluted shares were $697.0 million. Turning to Slide 5, sales performance. First quarter total sales were $3.1 billion, down 8% versus last year. Total company comp store sales were down 8% in the quarter. Please refer to our earnings press release located on GapInc.com for total sales and comps by division. On to Slide 6, gross profit. Merchandise margins improved 100 basis points, driven by savings in average unit costs. This improvement was offset by 110 basis points from occupancy deleveraging. Gross margin was 39.6%, about flat to last year. Gross profit was $1.2 billion. Please turn to Slide 7 for operating expenses. First quarter operating expenses were $886.0 million, down $73.0 million versus the prior year. About half of the reduction was due to lower store-related expenses, primarily a result of the decline in sales. The balance was driven by lower corporate overhead expenses and about $16.0 million of foreign exchange benefit. Marketing expenses were $96.0 million versus $93.0 million in 2008. We kept marketing dollars relatively flat to last year while increasing our marketing efforts at Old Navy and adding Athleta marketing. Turning to inventory on Slide 8. We ended the first quarter with $1.4 billion in inventory, down 10% versus the prior year. Inventory per square foot was $32.0, down 12% versus the prior year. Entering May, we remain comfortable with our overall inventory levels. Please turn to Slide 9 for capital expenditures and store count. First quarter capital expenditures were $63.0 million. We opened 11 stores weighted toward international and outlet and closed 11 weighted toward GAP brand. Company-wide we ended the quarter with 3,149 stores and that square footage remained about flat. Regarding cash flow on Slide 10. For the quarter free cash flow, defined as cash from operations less capital expenditures, was an inflow of $139.0 million compared with an inflow of $62.0 million last year. The difference was primarily driven by reduced capital spending versus last year. Please refer to our press release for a Reg G reconciliation of free cash flow. We ended the first quarter with about $1.7 billion in cash and no debt. Turning to Slide 11, our outlook for the second quarter. Regarding merchandise margins, we are highly confident that we can continue to deliver lower average unit costs. However, given our goal of driving traffic, coupled with a consumer who is looking for sharp value, average unit retail, and therefore merchandise margin, remain uncertain. We expect second quarter operating expenses to be down $30.0 million to $50.0 million compared to the second quarter of last year. As a reminder, while we remain focused on our cost efforts, operating expense dollar savings may vary by quarter due to a variety of factors, including sales and marketing investments. We expect second quarter marketing expenses to be up $10.0 million to $15.0 million compared to the second quarter of last year, driven by Athleta and Old Navy. We expect the percentage change in inventory per square foot at the end of the second quarter to be down in the low double digits compared to last year. Regarding share repurchases, because our Q1 ending cash balance of $1.7 billion is relatively close to our target of $1.5 billion, it is unlikely we will repurchase any shares in the second quarter. For the full year, our guidance for the following metrics remain unchanged: depreciation and amortization about $550.0 million; effective tax rate about 39%; capital expenditures about $350.0 million; new store openings about 50; store closures about 100; and net square footage decline about 2%. In closing, as we enter the second quarter we will continue to focus on the levers we can control and are cautiously optimistic about the progress we are making in our largest division, Old Navy. Thank you and now I will turn it over to Glenn. Glenn K. Murphy: There are a couple of topics I would like to cover in the time we have together. First, I would like to just give you my perspective of the first quarter performance here at GAP, Inc. and also talk to you about, as I normally do during these quarterly conference calls, just give you a brand update. The market conditions, from our perspective, continue to be challenging. With that said, I think our performance in Q1 was respectable. None of us like to produce results in the quarter below last year. I don't think any business would ever want to produce results below last year but with the conditions in which we are operating in, I think it was respectable and versus a lot of our competitors, I was pleased with our performance in the first quarter. Part of the reason we produced the results we produced is we continue non-stop to produce a more efficient economic model, to tighten up that economic model, on a number of fronts we've discussed before. One on the margin front, getting a lower average unit cost in the business, still being smart on inventory, making good decisions on localized promos and mark-downs. Also taking out real cost dollars out of the business. In this first quarter of 2009 we were able to take another $73.0 million of incremental SG&A, that's on top of the $478.0 million we took out in 2008. So when you add that together and then that gives us the flexibility to make targeted investments where we feel they are appropriate. In the last quarter update we did tell you about an investment we're making at Old Navy. Now the dollars in marketing were almost identical to the year before, but still, having this new economic model that is much more efficient gives us the opportunity to make those choices. So far obviously the evidence is in the early days. The investment at Old Navy is starting to pay off some early dividends for us. I would like to now give you the brand updates, staring with Old Navy. On the product front we continue to see to see some improvement being made by the team and Mark Brightbart has now been with us for just a couple of months but his influence and his expertise has certainly being felt inside the business and we look forward to Mark's personal touch on product coming through sometime later this fall. On the marketing side, the investment we made in the first quarter we feel good about. It was a good campaign. I think it resonated on a number of different fronts, had Old Navy's personality, which is important for our brand, but most important, it had a very strong, very direct, very clear product message and value message, which when we hit that right at Old Navy we can really change the course of the trajectory we have been, unfortunately, on for the last couple of years. What I am most pleased about is that it's a fully integrated campaign, so it's taking the external media that I think a lot of people have seen, but it's taken it right down to store level by introducing the super modelkins right in front of our customers and engaging our stores and asking our store employees to be part of the campaign. As we look forward to Q2 we need to continue to evolve the campaign, keep it fresh, keep it current, keep it active. Allow the value message to come through very strongly. And I think that's very important in order for this campaign to have sustainability. And at GAP brand, I continue to see progress being made on the product front. The real challenge for that team is how do we get more traffic through those doors. You are going to see the GAP team relaunching denim in August with a new campaign. I think that's important. We were just introducing our whole new denim to the fashion press in New York two weeks ago and hopefully that will be the beginning of a series of investments that we can make with some break-through ideas in the fall and the holiday season to really get the consumers and that target back into our stores. And at Banana Republic, Jack and the team are certainly working on getting the product right and get a position for that target consumer. To make sure that we get there and achieve that goal, we were really pleased to announce that Julie Rosen will be joining our team at the end of May as the senior merchant for Banana Republic. Julie has an incredible taste level, really understands Banana Republic, has a great track record, and even though she will be joining us at the end of May, her real impact on the business won't likely be felt until the early part of 2010. But having her on the team, I think, has given us an added level of confidence in Banana Republic's opportunity to get back on track. And finally, one last brand update. Athleta came on to our universality platform last month and now you enter into any of our brands on line and you can get to Athleta and shop it. Shop our other brands, check out one time and pay one delivery fee. So it's pretty exciting, actually. It's a business that the integration has gone very smoothly, they have a very good team and I think it will be good for all of our brands to have Athleta part of the family now. So with all that said, I look forward to taking a few questions in a couple of minutes but let me first hand it over to Evan.

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

(Operator Instructions) Your first question comes from Janet Kloppenburg - JJK Research. Janet Kloppenburg - JJK Research: Glen, I was wondering if you could address what it would take for the company to invest in a traffic-driving marketing program for GAP. If you feel good about the assortments, what is the catalyst you need for investment in this brand to perhaps bring the customer in and perhaps there will be a campaign around the denim introduction. But if you could elaborate on that, or what other traffic-driving motivators you might use to help build productivity in the GAP. Glenn K. Murphy: We look at it that since the beginning of this year we have certainly been making some traffic investments in the business. And Old Navy has been the one we have mostly put a lot of investment behind but we are now starting to put some investment behind GAP as well. And they're not big investments. I think they're just we're trying to learn. We're making some traffic-driving ideas that are—we have one for Memorial Day this weekend. The marketing team have a few other ones planned over the next couple of months. And you're right to zero in on the denim campaign. Our 40th anniversary is in August and as part of the 40th Anniversary celebration and recognizing the heritage of the brand, denim is a key cornerstone of heritage in the brand so Mark and the team have put together, and they were working on it for the better part of a year, what is the right relaunch for the 40th Anniversary. Denim is the right category. Some work has been done on it. There's going to be a campaign but I would not say it's going to be break-through, but there is certainly going to be, as we talked about with Old Navy, a fully-integrated campaign. There is work being done in the stores to make sure the stores, actually the denim shows up. It's going to be a unique look, it's going to brought forward to the front of the store. There is going to be some incremental investments on top of that. So I would not characterize it as an Old Navy-type campaign that we started at the end of February, but as I said in the opening remarks, I believe it's the beginning of a more confident approach to the GAP brand and I hope we have some early reads that are positive. That will then us to make other sustainable investments after that. So in August I think we're going to come through with a denim campaign that has a marketing component. It's not deep, it's not rich, but I think it's good enough for the brand right now and then we'll take a look at the back half of the year beyond that and whether there's reasons to make further investments in GAP brand.

Your next question comes from Jeffrey Black - Barclays Capital. Jeffrey Black - Barclays Capital: On the Old Navy, obviously there is a productivity ramp. Is there anything we're doing in Old Navy that would suggest however given the marketing spend and really where we are with the margins, that that business would be able to deliver the same level of profit that we were used to several years back when this thing was comping positive? Glenn K. Murphy: That's way early for us to be predicting the kind of return on sales that Old Navy might get to. You're right to suggest that obviously a number of years ago it was a great profit vehicle inside of the total corporation. It still contributes quite nicely, by the way. We're taking this one step at a time. We told you in the last conference call that we felt that the product that is now currently in the stores back then, that was the March flow, was acceptable enough that we would make the investment, particularly in this environment, and to just build on Janet's question earlier, we did comment the last quarterly call that we felt given the value consciousness of consumers, the economic environment that we're operating in, that we put Old Navy sort of first-in in terms of an acknowledged investment to drive traffic. Our other brands do have traffic initiatives, not to the level Old Navy enjoyed in the months of March and April, and also in the month we're currently in, in May. So I think it's one step at a time. Mark, as I mentioned in my opening comments, has just joined us. I think the test for time right now, to ever get to what you're suggesting, which I'm not saying we're going to, but to get to that and continue momentum, now the trick for them is how do you keep the campaign, any campaign, relevant, keep it that it is disruptive in the marketplace, that people actually tune in and react to it, there's a call to action, and on the other side is what are we doing from Mark Brightbart's perspective to bring the product up to a much higher level. As we said in March, the product as acceptable. Now I think Mark has got to get it to good and then the total team has to get it to great. Now if everything was aligned, obviously we would like to see a little more profitability and contribution of Old Navy to the total business, but I think we're a number of conference calls away of getting to any kind of evidence to get to the answer to your question, but we're not in this business to have Old Navy be the same contributor it's been for the last number of years. That's why we decided to make the investment in that brand and to put the new team in place, to at least get it back on track and be a much bigger contributor to the business than it's been recently.

Your next question comes from Stacy Pak – SP Research. Stacy Pak – SP Research: I guess following up on the earlier question, I'm not hearing as much about how you feel about the Old Navy product for fall and holiday. Are you confident you have the product in place so we're going to continue to see an improvement there. And just a clarification on what you said on GAP, does that involve TV and if you are confident GAP product is right, is there a metric, like conversion or something, that you could share with us? Glenn K. Murphy: On the Old Navy product, what I was saying to Jeff is that back in March when we announced that we would be coming back with some marketing, I think we were asked quite directly how do we feel about the product and maybe to some people it might have felt premature. And what we said is that Tom and his team crossed a number of different thresholds with us to the point we felt confident giving him an equal amount of marketing money to last year. And in fairness to them, I thought they came up with a pretty good campaign. We would never have produced the kind of change in comp numbers in March and April if the product was not, as I described, a minimum acceptable. I do believe, and again, I can't give you any metrics on Old Navy, but I do believe from the time I spent with that team, which is a fairly high degree of time, that they are making some progress when it comes to product. And that the next threshold, just to be fair, is going from acceptable to good product. And then I think that once they get to that level, then they've got to get to great and these things don't happen overnight. But I do believe that they have got a really clear, more than anybody else in our business, and I don't mean to be disrespectful to other brands, but more than anybody else in our business, they really know their customer. They have really zeroed on who it is, who their competition is, and I think they are designing now for Old Navy. What's right for Old Navy in order for them to regain their proper position as value segment. So I certainly didn't want to give you the indication that they are going to get to acceptable where they are today and then hold for a number of years. I do believe they are on an upward trajectory and are really committed to improving that product and crossing and getting themselves back to great. No question about it. On the GAP side, to your question, you know, television is just one medium. I'm sure if we were talking on a conference call ten years ago everything we did revolved around television. But there are so many other ways now to get your message out, and GAP in particular, while markets brand is such a cultural brand where social networking and other mediums can be used in order to get your message out, and I think the challenge to them has been could they use television at some point—and by the way, television is not part of this denim campaign in August. It is a campaign but it is not a break-through idea but it is a campaign that I think is important and revolves around the heritage of the brand and as well as a celebration of 40 years of a very strong brand in the U.S. But they have a campaign that I think is well thought through, it's going to get the message out, it's very solid inside the stores. I have seen all that. Going forward, as they come up with new ideas, what I'm kind of saying today is you don't just do a denim campaign and then do nothing. So the challenge to them is beyond that what do they do. How do they get on some momentum? How do they continue to get their voice out to customers? Therefore, if television was to become one of the mediums down the road with a break-through idea they felt was necessary, I would certainly support it. Stacy Pak – SP Research: And is there a conversion number or something you can share to sort of back up your confidence in the GAP product? Glenn K. Murphy: You know, conversion is a tough number to fair to use in this environment because I can give you a conversion number—this is hypothetical, by the way—if I said a brand X's conversion was up 1% but it's AUR was down because we came that much more promotional, then it's really meaningless. So what we've been doing, and because I don't often come on calls like this and make bold statements if I don't believe them, the statement I made the last call and I'm backing it up today, too, is I do feel confident in the product at GAP and the way we've done that is we have really ramped up all of our customer research. It's at store level. We've got way more consumer panels going than we've had before. We are really finding a way to speak to customers and talk to them about our product. And our feedback and our research certainly points to that people are seeing the product now be absolutely zeroed in on our key target. That's what is important. Is it hitting the target we want and our evidence right now, it's not perfect by the way, no different than I said about Old Navy going from acceptable to good to great, Marka and Patrick and team have to keep climbing. They can't stop right here and rest on their laurels, but they have made a significant change and it is on target and we do feel comfortable enough, and there's traffic-driving events they're going to have in May and in June and July, but the real next step for them, I want to get really focused on the back half, is this beginning with in August, this denim campaign and then hopefully that will give us the foundation, to be determined by the way, but I'm happy to report back in August when we're together again, to be determined will that the foundation of the beginning of future investments to get that brand getting the kind of traffic we think it should be getting given the improvements in product we have seen.

Your next question comes from Dorothy Lakner - Caris & Company. Dorothy Lakner - Caris & Company: I don't mean to beat a dead horse, but to follow-up on what you're saying about GAP's campaign, you did say that this would be followed through with break-through ideas for fall and holiday, is that accurate? Or is it a case of you want to see how things go in August and then you will kind of go from there. Was that my understanding, that you are starting to market the brand beginning Memorial Day but with this big campaign on denim to start in August, and then other ideas will follow through in the back half of the year. Glenn K. Murphy: Yes, definitely the latter what you said, and I wouldn't say it's a big campaign, I would say it's the first time since I've been here we can actually say that GAP has a campaign, which is the denim campaign in August. No different than Old Navy. I think you have to be able to put something into the market and we take these things very seriously. But then we have to read it. We have to make sure that actually they have the right idea, the creativity, the store-level execution, and obviously in the case of denim, they have the product. And the premium denim relaunch and the fit and the washes and everything that appeals to our customer. The challenge we've given that team, and they don't us here at corporate to challenge them, they're self-motivated, but it helps with a little bit of challenge from us, is if we're going to do this, and this is a step, please make it the foundation with proof points in your August launch that will give us confidence to spend more money going forward. Because that's what we all want. If the product has improved, and I've obviously expressed my perspective on that, that we are going to put some money and some effort and get our stores reengaged in this campaign in August, then let's make sure we do it, execute it well, make sure that it's absolutely a call to action, and then with that evidence, I am more than happy—because I'm a big believer in return on capital, I've a big believer in return in investment, so if we're going to make the investment I need to see the return. But there is a feel to this, too. It's not all mechanics, it's not all financial. But I really believe that they're on the right idea and Marka is obviously thinking ahead, but we're not going to give her any kind of green light beyond the denim campaign until we see the early results.

Your next question comes from Richard Jaffe - Stifel Nicolaus. Richard Jaffe - Stifel Nicolaus: Looking forward to GAP and there was a bit in the paper about a resurgence of the khaki business, do you want to talk about what follows denim or what could follow some of the iconic products that we saw at the GAP and whether they might be part of the future of GAP. Glenn K. Murphy: I think that CFDA, we had two good years of doing the white shirts and you know, it's something that we believe in very strongly. And on a number of different fronts. One, it's not only the product in our stores, but the chance to work with young designers. And so is it a big mover of the needle for us when it comes to our stores and our P&L? The answer is no. It's something that actually differentiates the brand and really says what GAP's all about. I think, to be honest with you, again the same thing applies to khaki, I think the khaki campaign with the designers for CFDA is brilliant. I think it really is. I'm glad we didn't do white shirts again, I'm glad we've done something else. But it only goes into about 120 of our stores and it really is part of the overall brand image that Patrick and Marka are trying to curate and rebuild, to be honest with you, at GAP. But between that and the artist Tees, and some of the other work we've done, I think that the vote campaign we did in November, if GAP truly—one of its emotional cornerstone in retail is that GAP creates culture, then there is always going to be some of these associations we're going to have. Either with CFDA, like I said, or the vote campaign we did in November, and some of the other ideas that have come out of that brand. But to be honest with you, I think there are little pieces that help build the reputation of the brand, but they're not in keeping with the campaign we're going to do starting in August, which is really an all-store campaign, and that's an attempt to not only to reestablish the brand but to actually move the needle on the P&L.

Your next question comes from Laura Champine - Cowen & Company. Laura Champine - Cowen & Company: Could you comment on merchandise margins and what your expectations are for product cost as we go through the year? Sabrina L. Simmons: We did say that our merchandise margins were up 100 basis points for the quarter. What we said for our outlook for Q2 and the rest of the year is that we are highly confident that the average unit costing that's been driving that merchandise margin improvement in Q1, will continue through the rest of the year. The tougher part to predict is the average unit retail, which our product will ultimately sell at. We haven't guided to that piece but we feel really good about the average unit costing and again, we were able in Q1 to accomplish our goal of delivering the increase in merchandise margins. Laura Champine - Cowen & Company: Is that driven by consolidating your vendor base or are you just seeing an overcapacity in the supply chain? Sabrina L. Simmons: No, it's a lot of leverage we're using. So over time, we have been working to concentrate more of our buys with fewer vendors but I think a big important piece of it, this year in particular, has been the supply and demand equation. And in addition, we have been talking about for some time our use of various tools, using our size importantly against our buys to get those savings, but also tools like e-sourcing and counter-sourcing.

Your next question comes from Marni Shapiro - The Retail Tracker. Marni Shapiro - The Retail Tracker: I was curious about, just to get back to the denim, and I'm sorry to harp on it, but did you wipe the slate clean at GAP and kind of start all over with new fits, new washes, new styles, or is this more an evolution of what you already have there? And I noticed in the stores recently a white jean that had a premium label, a premium fit. It looked great. I was curious if that's indicative of what's to come. And if you could just touch on the same ideas at Old Navy. Glenn K. Murphy: Definitely what you saw in the store, the white denim, is indicative of what's to come. I would say it's an evolution. We don't have to start from scratch, we've been doing this for a long time. But I do believe Patrick really fundamentally, in the last year, has thought as he looked at our business and looked at our assortment and looked at what was important and got himself confident in what you saw in the store, obviously in the premium denim. And I think he did do some work on the fit. He's very focused on the washes. I think it's a little more in women's than it is in men's. Men's might be at best a tweak here and there but when you have a fully-integrated campaign it's nice to bring everything together. So it's what a company like us, when you're rooted, our heritage category is denim, it's nice to come back every now and then and reclaim your rightful position and make some noise and let people know that not only do you have the fit and the washes and the selection people are looking for, which is obviously critical in this business, but I think there's also a good value message when it comes to GAP. Denim is trending nicely and some people have obviously gravitated over the years toward $100, $150 denim. I think also there is a good everyday value message here, which is secondary to the fit and the washes and what makes GAP exciting, but there is a value message. So, yes, what you saw is absolutely an indication of what's to come. Marni Shapiro - The Retail Tracker: And at Old Navy is the same kind of push on denim or a revamp of denim for the fall? Glenn K. Murphy: Not really. I think Tom will always be introducing whether it's a fashion denim, he'll always be doing something because Old Navy's world-famous jeans, as we call them, is something that's been around for a long time, but there's definitely no plan for massive investment in denim. I think it's just part of its core message. I think Old Navy is about product, key categories, a really great value, and sometimes Tom will use denim to communicate that, but this is completely different from what we're planning to do with GAP.

Your next question comes from Jennifer Black – Jennifer Black & Associates. Jennifer Black – Jennifer Black & Associates: On the last call you talked about how vendors are bringing your company more value and you talked about the average unit costing just now and I wondered, when you're looking out, what inning do you feel you're in as far as the value realized? And also if you could give us an update on GAP Body. Glenn K. Murphy: It's tough to tell because I would have told you six months ago that we were getting into the middle innings and then the rules of the game changed. And commodity pricing came down, people really cut back on their orders throughout factories around the world, and capacity opened up, and then we went back down a few innings. So really there is our own score card internally about how we think we're progressing and we're always trying to look a year ahead, what else are we going to do next to make sure we strike the right balance. As I've said before on these calls, between quality, which we never want to lose sight of that, the flexibility to work with vendors, as we work on pipeline speed, particularly at Old Navy, and the last part of that equation is cost. So all I can say without naming an inning, I would say we were in the middle of the game and then it came back down a few levels when the world changed and we were able to take advantage, as other retailers have taken advantage, of some good costing opportunities right now. What I do know as a good company, we're not just thinking about what's actually being ordered and placed right now for Q3 and Q4. Our global production business, as you know we operate in 48 countries, we're already talking about 2010 and what are we going to do and what else can we do to make sure on all three of those fronts, strategically we can make sure that we bring the best quality, consistency, the flexibility we need, and continue to bring our size to market and get the best cost that we deserve, given the size of this business. So my job with the global production team is always thinking ahead. In the moment, they know what to do. Twelve months from now is what I'm interested in but I think it's been obviously a little wind at everybody's back in the last few months when it comes to getting an average unit cost down. Jennifer Black – Jennifer Black & Associates: And can you speak to GAP Body? Glenn K. Murphy: You know, GAP Body—Patrick went out about six months ago and hired a phenomenal designer to join us in New York. I think that's one of the benefits of getting great, creative talent in our business and retaining it is, as I said at the annual meeting two days ago, talent attracts talent. And I think that that is an example. And there's many examples like that, where we've been able to bring in really either people who worked with us before who have chosen to come back, and we talked about Julie Rosen earlier in my opening comments, or to go out and find really talented people who can help us. And MiDee[ph] who has come in and working for us on Body, her first collection is now in the stores. The swim collection and what she's done for summer and not that I'm an expert in the category but I have seen what she's done for fall and holiday and I really think she's doing some really good work, so that has certainly given us the confidence to go back to some of our stores and look at putting Body in some small concepts in some cases, only 300 square feet, to some mid-range concepts of about 600 square feet, and to add that back into some of our stores. To be quite frank, we lost our way a few years ago and to me that whole category is so synonymous with GAP, it just fits so perfectly. It may not be foundations that you need to have in there, but just some of the categories we're into now. Just sleepwear, loungewear, some of the Athleta categories. It just fits perfectly. And we now have the leadership under Patrick, Marka really believes in it, a great merchandising team. We're early days but we're certainly making a reinvestment in the store to give it more prominence.

Your next question comes from Paul Lejuez - Credit Suisse. Paul Lejuez - Credit Suisse: Just wondering if you're seeing any difference in performance at Old Navy in malls versus off-mall and if you have detected any cannibalization in terms of maybe GAP customers moving over to Old Navy. And then wondering if you could share with us the percent of mark-downs currently in inventory versus last year. Glenn K. Murphy: I'll start with the real estate question and then I'll hand it over to Sabrina. There really hasn't been a big difference. We are about 70% invested in off-mall locations for Old Navy and I would say that traffic-wise those are slightly better because the people who are neighbors tend to be a little more in the value segment, therefore their ability to attract customers during these times, we all know that's a growing segment here in the United States. So I think the performance has been relatively better, whether that's because of the type of location or just the type of our neighbors, I would rather say that it's the neighbors we have are bringing in traffic that we can take advantage of. So I think that would be the answer to that. Sabrina L. Simmons: On the inventory at mark-down, we actually did well on selling more goods in the quarter at regular price. So another piece of our improvement in merchandise margin were healthy mark-down margins, and also selling more at reg. And reg, of course, includes promo. And we did a fair bit of that at Old Navy. But we did well on reg selling and we ended the quarter with less inventory at mark-down than last year. Paul Lejuez - Credit Suisse: And on the cannibalization, anything there? GAP versus Old Navy. Glenn K. Murphy: It's tough. I'll be honest with you, we don't spend a lot of time looking at it. We have some numbers but nothing that we would see right now from Old Navy's very recent resurgence would be necessarily causing some of the clients that we are still experiencing at GAP. It's a big, big market and we obviously are aware that our brands have to be differentiated to some extent but at the same time you are talking about a very large market where we have a relatively, because it's so fragmented, even with our combined strength and size, a relatively small share. But I don't sit back here today and look at any data that shows me that Old Navy is currently cannibalizing GAP. I think they are complementary businesses and I think we like the way that they actually work in tandem together.

Your next question comes from Brian Tunick - J.P. Morgan. Brian Tunick - J.P. Morgan: On the return of sales discussion at Old Navy, would you say more of the erosion over the past few years has come from the sales deleverage on the comps versus merchandise margin erosion. And then given the change in the real estate environment over the past couple of months, what is your real estate team telling you as far as the goal of shrinking the boxes or closing and combining doors? Do you still think it's as big of an opportunity as you thought? I know ICSC was last week. Maybe just give us an update on what you think is going to happen on the real estate front among the divisions. Sabrina L. Simmons: I will start on the return on sales for Old Navy. I think both merchandise margin and deleverage on ROD have impacted Old Navy over the past couple of years where we were very unhappy with performance. So obviously when our sales go down and we have a fixed amount of rent and occupancy you are going to deleverage quite a bit on the ROD line. But what is driving that drop in sales is also the fact that you are not achieving the merchandise margins that you want to be achieving. Whether it's because you have to go at a lower mark-down margin or you're just not getting all the reg selling you want. So I think in the past couple of years we would say both were contributing to the decline and we are moving forward on our trajectory to improve that performance, certainly in the first couple of months of this year. Glenn K. Murphy: On the real estate front, it's been an interesting time, no question. First off, we are completely committed to the five-year strategy we have been talking about for the last number of calls, which is to get our square footage down and do it over the next five years. Combination of consolidation of assets, downsizes and closures. So we are committed to that five-year goal. Our new head of real estate, David Sobol, is actually at the ICSC meetings in Las Vegas this week, and well before he went there, what I would say we are seeing as more of a trend in our business is we were probably more focused on downsizes on the exact same site in which we're in and we still believe there's lots of opportunities for those. But now what's happening more than anything else is we are getting opportunities for repositions. And so I think there is a lot of tension in the landlord community. They want to keep the best tenants and obviously not only because of our 40.0 million square feet but because of our balance sheet. We're an attractive tenant. But I think we're getting a lot more opportunities now where we are being—if we were in 25,000 square feet and if we wanted to be 17,500 square feet and were unable to get it done the site in which we're in, we're being offered some opportunities to move across the street and do it, because everybody would like to make sure they're holding on to as many of the best tenants during these times. With that said, when you're in a location and you have an opportunity to move, obviously the last thing that any landlord wants to do is to lose an anchor tenant like we might be. So I look at the environment and say a little more repositions than probably downsizes, on site, we were thinking would be the way in which we would go. But that's fine. As I was telling the real estate team just a while back, as one door sort of closes a little bit another door opens. And so there is a multiple different ways for us to get to our strategies so if it means a few more repositions than downsizes, at the end of the day we're going to get it done regardless.

Your next question comes from Jeffrey Klinefelter - Piper Jaffray. Jeffrey Klinefelter - Piper Jaffray: Sabrina, can you give us an update on your occupancy and also operating expense leverage points for the GAP and Old Navy divisions, given changes you've made here in the last couple of years? Have there been any material changes in that leverage point that would help you recover that much faster now, as you ramp back up comps, at some point in the future. And then Glenn, on international expansion, there's been some comments from you in the press and you have been a little more active there with some of your licensing, maybe a few thoughts on how you view that opportunity and maybe a use of capital in those markets going forward. Sabrina L. Simmons: I will start you off with the question on deleverage abroad. I think what's fair to say, and we've been saying this for some time, it is going to be difficult to meaningfully leverage ROD unless we get pretty close to flat to positive comps. Now what we've seen recently, of course, and we're making progress, we didn’t deleverage as much this quarter because our comp was obviously less negative this quarter than it was the last few quarters. With regard to the relationship on how that moves, if you just calculate what's been happening over the last couple of quarters, for every point of comp improvement we get, we tend to get 20 basis points less in deleverage. So we're headed in the right direction as we did a negative 8 this quarter versus a double digit in past quarters, but we really need to get closer to flat to positive to make us stop deleveraging. Glenn K. Murphy: And on the international front, our franchise business is still something we believe in. We're in 14 countries right now, operating, with about give or take 160 stores. We will be in 20 countries by the end of the year. So you are right to, you know, every now and then we will sign another country and put a press release out, so we do feel that we've gained good momentum from the first store we put in the ground three years ago in Southeast Asia to the most recent store we did in Moscow. So I think that that team continues to look at the world and I think that from a capital perspective the franchise business is obviously capital light to us. It's very little capital investment at all. Very good return on invested capital. So for that reason we really love that business and at the same time we have to make some bigger decisions on Western Europe where we have no presence. We have nothing east of France, all the way to the border of Greece. So there are some decisions there but are those going to be franchised, could they be joint ventures, would they be corporate controlled like our business in France, the U.K., the Republic of Ireland is? And we are doing some exploratory work, I want to make sure I'm clear on this, just exploratory work, on China. And just take over the Chinese market. One, how would we enter it structurally, and secondly, with what brands, in what way, in what sequencing. So for now we are continuing to ride the success of our franchise business in those 14 countries with 6 more to come. But a lot of time is being spent here, just what are we going to do in these other countries that may not be appropriate to franchise. So more to come on that, probably, in the future.

Your next question comes from Kimberly Greenberger – Citigroup. Kimberly Greenberger - Citigroup: It seems that the challenge to the GAP brand is traffic and I'm wondering if you can talk about different ways or different strategies that you are thinking about to try to drive traffic across the threshold? Glenn K. Murphy: Well, to be honest with you we've been, for the last three months, I think trying a lot of different ideas. Instead of just trying to get to the silver bullet or the gate, we've been trying different things in different markets. Whether it's different promotional levels, some collaboration work we've done with Starbucks, whether it's the use of radio. We have been trying and that's what I've encouraged the team to do. Is we would like to come out and just figure it out of the gate but I think before we do that we are trying different ideas over every single month. We have an idea this Memorial Day weekend that the team thought of and they're going to do that and we have to get a little more active on radio and media to see if we can move the needle on traffic. We have some different ideas in June and July. So I don't think there's any value in me going through the dozen or so different concepts they're trying. The one thing I will say to you that I have found that has been effective and we've got to do more of, is when they involve the stores and not just make the stores responsible for conversion, service, and getting people comfortably in and out of the store, but how they actually engage them in dealing with people inside the mall, or even outside the mall, to get them to come in our stores. That has certainly paid dividends for us. I think that is something that not just GAP, all the brands, are looking at. And I know that I think Sabrina talked recently about our Give and Get promotion. Those are the kind of ideas when you take something that we kind of pioneered in Friends and Family but after 15 years of it it gets a little stale, you turn it into Give and Get and you give 5% back to charity and you have all our brands work together, that certainly helps us with getting more traffic and people through our doors to see our improving product. So a lot of creativity being applied to, a lot of tenacity. Some things are working really well, some things, I think, whether it's the economic times or it's just not appropriate for the brand, then we're shelving it and we're not bringing it back. So as I mentioned on a question earlier, they will continue to provide different traffic ideas from now until about the third week in July and then we're going to go quiet for a bit and come back with our denim campaign. I don't want to wait until the denim campaign. I would like them to show some noticeable improvement between now and then but they're working hard at it and as we have said before, we are clearly committed to resolving this traffic malaise we've been under for the last few years.

Your next question comes from Dana Telsey - Telsey Advisory Group. Dana Telsey - Telsey Advisory Group: When you think about the message of value to the customers and the lower average unit costs, what do you see as the opportunity by brand for each achieving value and the balancing of raising IMU through the lower average unit cost, and the time frame to achieve that? Glenn K. Murphy: What was the last part about raising the value of average unit cost? Dana Telsey - Telsey Advisory Group: As you look at initial mark up and the opportunity for that, through the lower average unit cost, if you were to gain even more economies of scale. Glenn K. Murphy: Well the first thing I'll mention, I don't know if we talked about this a year ago, is we spent quite a bit of time a year ago really separating average unit costs from average initial retail. I have been pleasantly surprised about the work we've done the last year but I was a little shocked when I first came here, is our pricing was really driven by our costing whereas our pricing should be driven by what we think the consumer is willing to pay. And so that took us a while to separate the two of them. So what I will say to you is just because we were able, because of good economic conditions, or the size of our business, or relationships with a smaller vendor base, get a 5% reduction on costs—this is hypothetical by the way—that doesn't mean that we should have a 5% reduction in retail. The two of them meet on the P&L but they are really two different metrics altogether. So what we've been encouraging each brand to do, and obviously this starts with Old Navy and I will argue our outlet business, too, is they have to be continuously trying to find a way to get their message across and bring real value to customers. So for instance, if Tom really felt that he needed to have a $10 price point on something, because that's what it takes to have a leading price point on that category in the marketplace against his competition, then he had better find a way to get the right costs to be able to afford that. So I think that we are looking at our business completely differently. It's been quite a bit of change. We have a whole new pricing strategy put into place by every single brand, we have actually pulled pricing out of the merchandising team and allowed some pricing people to actually work on it. Merchants have to be accountable at the end of the day for gross margin. When we've got pricing people in each brand doing the work so they're the ones who more than ever, we have more information on the competition on a weekly basis. We know, we've done a lot of testing, localizing, to find out what works when it comes to promos. So my point is that regardless of the AUC you are able to get, that shouldn't drive our AIRs. But we definitely have solidified our pricing strategy for Banana Republic, for GAP, for Old Navy, and for the outlet businesses and they are in the process now of making sure that pricing strategy gets to market over the next six months.

Your final question comes from Adrienne Tennant - Fbr Capital Markets. Adrienne Tennant - Fbr Capital Markets: My question is really on sales productivity around the divisions. In 2008 it was around $336. I'm wondering if the three divisions that sort of clustered around there or if you can give us any idea of relative to each other. Sabrina L. Simmons: I think you get a sense because we do report sales in square footage in our 10-K. I think where we're at, at the highest level, is we're disappointed that our productivity has declined. Now some of that over the last two years has been purposeful and we have removed units because we felt like we were selling too much at mark-down and we really wanted to drive a better, healthier reg business. So we took units out, each selling at healthier margins, by the way, but our overall sales productivity has continued to decline. So the next stage of the evolution has to be really holding on to that nice mix we've gotten of reg selling and healthy margins and then over time introducing more units to drive much more productivity per square foot into the box. We will achieve that in many different ways. You know, the downsizing of the boxes will help us, adding different categories into our boxes, like jewelry at GAP and some personal care at our brand Body and more of our GAP stores, so we're looking overall to just drive productivity per square foot up. Adrienne Tennant - Fbr Capital Markets: Is there any color you can give on where the three, Old Navy, Banana Republic, and GAP fall relative to that metric? The 2008 metric. Or perhaps which has the most potential and has fallen the most. Sabrina L. Simmons: They have all fallen quite a bit. So we have ample opportunity from peak levels in 2004. We have ample opportunity in GAP, Banana Republic, and Old Navy. Probably the most, I would say, gosh, they're all actually about the same. So I think they all have ample opportunity to get back to 2004 productivity levels. Adrienne Tennant - Fbr Capital Markets: So the spread around that 336 is pretty tight around the three brands. Sabrina L. Simmons: Yes. And it's all calculable, but yes, it's pretty tight.

Thank everyone for joining us on the call today. As always, the IR team will be available after the call for further questions.

This concludes today’s conference call.