Mark Webb - Glenn Murphy - Chairman and Chief Executive Officer Sabrina Simmons - Chief Financial Officer, Principal Accounting Officer and Executive Vice President of Finance

Dana Telsey - Telsey Advisory Group Stacy Pak - Barclays Capital Jeff Black - Citigroup Inc Michelle Tan - Goldman Sachs Group Inc. Paul Lejuez - Nomura Securities Co. Ltd. Brian Tunick - JP Morgan Chase & Co Jeffrey Klinefelter - Piper Jaffray Companies Kimberly Greenberger - Morgan Stanley Evren Kopelman - Wells Fargo Securities, LLC Janet Kloppenburg - JJK Research Lorraine Hutchinson - BofA Merrill Lynch Edward Yruma - KeyBanc Capital Markets Inc.

Good afternoon, ladies and gentlemen. My name is Kristen, and I'll be your conference operator today. I would like to welcome everyone to the Gap Inc. First Quarter 2011 Conference Call. [Operator Instructions] I would now like to introduce your host, Mark Webb, Vice President of Investor Relations. Please go ahead.

Good afternoon, everyone. Welcome to Gap Inc.'s First Quarter 2011 Earnings Conference Call. For those of you participating in the webcast, please turn to Slides 2 and 3. I'd like to remind you that the information made available on this webcast and conference call contains forward-looking statements. For information on factors that could cause our actual results to differ materially from the forward-looking statements, as well as reconciliations of measures we are required to reconcile to GAAP financial measures, please refer to today's press release, as well as our most recent annual report on Form 10-K, both of which are available on gapinc.com. These forward-looking statements are based on information as of May 19, 2011, and we assume no obligation to publicly update or revise our forward-looking statements. Joining us on the call today are Chairman and CEO, Glenn Murphy; and Executive Vice President and CFO, Sabrina Simmons. Now, I'd like to turn the call over to Sabrina.

Thank you, Mark. Good afternoon, everyone. In the face of a challenging quarter, we continue to focus on levers that drive long-term value. On the balance sheet and capital structure plan, we repurchased 25 million shares during the quarter, and we raised $1.65 billion of debt, providing us the flexibility to deliver additional cash to shareholders. On the operating side, we continue to drive forward on our long-term growth initiatives while maintaining expense discipline and delivering operating expenses below the prior year. Please turn to Slide 4 for our earnings recap. In the first quarter, net income was $233 million, down 23%, and EPS was $0.40 per share versus $0.45 last year. Turning to Slide 5. First quarter net sales were down 1% to $3.3 billion, and this includes the impact of the events in Japan. Comparable store sales were down 3%. Online sales grew 18% overall and had a positive impact of 2 points on comp sales in the first quarter. Total sales and comps by division are listed in today's press release. Turning to Slide 6 for margins. First quarter gross margin was down 250 basis points compared to last year's strong first quarter. Rent and occupancy deleveraged only slightly by 10 basis points. Merchandise margins were down 240 basis points, driven by rising cotton prices, which in turn increased our average unit costs. First quarter gross profit of $1.3 billion was down $97 million to last year. Turning to Slide 7 for inventory. At the end of the first quarter, inventory per store was up 9.9%, with the increase in North America several points below that of Gap Inc. This is a bit higher than our expectation we laid out in February with the variance driven by the unit sales miss in Japan, which was worth about one point. Please turn to Slide 8 for operating expenses. We continued our commitment to managing cost tightly in the first quarter and delivered operating expenses down $9 million to last year and about flat as a percent to sales. Total operating expenses for the quarter were $918 million and included $119 million of marketing, up $6 million to last year, driven by Athleta and China. Please turn to Slide 9 for capital expenditures and store count. We ended the quarter with 3,245 stores including franchised stores. Net square footage for wholly-owned stores was 37.8 million, down 2% compared to Q1 2010, and first quarter capital expenditures were $127 million. Store count and square footage by division are listed in today's press release. Regarding cash on Slide 10. For the quarter, free cash flow was an inflow of $104 million. We repurchased 25 million shares in the first quarter for $548 million and ended the quarter with $2.5 billion in cash. And now, I'd like to discuss our outlook for the rest of the year. Please turn to Slide 11. As we stated on our fourth quarter earnings call, we continue to expect 2011 average unit cost increases to more than outweigh, offsetting average unit retail increases, especially in our sizable value channel. This is, in fact, how Q1 played out, driving our merchandise margins down 240 basis points. At the time of our fourth quarter call, we had only completed purchases for our spring and summer seasons. Although we anticipated escalation of average unit cost for the back half, our costs are now actualizing well above our initial expectations at about up 20% versus last year. Due to the sharp escalation of second half costing, we are ever more focused on increasing our average unit retail. In addition, you can count on us to remain disciplined in managing our operating expenses tightly. Also as a reminder, we'll incur about $70 million in interest expense as a result of our recent debt issuance. Driven primarily by the higher back half average unit costing, we are revising our full year 2011 EPS guidance, which we now expect to be $1.40 to $1.50. It's important to note that we see this significant costing pressure as temporary. Therefore, we remain steadfast in supporting our long-term brand health through marketing and investing in initiatives that will enable future growth. Regarding inventory, we plan to buy units down to last year for the remainder of the year. However, given the sharp increases in average unit cost I've already discussed, coupled with international store openings, we expect Q2 ending inventory per store to be up in the teens. We anticipate the increase in North America to be several points below that of Gap Inc. Regarding stores and net square footage. For the full year, we now expect net store openings, including franchise, of about 75, up from our previous guidance of about 65, driven primarily by more Outlet stores in North America. As a result, we now expect full year net square footage for wholly-owned stores to decrease by about 2%. The following full year guidance metrics remain unchanged: Depreciation and amortization, about $550 million; effective tax rate, about 39%; capital expenditures, about $575 million. In closing, in the face of a very difficult costing environment, we'll stay focused on managing average unit retail and maintaining expense discipline. And of course, we remain committed to our financial framework, including distributing cash to shareholders. Thank you, and now I'll turn it over to Glenn.

Thank you, Sabrina, and good afternoon, everybody. I have[ph] a few things I'm going to talk about today before we hand it over for questions. First and foremost, I want to talk about Q1, a lot of events happened inside our business in the first quarter, and I think it's important for me to put some color around that, I then will reference to guidance that you heard Sabrina give for the full year, and then I want to come back to our strategy, and reinforce how strongly we still feel about Gap Inc.'s mid- and long-term strategic plan. So in Q1, as everybody knows, we dealt with the absolute tragedy in Japan. I was in Japan, met with our team in April, spent time with them. Now the Japanese business is, from a consumer perspective, it's going to go through a slowdown well beyond May, June and July. As a matter of fact, the consumer confidence numbers came on Japan are the lowest numbers in 7 years, which you'd expect. So this is not going to change anytime soon. We're planning our business accordingly, knowing that the consumer is not going to show up, traffic is going to be down. To that point, there's 5 stores we plan to open in Japan. In 2011, there were value stores that we will not be opening now in 2011. They're just not going to be ready. But I do want to reinforce that our Old Navy strategy to open stores in the fall of 2012 is still absolutely our intention to do that. The second thing I want to talk about is sales. We were minus 3 comp in the first quarter, which is not good performance. For the last 6 quarters, we have been either flat to positive 4 comp, up until this latest quarter. And as I sit back and take a look at it, we were just more dormant than we should have been in March as a business. We've made some adjustments in April, you saw that with a plus 14 comp at Old Navy, plus 11 comp at Banana Republic. And we've clearly met with the teams and told them that when we get these calendar shifts, which are rare, to make sure that you make the right decisions through the whole quarter and not rely too much, on this case April, which benefited from the shift. We made a change to our Old Navy marketing platform in February and March. I feel really good about the change and really the strategic thinking behind it was that the model-themed[ph] campaign we had was really rooted in fun and value. But as we've been changing our assortment, we had to make a slight shift to fashion and value, never ever giving up on the value piece. And whenever you make these changes to a platform, it's always likely that you're going to lose a little momentum, you have to make some tweaks, make sure that it's resonating with customers, that they actually start seeing the new platform in as positive light as the one that you've left. I now see that those have been made, as I mentioned earlier, evidenced by the performance in April, and I believe the team continues to make those adjustments going forward into Q2. And in the first quarter, as everybody knows, we made some changes to our organizational structure. Now the first sad decision we made was to consolidate all of our creative activity and decision making in New York for Gap brand in our new Gap Global Creative Center. Secondly, strategically, we brought together our specialty channel and our value channel and making sure that comes together under 2 leaders: Jack Calhoun, Art Peck, now control all those stores, have to make the right decisions for customers, the right decisions for the brands and the right decisions for return on invested capital. We then turned around our last month, and made some changes to our International team, consolidating 2 divisions down to one, all decision now for International business being made by Stephen Sunnucks out of London, simpler, cleaner decision-making for the overall business. And 2 weeks ago, we've made some changes to our design team at Gap Global. And those are changes that I support, needed to be made, what I'm really asking the team to do is consider what is the right structure going forward. Now that we know exactly the global potential of Gap brand, what kind of structure do we need in our design team? What is the designed operating model for the business going forward, and I've given that a lot of thought. And lastly as you've heard from Sabrina, in the first quarter, we did get lift and improved performance on our AUR. But the input costs were AUC made it difficult for us to hold onto our margin rate in the first quarter. We've been trying things in different markets, whether it's opening price points, we've been looking at promotional levels, marketing ideas to drive traffic that do not involve discounting. What I can tell you and I may come back to this at the end, I will not allow anybody in the business to compromise the long-term value proposition of each one of our brands for what turns out to be a near-term shift in our economic model. Let me talk about full year guidance. I'll be quite honest with you, I don't feel good about having to come here today and reguide. For 14 quarters in a row, this management team that's in place, have either delivered or exceeded what we said we're going to do. We've taken a business from a 7.7% operating margin to 13.4% last year. So we'll feel good about that, but the 20% increase in our average unit cost in the back half is real. And as you heard Sabrina said, it's being driven by our 2 value businesses: Old Navy and our Outlet channel. As further evidence of that, Banana Republic's increase in their cost of goods, as were forecasted right now, is going to be mid-single digit. So if that kind of performance applied to our total business, which is not realistic, given how invested we are in the Value segment, obviously, we'd have a different discussion today when it comes to guidance. Also I think you need to know that we're making changes to our assortment in every one of our brands and divisions. What is the right assortment as we stretch the assortment of our business towards more better and best price points? That alone is causing some pressure on the increasing average unit cost. It's not the driver. It's just another reason why you're seeing these 20% increases for Gap Inc. in the back half. What I can say in closing is that the recent 35% decline in the commodity pricing of cotton tells me this is not a structural issue. We said that to analysts 6 month ago, we reiterate it 3 months ago, and now we have the evidence that it's not a structural issue. So we have to make sure we are clearly concentrating and never getting off our long-term value proposition for what is going to turn out to be a near-term significant increase in our input costs, but it is near term. Lastly, let me talk about our strategy. In China, we opened our fifth store this quarter in Beijing. The 4 stores prior to that are still performing very, very well, and we're committed to doing 10 stores in 2011. Italy continues to do exceptionally well in Milan, both the Gap store and Banana Republic store and the top stores we have around the world. We should do 8 to 10 new stores in Italy. Our Franchise business, we had committed to 75 stores in our guidance. Our Athleta business, we should do between 8 and 10 stores in 2011 to fill more store. Our flagship we opened in San Francisco was performing ahead of our expectations. And lastly, our Online business has been very strong. I think that was partially driven by the introduction of free shipping last fall. It has a lot to do about the work that team is doing on mobile and other means to get our brand messaging up in the different mediums that they're using. I'm very, very pleased with what I'm seeing, not only here domestically in our Online business, but globally around the world. So in closing, I was talking to some people this weekend in the business. And I was telling them as we're going through the strategy in the direction and the work the company is doing, that without doubt, you can't ignore what is in front of us on this near-term significant shift in our input costs in the business. But it is near term, which means we are going to do everything we can in terms of managing costs, execution, product, marketing. Everything this business does has to be of very high level this year to try to offset those costs as much as we can and still deliver a respectable performance in 2011. But that doesn't change our strategy. The strategic framework that we've laid out for people on the phone, for our investors, for the Board of Directors and for our employees is still in place. We believe in it. This is just a moment in time that we're going to have to deal with to the best of our abilities and then continue to move forward. So with that said, I'm happy to take any questions from the analysts.

Okay. Operator, that concludes our prepared remarks. I will now open the call to questions, and we'd like to get to as many questions as we can, so we'd appreciate it if everyone could limit their questions to one each.

[Operator Instructions] And your first question comes from the line of Jeff Black with Citigroup. Jeff Black - Citigroup Inc: I guess, Glenn, costs moved from 10 to 20 in pretty lightning speed here, and what was the disconnect? What did you not anticipate? Why is this happening? And when do we see any costs moderating? It just seems to me it's been there in front of us. Either you guys weren't prepared for or you weren't talking about it. Which one was it, I guess?

Jeff, I'll start out on that. At the time of our Q4 call, we had only bought spring and summer and we just started buying fall. We made the assumption at that time that holiday pricing would ease because we were buying fall into what we believe at the time was the peak of cotton. We do most of our holiday buying, and as you guys know, our holiday buys are our biggest buys of the year. We do most of our holiday buying through the months of March, April, May. We're actually not all the way done, and we still have our trends in spring assortments that come into Q4 still to go. But we had made the assumption at the time that our fall buys would be the most expensive, and that we'd get some easing in our holiday buys. And it turns out we were just absolutely wrong on that assumption. Holiday got worse, and that costing came in much higher than we expected and higher than fall.

As we said on the opening comments, the real focus here is in Old Navy and our Outlet business. As you look at in hindsight, for the last 3 years, we've done a lot of work whether it's on the fabric, on trim, on choices for that business. And we've gotten some of our benefit on the operating margins of the business to 2010 by some of the work that all our teams did. Maybe we're a little ahead of the curve as when new management came in in 2007 and then the recession started to show, it's show up at our door, we started to move on a number of different fronts, one was SG&A and one was AUC, which we talked about in all these calls. And we did some good work. Do I still think back then we had the lowest cost? No. Do I still think today there's always opportunities for the business in terms of 2 ways that come in the market through negotiations? For us to get better costing, I mean, that's what we always have to believe when you're dealing as a retailer to a vendor. But at the end of the day, when cotton went above $2 around that February mark and sustained itself for almost 12 full weeks, which was around at the time, as Sabrina said, we were in the midst of negotiations for our holiday product, we didn't have any leverage. And I'm with her, I really thought what we're looking at -- I think we said this in a call in February, we know a lot more about cotton than we did a year ago. We've been talking to everybody. I was out for 12 days out in Asia and our hubs meeting with vendors one-on-one, trying to understand what options we had, what could we do, all the different tools available to us. And even then, Jeff, in fairness, that was 2 months ago, and even then, meeting with vendors and talking very specifically about what was going to happen at holiday, even they didn't have the clarity that people like me would want even the responsibility that I have in the business. Our team is still there today working very hard to try to still because holiday, as Sabrina said, is not complete. But there's no way we're going to come out of the call today and not let people know with all the information we have and it's in real time, this information. I mean, it's changing every single day so we're giving the best information we have today. There's still a huge amount of pressure in our team. I'm obviously disappointed at the numbers we're giving today. We got a huge amount of pressure on our vendor community because we're disappointed in the numbers they are quoting back to us, and how they're taking like-for-like product up to that 20% level or greater in Old Navy and in our Outlet business. And so we haven't all of a sudden gone brain-dead when it comes to our ability to negotiate, the 50 countries we use, the hubs. But we are very cotton-invested as a business in those 2 brands more than anybody else, definitely a much bigger part of anything in our portfolio. And our teams are not giving up. But as we sit here today, this is the best information we have and the forecast we want to come forward with. But it is continued -- tomorrow, I have new information. It continues to move, we continue to fight the good fight, but cotton had almost a 300%-increase versus LY. I may be off a little bit on that but directionally correct and given the amount of cotton means to our product, we took a holiday hit much bigger than we thought 3 months ago. But it's based on the information we have today.

Our next question is from Paul Lejuez with Nomura Securities. Paul Lejuez - Nomura Securities Co. Ltd.: Can you actually kind of differentiate between the cost pressures that's coming from cotton versus wage pressure that might be a little bit more structural? Are you seeing that from your vendors when you get pricing? And then second, just wondering what you could tell us about China? What are they buying in those stores? Do they like the logo product?

Paul, I guess, it's not easy, what we may have said in some past calls is that what I like about our model is -- our buying model that is, is that we can move from country to country. And we've been moving into other countries outside of China now for the better part of the last 18 to 24 months. There is wage pressure, no question about it, and our teams on the ground are keenly aware of that, and we have moved to other markets. Now we're well invested in Vietnam, in Cambodia, in other parts of India, Bangladesh and Sri Lanka. So we are moving business around where appropriate. So there is some wage pressure, there was no question about it. But at the same time, we're assuming, but we don't know when the year plays out, there's also going to be some further, we suspect, demand destruction which maybe will open up some capacity, which would then also have an impact on the wages and the labor line. But I'm not here to predict that today, that's just a theory that could happen with further demand destruction. In our China stores, and I was there in March on the way back from the hub and the sourcing business that I did, still to this day, the percentage of purchases in the Fashion part of our business, and as I was saying earlier, part of the assortment moves that we're making that is a driver of the 20% increase is part of the assortment moves we're making is being driven by our International business. So definitely in China, which is below -- we're a little caught off guard. We really thought that the balance of fashion to basics would be somewhat similar to our U.S. business. But the Fashion business is very strong, which is reassuring for us. We're going to obviously set a good price point when it comes to basics, make sure we have good entry price points complete against who we've identified as our competitors in China fashion -- American fashion product has differentiated us. So what we're encouraged mostly about is when we will get our fashion right because in women's today -- our fashion in Gap, while they're selling successfully in China is not to our standard expectation. That really provides a nice opening for us on marketing perspective and a differentiation. We opened our fifth store 2 weeks ago in the same sort of split of business between fashion and basics, that's a very encouraging sign. Paul Lejuez - Nomura Securities Co. Ltd.: Do you have a lot of logo product in the store, Glenn? I haven't seen the stores. And is that working?

Yes, not soon. I mean, anything with logo on it and obviously, we customize that and localize it, so when I was there recently, Gap Shanghai, Gap Beijing, Gap China, New York of course, San Francisco. We probably do a double-digit percent of our business on logo in some of these markets initially. Our franchise markets, our China markets because that really is what denim and logo bring people in. And then you sell them the fashion because that's where the brand is known for. Even our marketing was not emphasizing that, but in our Franchise business, still our European business today, our Japanese business and China's planning the same way. Logo and denim are very, very popular with consumers.

Your next question is from the line of Edward Yruma with KeyBanc Capital Markets. Edward Yruma - KeyBanc Capital Markets Inc.: I know you'd made a number of very significant personal moves. Glenn, at this point, is your team stable? And can you also give us some insight into what other types of personal moves you've been making, maybe below that kind of below that kind of very most senior level?

Mostly the focus, as I mentioned at the beginning in the commentary was the integration and the merger of our Specialty and Our Value business. That was very important. And so that was a big move because our impact took over Gap North America, then I was followed up by the international changes we made we're. We're trying to simplify our structure internationally and Stephen Sunnucks has taken over International at London. So I'd say from a stabilization perspective, those 2 senior leaders are in place. We put out a fairly large announcement internally just about a month ago, which establishes all of our senior positions in International, in our Gap Global Creative Center in New York, in the team here in North America. So that's all been done. So I'm actually quite pleased with the moves we've made. I think people are hitting the pavement, running as they have to. They're very focused on the Gap business and inside the Gap business, very focused as a top priority in product in Women's. So Mark Breitbard running Merchandise and I feel great about Kevin Komos, that's in North America. Kevin Komos running the International teams, Seth Farbman joining us as our first-ever Chief Marketing Officer for the Global brand. So there's a lot of strategic reasons we've made the changes. We were fortunate to be able to fill most of those internally a couple of positions we went outside to get done. So this was a nice shift to get the International team done, the right call long-term to merge our Specialty and Value business. And no, there's always going to be some onesies and twosies but at the end of the day, I think that the team is very much intact and working well together.

Our next question is from Stacy Pak with Barclays Capital. Stacy Pak - Barclays Capital: I guess I'm curious how much of the hit to 2011 is Japan? That's sort of one thing. And then just on the AUC, what do you think accounts for the difference between Banana and Old Navy? And I guess how much of the sudden 20% increase, which honestly is higher than I've heard anywhere, has to do with how much you guys cut on sourcing in the past and maybe pushed too far and it's sort of payback time?

So Stacy, I'll start with your first question on Japan. So we called out, I think, on the March sales call in April that we thought it'd be about $0.04 to the quarter. It turned out around in that ballpark. We did a little bit of cost cutting in Japan to offset the gross margin hit, but that's the right ballpark. Embedded in our new range is the fact that we don't think that Japan will perform to the level that we would have thought when we have pre-earthquake and tsunami. It is actually recovering nicely, so we're pleased to see that there's some recovery, but we do not believe that the year will perform to the level pre-earthquake/tsunami. And there's a little bit of a range in there, but that is not a big driver to the revision in guidance. The revision in guidance is driven by the AUC. To give you some color on Old Navy versus BR, there is just some old-fashioned map in this. Old Navy's beginning AUC, as you can imagine, is far lower than Banana Republic. So I'm going to make up numbers right now hypothetical. If you take a $1 increase on a beginning average unit cost of $5 versus $1 increase on a beginning average unit cost of $12 to $15, your percentage is going to be much bigger at an Old Navy just because the base is so low. And that is some of what we are definitely experiencing as we have worked through the last 3 years bringing costs down, especially at Old Navy and Outlet, to really low levels. Glenn, did you want to comment?

The one thing I'll add on Old Navy as well is that we have quality standards. I think everybody's business does. And it's our view that while there were still choices available to us that may have allowed us to mitigate against the 20% in the back half, that would just be crossing the line. Right now, the quality standards, we have a lot of meetings with focus groups and other means to identify how our consumers view our quality upfront through either hand-feel, through stretch and recovery, all the different parts that define your quality through fit. And as Tom Wyatt knows, who runs Old Navy, we are at an -- I'd say, an acceptable level today. It's not as probably as strong as Tom Wyatt and Nancy Green would like it, but it's acceptable. So there was no way that some of the choices that either vendors or hub leaders in production presented to us. I saw some of the choices we could have made for fall. Again, holiday is still in motion, so I'm not close enough to see some of the choices, but I know in a lot of cases, they just don't feel comfortable making those trade-offs. So that's really how it played out at the -- from an Old Navy perspective. On the payback commentary, all I can say about that is I don't believe it. I hope not. We did some e-sourcing like a lot of other companies did in 2008, 2009 to find out what the right price was. When we made our statements publicly about our AUC cost opportunity, that was driven by our own personal, internal, how we structure ourselves, how we came to market. The fact that we thought we were not getting recognized for the size of the business and getting the cost we should be getting. But just one more time to reemphasize, we have teams right now in the field meeting with vendors because, as Sabrina said, holiday has not completed yet, but obviously, with the decrease of cotton by about 35%, that came down from that peak period, that was around the end of April when it was well over $2 and the peak has started to come down fairly quickly for the last 5 or 6 weeks. Our teams are certainly having conversations with vendors because -- I'm a little bit like you, Stacy, 20% is not a number that's been quoted publicly. So we are looking, and internally, we're talking to our teams. I'm not necessarily happy right now with our production teams. They're talking to their vendors to say in light of the fact that cotton has come down. It's not down or anywhere near where I think it's going to get to eventually, but it has come down substantially. What does that truly mean for the price, we are going to pay when those goods get delivered in October. So we are working all angles in that front and what we did was I don't think we had the lowest cost back in '08 or '09. We were just taking a correction from a poor process and not being as aggressive a negotiating team as we should have been back 3 years ago.

Your next question is from the line of Lorraine Hutchinson with Bank of America Merrill Lynch. Lorraine Hutchinson - BofA Merrill Lynch: I was a little surprised to see that you expect to end the second quarter with inventory up in the teens. And even x-ing out a couple of points for International, I guess I was just hoping to get the rationale for buying inventory dollars up so high for the North American business.

Yes, I'm glad you raised that, Lorraine. I want to make really clear that North America -- we keep saying North America units are definitely down further than International. So we've been buying North America units down. We're going to continue to buy them down, and of course, facing this AUC, they are coming down further in the back half in North America. The $1 per store that we give at the Inc. level is being impacted, of course, by this very high AUC, but also by our International growth, which you might be surprised how much that impacts us. We are opening, for example, about 20 new stores in the next 3 to 5 months internationally. Some of those are important flagships like Rome. They require quite a bit of inventory buy. So that's definitely impacting us is that International store growth. In addition to that, with the weakening dollar, that inventory that we buy is getting translated at a higher U.S. dollar cost. So again, I want to leave you with the message that North America comp store units, we are definitely buying down. We are trying to balance that because we still have our full year goal of trying to deliver the total company revenue growth. So we're doing the balancing act between not going so severely down so quickly that we have no ammunition to meet that goal, but they are definitely down tightly.

Your next question is from Evren Kopelman with Wells Fargo Securities. Evren Kopelman - Wells Fargo Securities, LLC: Question on expenses. First on the SG&A expenses, they were down 1%. Is that possible to see down SG&A for the rest of the year, given you have square footage growth internationally? And along the same lines, depreciation was also down 12%. If you can touch on what drove that, that kind of decline in the quarter? And same question for the rest of the year, I think based in your guidance, you don't expect to see such a decline. If you can touch on those, that'd be great.

We're not guiding specifically to SG&A, Evren, but we have demonstrated, I think, quarter-over-quarter or year-over-year, a lot of discipline when it comes to expenses. I think the important thing to point out, as Glenn said in his remarks, we're very committed to our long-term strategies into supporting our brand health. So what we're most proud of is in Q1, we delivered expenses flat as a percent to sales, and below last year even as we invested meaningfully in our growth initiatives internationally and for global online and also while we increased our marketing spend. So that shows you our determination and our discipline on expense. I'm not guiding that, that's going to be so every quarter. There's different dynamics that happen quarter-over-quarter. But I think you can absolutely count on us to continue with that kind of expense discipline. With regard to the depreciation, that also can be bumpy quarter-by-quarter, so we're sticking with our full year guidance. But certainly, we benefit from store closures. We're lapping last year. We had a lot of depreciation write-off because we were doing a lot of remodels for Old Navy in the first half. We don't have that this year. And we have some asset depletion. But that's going to be a little bumpy, but we're going to hold to our full year guidance on that.

Your next question is from the line of Dana Telsey with Telsey Advisory Group. Dana Telsey - Telsey Advisory Group: As you think about the new cost structure for the business, how does it differ by brand? And as price points get adjusted, how do you think about product category basic versus fashion for each brand and what you want the assortment to look like?

Well, look, our economic model is based on the culmination of all of these different parts in our business. So our Online business is obviously one we've always put out there as a very strong return on capital, return on sales, same with our Value business or Outlet business. And even though we're going to go through this period of time, as we highlighted them, given the nature of their business, what I talked earlier about Old Navy, same thing applies to the Outlet business. There's only so many trade-offs they can make given all the ones we have made the last 3 years. But that economic model is still very strong, still something we believe that not only here domestically, but globally. Same with the Old Navy business. What I do and we have tried to do in the last couple of weeks, as we've got ourselves ready for this call and stuff started become clearer to us in the last few weeks about early numbers coming through for holiday and we started looking at. Sabrina and I have sat back often and looked at our business on a pro forma basis. And do we still feel very confident? The answer is yes, in our economic model, in the business, as we look at what is a normalized trend that's going to happen on AUC as we go forward and take out this moment in time. So I think all of those components, there's nothing going on right now in the business what we're talking about today that changes our view of the mix and the businesses we have, the portfolio we have, the multiple brands, the multiple channels. There's nothing on that side. On pricing, that's a great question because obviously, that's one thing that people should be looking at when it comes to our guidance piece. Some other people have been able -- maybe different businesses than ours and different models, have come forward recently and said they're going to hold margin rate. I guess the squeeze we're into right now is we do not want to take some of the choices that have been presented to us when it comes to product because the quality piece of the Outlet business in Old Navy is just too important to us, as I stated earlier. At the same time, on the other side of that coin, we don't want to take bad decisions on pricing, on key categories for us that we believe in, they're volume drivers, they define the business. I was talking to Sabrina earlier just to lighten the mood, I was telling her that'd be like us going out Old Navy on something that they are known, which $1 for flip flops and sell them for $1.50. There's just certain things that you believe in the business, and you have to stick to those principles. And we are looking what we've been testing every opportunity we can on pricing. We've been testing the depth of discounts, frequency of discounts, longevity of our discount and promotional cadences. And it will come back to our pricing architecture. At the end of the day, if the competition that we've identified, that we have to beat and that we have to make sure that our value proposition is equal to or better than theirs, if there's no wiggle room for us to make moves in key categories that applies to Banana Republic, Gap, Old Navy and our value channel and Athleta and Piperlime, and all of those brands, there are certain things that are, to different levels, that we hold near and dear and are critical to the value proposition of that brand. During this moment in time, we believe that it would be irresponsible for us to put that at risk. When we firmly believe what will be proven out to what level over the next 3 to 6 months. What we do believe that the input costs are going to subside even further than they are today, given what we believe that we're not going to take these chances on our value proposition. And the adjustments we're making, Dana, on these tests we're doing, some are working out successfully. We're able to actually learn from it and maintain our unit volume and get the incremental gross margin dollars and AUR. In some cases, particularly given in the U.S. right now where we're looking at fuel and food pricing going up, some cases in some brands, the consumer is not at a place where that can happen. Globally, there's different stories. We got more leverage in our Franchise business. China has some opportunities for us. Japan, of course, we wouldn't even think about changing our prices right now. The U.K. with our austerity programs, a little tough right now when it comes to traffic and comes to consumer confidence in England. So we wouldn't be making any irresponsible changes there, too. So it's a big board that we look at, by brand, by geography, by category versus the competition. And where we can make adjustments, we're making them.

Your next question is from the line of Jeff Klinefelter with Piper Jaffray. Jeffrey Klinefelter - Piper Jaffray Companies: Glenn, could you talk a little bit more about your -- maybe on a longer-term view basis, your International growth plans? You're clearly accelerating those openings this year, and it sounds like those stores in both Europe and Asia are trending very well in terms of productivity. You've also talked in the past couple of years about reducing your footprint in the U.S., particularly for Old Navy, where there are less productive stores. Maybe talk about that cycle. And to the extent that you can accelerate that, the expansion of International, the reduction of U.S. in order to drive the overall productivity higher. And I bring it up because internationally, it seems that it's getting more and more competitive every quarter in terms of the real estate. So how are you positioned to take advantage of that?

Jeff, I'd say that we haven't made the decision to push any further on the speed and the pace in which we're going to expand internationally. Now 2012 is a long way off, although plans are being put together and no order of importance. We're very excited with our Franchise business. We're up 43% in the first quarter in our Franchise business. As Mark touched on it, I think, in his opening comments, we were thinking that we do 75 stores. And we're short now, maybe 80 stores, right in the right countries in place, franchisees with the exception of maybe Greece that are going through a real tough time right now. We have not hit any wall that I can tell with any of our franchise markets that our 23 countries today we'll -- as we sit here today, we'll add another 5 or 10 over the next year or so. So that's a very strong business for us. Online International, we're pushing I'd say, pretty aggressively into it. We're in Europe in 22 countries. We're going to be looking at making that site into local languages, which I think is only going to help. And we're getting a great read from our online site in Europe to indicate to us what will be our next country, after Italy, we would consider going into. That's a great way to get that read in our business. So but we're -- Canada online is very strong with more to come on there. Feeling good about Europe and in China. It is basically -- our online site is our #1 store. Sabrina and I've been talking about let's set a target on what actually online should be in China. So yes, it's 10%, 11% here in North America. We got to set up a bigger target because we really believe in our online site and our online innovation that happens. China, 5 stores, one just got added of this year '10. We are having a good look in 2012 now. Second-tier cities, which I hate to call some of those cities as second-tier cities, but it seems to be a common language. But in China, looking at other opportunities outside of Shanghai, Beijing and Hong Kong, I've been to 3 markets outside of those 3 big cities. We're definitely going to go in there in 2012. How many stores to be determined? Definitely Outlet will open 2012. There's a lot of good Outlet centers today with more to come. We're keeping Banana Republic probably a little bit in the back burner for now, but maybe a 2013, that could be an option. Italy, 8 or 10 stores, and I would -- all in good sense, I'm going to Italy for 4 days in June, a good sense what 2012 could to look like. But Sabrina and I was always battling as every local team wants to step on the accelerator, because once you feel like you've got a tiger by the tail, everybody wants to get more and more store openings in capital, and we just got to find the right pace. And as we've said before, if you're doing well and you're being a performer, you get a good return on capital. You're running the business well and the brand is actually resonating with consumers, we will give you the capital. We got to make those decisions. And the last I want to mention, 2 things in North America: Athleta looks a solid 9 stores, now maybe 10 in 2011. That is one that I would say Sabrina and I have both agree, with Toby Lenk and Scott Key runs that business. That's why we're pushing on the accelerator. And that is -- although everybody has a perception they have a tiger by the tail, the one that can clearly look at the day is Athleta definitely has that. The store opportunity is significant, the consumers love it, the sales per foot we're getting, the returns are all very strong. And we think we've got a lot of white space and anybody who's in our way competitively, we think we have a better model. And so your point on Old Navy, I'd say it's more of a Gap play in terms of store closures, consolidation of Kids and Baby to Adult. That's really where the closures are coming. Recently, in the conference I said in 2013 I could see us getting to around 700 Gap stores to that consolidation play and then beefing up our Specialty stores to around 250. So getting almost closer to a 3:1 ratio, which when I started here, the ratio of Specialty to Value was 6:1. So that's a strong signal from us to the market and to our customers most importantly. As Jack Calhoun and Art Peck run these businesses holistically, as opposed to by channel, they're running it by brand. They will make the right decisions for those brands about when to grow Value, when to grow Specialty. Old Navy is a square footage play, but very few store closures.

Your next question is from Michelle Tan with Goldman Sachs. Michelle Tan - Goldman Sachs Group Inc.: I was just wondering if you take away the product cost issue, can you give us a sense on what you guys are seeing with respect to markdowns and depth of promotions against last year and how you think about that through the balance of the year?

Yes, I think, Michelle, as we've been saying it on the monthly sales call every month, February and March in particular, we weren't happy with the performance of Women's at Gap and at Banana Republic. We really need to make those Women assortments more appealing. And so our performance in those departments, in those 2 brands, we have been disappointed. We've had to go more at markdown than we wanted do. And our markdown margins are impacted when the assortment and the styling doesn't resonate with the customer. So we have our work cut out for us in those 2 brands. At Old Navy, we actually feel really good about the product assortment across-the-board and in particular in Women's. So when we get her in the box, we've seen throughout the quarter very nice conversion, very nice AUR. What we thought happened at Old Navy was really more of a marketing, as Glenn talked about in his remarks, in our evolution of that marketing campaign, we lost some momentum on the traffic. We've got a lot of that back in April, and we hope to keep that momentum obviously, as we go forward. We've got some lessons learned in February and March. But we're really happy with that product assortment. And of course, the teams at Gap are hard at work with all the changes on the leadership side. And then at Banana, that definitely is the focus of the team at Banana is to get that Women's product back on track.

And on the promotional front, my view is we have every intention to be less promotional. That's our goal. We know what we did in 2008, 2009 was to compete. And I would argue that maybe in the second half of 2010, there was, through better innovation, better creativity, better focus on just the product and not the promotional idea that may have come forward, we probably should have started to move a little bit more in that direction in the latter half of 2010. The teams are committed to that and as Sabrina said, what we would have done a year ago is if we wanted to be promotional to drive traffic, or to move through some inventory, we would have holistically had a 40% off total store. Now I think we go right to where inventory could be, 40% off Women's, excluding denim. That would be an example of what's happening at Gap. Now the goal is we have to -- there's no question, we get the whole issue of what is it our customers want, what kind of frequency, yes, she needs some incentive, thinking out to couch, a little more than usual. That hopefully will weigh in over time. But how do we, through some very creative means, and I think I'm starting to see that at Old Navy in particular, through some of the partnerships they're doing, which I think will really benefit us in this summer and this fall by not actually just go into a traditional way of driving traffic and describing your value proposition by getting much more creative. I mean, everybody on the phone has heard me say this before. And there's times where we've actually delivered on this. And there's time I've been disappointed that we go to the lowest common denominator at times. But the business and all the leaders that I deal with are very committed. We're going to see more of that in the back half of the year, shifting the conversation to less about discount and more about product. Michelle Tan - Goldman Sachs Group Inc.: Great, thanks. And then Sabrina, just a quick one, if you could quantify the impact of International on the inventory dollars, that would be really helpful.

We haven't quantified that. I'll tell you the foreign exchange piece by itself is a point. And again, I'll just emphasize that the units in North America are very tight and definitely down much more than, than International.

Your next question is from Janet Kloppenburg with JJK Research. Janet Kloppenburg - JJK Research: I heard a whole lot about costs today, but I haven't heard a lot about top line. So I would love you to give us some idea about how you're feeling, the confidence you have in the brands, Glenn, domestically for the rest of the year. And if some of these earnings revision has to do with a less optimistic outlook in terms of your top line performance. And with respect to the costs coming down in the first half of fiscal '12, I'm just wondering, are we just supposed to adjust our models and get back all the margin that we're taking away? Or perhaps you could help us rationally develop a model for next year.

It's probably a little premature. Obviously, coming here today, 3 months after we gave guidance to have to reguide because, as I said earlier, because holiday is just happening in real time. It's still happening now. The last thing that I want to do is try to be predictive on spring and summer right here, right now. As information becomes available and as we get clarity, we will absolutely -- the minute we have clarity, know exactly what spring is going to look like and which would probably be at our next conference call, we'll be able to at least identify whether this 35% drop in cotton, which again futures are around $1.10 and $1.15, but in December, if that trajectory was to continue, you would have a much better sense of what will that mean for our AUC. Sitting here today, I just find it hard to believe that for the fiscal year 2012 -- and this is again, there is no evidence of this, I'm just sitting here today with what I know, if it was to keep coming down at the rate that it's supposed to come down from people who are experts in this field, how could our AUCs not be below through a whole -- through all of our 2012 versus 2011, how could they not be lower? But that -- we're going to give information as we know and as we meet with our teams and as we negotiate. You're absolutely right to bring up top line. We knew today was going to be a lot about -- obviously, the news today was about the reguidance and the reasons behind it. But top line perspective, I'd look at it this way and say that Sabrina's right. The Old Navy business we put a new marketing platform in place, I mentioned earlier, didn't have the needed effect immediately. We made those adjustments. What we were actually feeling with the work Nancy Green and her team have done under Tom's leadership, we're starting to see that form a conversion perspective and at UPT inside of our stores. So I'm feeling that Old Navy and they've got more innovative ideas coming. They're massively embracing new category introductions. The marketing team, even though they had to bridge from the old to the new platform, they have so many other ideas coming. And I think that team, in this environment, from a top line perspective -- because we need Old Navy to do what Old Navy has done. I think it was either Mark will correct me in a second. I believe either flat performance to positive comp 18 of the 24 months. We need Old Navy to have that kind of performance in order for us to grow in 2012, which is our goal. Our goal is to grow top line sales in 2012.Gap right now is obviously going through quite a bit of change. Art Peck and Stephen Sunnucks, in conjunction together from a global perspective, are trying to use our speed platform to help out a little bit in fall, but it will be a little bit. They're mostly taking Women's non-denim for holiday and just tearing it apart, trying to do the right things so we can get the best chance to have an assortment that we can feel good about for holiday. Now I was telling Sabrina this notion of our business that anytime you make a change, you have to wait 12 months or something to happen. I just don't accept it. And the team has been in New York. I've been there a few days over the last few weeks. They've been there for the last 3 or 4 weeks under clear direction, under Stephen and Art's working with Mark Breitbard and working with Simon -- sorry, Kevin Komos making the changes to make sure that we fix the one area of the business that we're very unhappy with today. On the other side, Kids and Baby is doing well. Our Body business, particularly GapBodyFit is doing well. Our Denim business in Men's and a number of woven tops in Men's and knits are doing well. Our Denim in Women's coming out of our LA design office led by Rosella Giuliani is doing well. But that size of the assortment, Women's Non-denim is a big pool for Gap, and it really defines your fashion message for the season. And I'm hoping the though small adjustments in fall, but holiday, they can show us what that brand needs. So their goal: Keep the strength that we have right now and make those adjustments in product to get to a better sales performance. And Banana Republic, as you know for the last 6 to 9 months, our Women's business has not resonated. Our Men's business is on fire. I think Women's in general is in a bit of malaise just market-wise. But regardless of that, some people are gaining share and are growing Women's. But in general, Women's from an NPD's perspective looks a little down right now. But our team, I think we'll see -- the new flow just came in now. I saw some real adjustments they made for July, which I felt actually good about Julie Rosen and Jack Calhoun have done. So all of that sort of -- that's a little trip around every single one of the brands to get to the point is that we are still committed even in the face of these cost increases, still committed to getting total top line growth in the full fiscal year at Gap Inc. that's a critical message for us. Janet Kloppenburg - JJK Research: And for Sabrina, I was wondering if we should consider the inventory levels domestically, which I know are down somewhat less than they are on a global basis. But we should consider those in addition to AUC at least for our gross margin estimates in the second and the third quarter. Would that be appropriate?

So we haven't guided to inventory beyond Q2 -- in the Q2 Janet. But with these AUC levels, the way we've described them for the back half, you're definitely going to have inventory higher than cost because we're also basically, we said since actually the fourth quarter earning call, pressure on merchandise margins, pressure on operating margins. It's just that now with the AUCs coming through at much higher levels, that gap is even wider. Janet Kloppenburg - JJK Research: But I'm speaking to the question of promotions to bring that inventory down. I think that it's more than just AUC that's driving the inventory, isn't it? You came into the year with more than you expected domestically and you need to get them in line with sales.

We won't have them in line with comps because our margins are not going to be flat or up to LY. They're going to be down to LY. So the inventories will remain above the cost. Now we're taking units down, for sure. We keep reiterating that in North America, especially our comp store units will be down. But the cost is up such that in the AUR, we won't expect to come up as much as would make up that comp that you're going to have margin pressure on the merch margin just like we did in Q1, and that's going to flow through the operating margin line. Now we're bringing the units down, we're trying to balance again to your first question on top line. We want to keep enough units in the system to give us an opportunity to meet our overall goal of driving top line. But the units are down. We're not bringing them down severely. I mean, they're down a lot in North America, but we don't want to go so severe that we have no opportunity to drive top line overall. That's the balance that we're trying to achieve.

Your next question is from the line of Brian Tunick with JPMorgan. Brian Tunick - JP Morgan Chase & Co: Just a quick question, I guess. On the -- it looks like the cash flow, the free cash flow this year, I guess, on your new $1.40 to $1.50, would be, I guess, under $800 million. And I was just wondering, Sabrina, given the bond offering and given your share repurchase program announcement, does this at all change your appetite or pace of share repurchase program?

So we're very committed, as I said in my prepared remarks, Brian, we're very committed to our financial framework. We're very disciplined about distributing cash to shareholders. The debt issuance just gives us more flexibility with regard to how much we achieve. But we have demonstrated over a decade that through many cycles of positive comp, negative comp, global recession, our cash flow is very strong. So it's strong enough that we remain confident and comfortable that we can continue on our path of distributing cash to shareholders.

Your final question will come from the line of Kimberly Greenberger with Morgan Stanley and Company. Kimberly Greenberger - Morgan Stanley: I wanted to ask just philosophically about how -- what benchmarks did you use in order to guide your inventory buy? I'm just looking at the last 4 quarters where we had total sales growing faster than total inventory -- I'm sorry, rather total inventory growing faster than total sales. So I understand that there can be a quarter where there's timing differences or an international impact or Japan, et cetera. But to have a persistent growth in inventory above sales, it strikes me that there might be something different today about the way you're managing inventory, and I was just hoping you could step back from the noise of the quarter and help us understand how you're thinking about that going forward?

Yes, that's a great question, Kimberly. So it's in our long-held philosophy that we want to try and keep inventory units in line with demand. There's a lot of noise now with AUC which I'll get too. But our underlying philosophy for many years has been to buy inventory units in line with demand. Last year, the management team broadly speaking at Gap Inc. held hands to make the decision to air on the side of the customer and buy units to make sure that we were in stock in our stores. So last year, we began to depart a little bit from buying the units in line with our traffic. We were not happy with the results. And we've talked about that, and we definitely also decided, given the results of that, that we would go back to our practice of bringing the units down. Just at the time we brought the units back down, we're getting safe with this very high average unit costs. So that is frustrating because we're not reporting the dollars as far as the units are down, but the units, again, I will say, are definitely down. We're getting back to our principle of getting back down in line with traffic for certain. We realized the cost is up much where in many cases bringing them down below traffic to account for the fact that average unit costs are up so much. I feel like they're in reasonable shape in North America. We've actually bought them quite conservatively, especially at our largest brand, Old Navy. The other dynamic that's happening that's masking that discipline is this commitment to International growth, and that the pressure that is putting on a per-store basis as we try and open these stores internationally in our back half, some of which are flagships and bringing inventory in. So I -- we will consider going forward, whether we just get more transparent about telling you about our units in North America down because it obviously is an important point to make, and it might be helpful in future as we consider actually just being more clear about how far those units are down because I think you guys would gain comfort from that.

Okay, we'd like to thank everybody for joining us on the call today. As a reminder, the earnings press release is available on www.gapinc.com and it contains a full recap of our Q1 results, as well as the forward-looking guidance included in Sabrina's remarks. And as always, the IR team will be around after the call to take questions. Thanks.

Thank you. This does conclude today's conference call. You may now disconnect.