Katrina O'Connell - 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 Betty Chen - Wedbush Securities Inc. Paul Lejuez - Nomura Securities Co. Ltd. Adrienne Tennant - Janney Montgomery Scott LLC Michelle Tan - Goldman Sachs Group Inc. Brian Tunick - JP Morgan Chase & Co John Morris - BMO Capital Markets U.S. Jeffrey Klinefelter - Piper Jaffray Companies Erika Maschmeyer - Robert W. Baird & Co. Incorporated Kimberly Greenberger - Morgan Stanley Evren Kopelman - Wells Fargo Securities, LLC Janet Kloppenburg - JJK Research Lorraine Hutchinson - BofA Merrill Lynch

Good afternoon, ladies and gentlemen. My name is Kristen, and I will be your conference operator today. At this time, I would like to welcome everyone to the Gap Inc. Second Quarter 2011 Conference Call. [Operator Instructions] I would now like to introduce your host, Katrina O'Connell, Vice President of Investor Relations. Katrina O'Connell: Good afternoon, everyone. Welcome to Gap Inc.'s Second 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 and our most recent quarterly report on Form 10-Q, all of which are available on gapinc.com. These forward-looking statements are based on information as of August 18, 2011, and we assume no obligation to publicly update or revise our forward-looking statements. Joining us today on the call 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, Katrina. Good afternoon, everyone. Though we're certainly not pleased with an earnings decline, our second quarter performance does demonstrate a continued focus on our stated goals, including growing the top line, maintaining expense discipline, investing in our future and returning excess cash to shareholders. Specifically, we're pleased that we were able to achieve net sales growth of 2%, driven by our new international stores and our online and franchise businesses. We tightly managed our operating expenses, which were flat to last year and leveraged 50 basis points. And finally, during the quarter, we returned $880 million to shareholders, with $820 million in share repurchases and $60 million in dividends. Please turn to Slide 4 for our earnings recap. In the second quarter, net income was $189 million, down 19%, and EPS was $0.35 per share versus $0.36 last year. Turning to Slide 5. Second quarter net sales were up 2% to $3.4 billion. Total sales and comps by division are listed in today's press release. Turning to Slide 6 for margins. Second quarter gross margin was down 270 basis points, driven entirely by declines in merchandise margins. Second quarter gross profit of $1.3 billion was down $63 million to last year. Turning to Slide 7 for inventory. At the end of the second quarter, inventory units per store were down, and inventory per store in terms of dollars was up 5% in line with our revised guidance. Please turn to Slide 8 for operating expenses. Total operating expenses for the quarter were $917 million and leveraged 50 basis points as a percent of sales. This includes $114 million of marketing, up $13 million to last year, driven by Old Navy and our online businesses. Please turn to Slide 9 for capital expenditures and store count. In the first half, capital expenditures were $261 million, focused on international stores, global online expansion and Old Navy downsizes. As a reminder, our goal is to grow our store base internationally through both wholly-owned and franchise stores. In North America, our goal is to reduce our square footage overall, driven by downsizes at Old Navy and closures at Gap brands. True to our goals, year-to-date, we've opened 15 international stores and 18 franchise stores. We've downsized and remodeled nearly 40 Old Navy stores and have closed about 30 Gap stores in North America driving a total net square footage decline of 2% compared to Q2 2010. Regarding cash on Slide 10, year-to-date free cash flow was an inflow of $298 million, slightly above last year. We ended the quarter with $2.2 billion in cash and short-term investments. As continuing evidence of our commitment to return cash to shareholders, we've repurchased 67 million shares in the first half for $1.4 billion. Our Q2 weighted average diluted shares were 545 million. At the end of Q2, we had about $670 million remaining on our current $2 billion share repurchase authorization. And now I'd like to discuss our outlook for the rest of the year. Please turn to Slide 11. We are reaffirming our full year earnings per share guidance of $1.40 to $1.50. As a reminder, our back half assumes average unit costs are up about 20%. Given our focus on targeted price increases and promotions, we expect our average unit retails to be up, especially as we bring our unit sales down. However, we do not expect average unit retails to increase enough to offset the average unit cost increases. Therefore, our guidance reflects significant pressure on our margins. We have a goal of leveraging rent and occupancy and operating expenses. We're confident the goal is achievable on a positive comp base, but it's more challenging if comps remain negative. Our planned inventory unit buys are down across all divisions in Q3. Despite this, we expect our inventory dollars per store at the end of Q3 to be up in the high single digits, driven by average unit costs up about 20%. The following full year guidance metrics remain unchanged. Depreciation and amortization about $550 million; effective tax rate about 39%; capital expenditures about $575 million; net store openings, including franchise, about 75; and net square footage decline about 2%. In closing, we remain committed to our 2011 goals of growing top line, maintaining expense discipline, investing for long-term growth and returning cash to shareholders. Thank you, and now I'll turn it over to Glenn.

Thank you, Sabrina, and good afternoon, everybody. Before I hand it back to the analysts for any questions on the second quarter, I want to just give you some opening comments. I'm going to start talking about our international business because there's been a lot of progress in the second quarter, and then I'm going to come back and talk about our domestic business. So first on the international front, we just recently opened our sixth store in China, and we're excited about that. We have 10 more stores to open between now and the end of the year, with the key of those 10 store openings being the major flagship in Hong Kong. And also something that's different, I think, from the last conference call we had, we were pretty much set on opening only in 3 cities in 2011: Shanghai, Beijing and Hong Kong. We've now made the decision as we have been presented incredible opportunities. We're going to open up in 2 incremental cities in 2011: Tianjin and Hangzhou. Now for Italy. We've also, as of today, opened 6 stores, with the key opening in the second quarter being Rome. We have an amazing site in Rome. It's doing really well. It's a flagship location just like Milan. So we feel very good about our Italian strategy right now, and we will open up 5 more stores between now and the end of the year. Our franchise business, we're going to open up in 7 new countries in the second half of this year. That the most new countries we've done in any single 6-month period. Our global outlet business, we did 6 stores in the first half. We'll do 15 stores in the back half. Our Athleta business, we just opened up in New York City. So we're now on the East Coast. Two stores in New York opened back to back, and we're very excited, strong response from the consumers in New York and we will do 6 more stores by the end of the year. Our Piperlime business, we're adding more and more exclusively brands. The newest on Piperlime is we're adding men's apparel this month, which I think will be a nice complement to the business we have. Our online business globally is doing very well. We are in 22 countries in Europe, and our China online business is just super impressive between our own site and also we're on Taobao. The penetration in China is very strong, and that is part of our long-term strategy to get major high street locations like the store in Hong Kong, complemented with core mall locations with outlet and with a very strong online presence. Okay. Let me switch gears now and talk about our domestic business. We've negative comped 2 quarters in a row now, and that's not good performance and it certainly is below our standards. We've been very clear internally and externally our goal is to have moderate, steady growth in our domestic business. So we've not achieved that. What's critical is our business needs to comp in North America, and that is something that the teams and the brand presidents clearly understand. Now as I look forward to the second half of the year, there are really just 2 key priorities for us in the second half. One is marketing, and the second one is women's product. On women's business, we're disappointing with our performance. If you look at the key categories at Gap Inc., Kids and baby did not negative comp in the quarter. Men's did not negative comp in the quarter. So really, it's our women's business that's a drag on the total company's performance. We need to get better right away in our women's product. We understand that, our teams understand that, we need to have great products in our stores. Banana Republic, I'd say the 3 brands as I look at them, I'd say Banana Republic is the furthest ahead in terms of achieving that. When I saw the product, I was in stores this weekend with the team, I think it's a good flow and particularly in pants. Wear-to-work women's pants, casual and going out. I'd say Old Navy is the next one, and there's a lot of great work going on by that team when it comes to product. But I've really seen it now in their denim. A lot of new fit, a lot of new washes, great color denim coming into Old Navy in the next few weeks, which I know the team is very excited about. Gap brand for their women's product, I think we've been telling everybody who's an investor that the Gap brand team is working tirelessly. The team in New York led by Pam Wallack have been focused on making sure that the Gap product in women, American casual style, that it gets designed right by the team in New York and we get that right product in our stores. Mostly, our customers are going to see that in spring. Having said that, I do believe that there's going to be improvements in holiday from the last 9 months, which we've been operating in, in 2011. And lastly, we've had some ineffective marketing in the first half. Not that it was bad, it was just less effective than we wanted it to be. Now our marketing dollars are up versus LY, but most of that has gone towards Piperlime, Athleta, Old Navy and has gone towards opening up our stores in our new international markets. So Gap had some very limited marketing spend particularly in the second quarter because there was not a lot of news at Gap. We're strong believers, philosophically, of not putting money in marketing just for the sake of doing it. There has to be something to talk about. Old Navy, we had some storylines, but the marketing did not pull, did not drive traffic as much as we wanted. We're still very fixated on getting new customers in our stores. We know that's important to us. The 1969 campaign really was an example of that, telling that L.A.-design studio story but telling it in a unique way. That's something that a lot of new customers, they really gravitate to that. They love how genuine it is, how real it is. You're going to see more of that type of marketing not only from Gap, but from other brands because people are telling us they respond very well to that genre of marketing. You'll see a shift in our media mix in the back half, definitely a lot more online media. We've been testing that for the last 6 months. We like the early response. And most importantly, the Old Navy creative and marketing messages and the strength of Old Navy's aggressive marketing to drive traffic to their key customer across their lease line, it needs to get better. There's a lot of good stuff going on at Old Navy right now. I see it in the product. I see it in the fact we have 300 stores now that have been remodeled, new categories coming in. But at the core, as marketing needs to find who they are and there's a big value component to that, but also it's the spirit and the personality of Old Navy, that's a big priority in the second half. So in conclusion, I believe the company is making a lot of great strides overall on its corporate strategy, which is to be dominant in multiple brands, multiple geographies and multiple channels and I highlighted that at the beginning when I talked about the countries we're in; our franchise business, which is unique channel; online, outlet and our new brands, Athleta and Piperlime. Now domestically, prior to coming into 2011, we have not negative comp for 6 quarters in a row. That's good, and we're really not off to the kind of start that we feel good about so far in 2011, granted there's been huge fluctuations in input costs. And yes, the economy in the U.S. has been a little lumpy in the last 6 months. But here's what I tell everybody internally, and I mean it. There's business out there. There is business out there in the U.S. market. I look at other retailers, other brands, not everybody, but certain ones that I watch closely and there's business out there. So besides following all the initiatives we put forth, we have 2 priorities right now: marketing in North America being more effective, and our women's product going from being okay to great. Those are 2 key priorities. So now I'm going to turn it over to Katrina, and I'm happy after that to answer any questions from anybody on the phone. Thank you very much. Katrina O'Connell: That concludes our prepared remarks. We'll now open up the call to questions, and we'd appreciate limiting your questions to one per person.

[Operator Instructions] And your first question is from the line of Lorraine Hutchinson with Bank of America Merrill Lynch. Lorraine Hutchinson - BofA Merrill Lynch: Glenn, I just wanted to follow up on the comment you made about there's business out there, you just need to go get it. Who do you think your female customer is who should be shopping at Gap? And where is she shopping right now? And what do you think you need to offer her to get her back in the door?

Well, let me think. I'll come back to the question 2 ways. I'll answer it from a Gap Inc. perspective first. When we look at our business today, we believe that even though the women's business, from an industry perspective, at a very high level seems to be lagging the men's business. We see there have been a bit of this down cycle. So I think all of us are going through that. And when you see the reports from people who are multiple categories, such as department stores, that seems to highlight a lot about their accessory business, their cosmetics business, their men's business and not much about women's. So in general, I think women's is in a bit of a down cycle, and there's not a lot of business relatively speaking from a growth perspective as we've seen in the past. But I would say the people who are getting the traffic right now are probably benefiting by their multiple categories that they offer and they are taking share. So that would be the department stores, and some of the ones that I think are in Gap brands' direct line of sight would be a department store like Macy's. When you think of Old Navy, I would say that today -- and again, there seems to be, from the research we've done plus the trips we make to the stores, the people we speak to, not just customers but our own store managers and competitors, seems to be a little bit of a deceleration in the number of trips people are taking. I think that's driven a bit, Lorraine, by the economics times in which we're in; obviously, in the second quarter by gas prices. And when that happens and over the last decade or 2, there's always cycles like this where I think people pull back a little bit. And when they pull back, trips come down. And when trips come down, if you are a multiple category retailer, such as department stores, or a one-stop shop retailer like a Target, would be a direct competitor to Old Navy, that for this moment in time seems to be a benefit. So trips are down a bit, and we're seeing that, obviously, with our traffic, but also with some of the research we've done. At this moment, that's what's going on. So I'd say those are 2 examples of retailers and brands who, in my estimation and the category when it comes to women's, seem to be doing better than our 2 main brands, Gap and Old Navy.

Your next question is from the line of Evren Kopelman with Wells Fargo Securities. Evren Kopelman - Wells Fargo Securities, LLC: Sabrina, I think you said you expect to leverage on the rent occupancy and operating expenses in the second half, but that requires positive comps. And I'm just curious, isn't that a little aggressive given the negative comp performance in the first half and kind of the -- it seems to be an increasing uncertainty in the economy?

Yes, Evren, thanks for the opportunity to clarify. So what I said was we have definitely a goal to leverage rent and occupancy and operating expenses, and we feel confident about meeting that if we positive comp. So if we don't positive comp, it's definitely more challenging. Now what we're very proud of in the second quarter from an expense management perspective is we actually achieved 50 basis points of expense leverage, even though we had a negative 2 comp. So that gives us some evidence that when we really put our minds to it, it's doable, but it's very difficult on a negative comp. We do feel much more confident if we achieved the positive comp. So thanks for letting me clarify that.

Your next question is from Janet Kloppenburg with JJK Research. Janet Kloppenburg - JJK Research: I had a question about the opportunity for positive comps. It sounds like the women's business is going to be tough. I think Glenn said we should expect it to get better in the spring. So if the women's business doesn't improve from the levels we saw in the second quarter, is there an opportunity for positive comps? And secondly, perhaps you have some vision or confidence that it could improve a bit from the second quarter. I'd like to sort of get a feel for the confidence level you have in the ability to see some progress made in that category in the second half of this year.

Janet, if you're referring to Gap brand, because that's the brand I talked about more in the spring when I answered Lorraine's question on Gap Inc., was more about women's in general in our total business. And again, I think there's a bit of a lull going on in the market right now. But in spite of that, we need to perform better at Gap brand. The team led by the global team, but the North American team led by Art and Mark Breitbard and the work being done by Pam Wallack in New York, I would say that they start to feel much more confident about the fashion and trend decisions because they've been working at this now for 5 months, trying to transition the brand aesthetic, which got a little out in terms of the evolution of the Women's aesthetic, got a little too modern for our customers. We want to be relevant. But I think the new team has really done a much better job on the aesthetic. We're going to start seeing that show up in our stores in the spring. What I was saying -- and the comp question is still to be determined because you heard earlier about the environment in which we're dealing with. These are all questions, I think, all retailers have right now. What I do know is when I look at what work has been done on the last 5 months and the media focus when they got in was to do some work on holiday. So the holiday work, the product that's coming in, the categories we're focusing on, the reversal of the aesthetic that was in place and changing it to consummate some categories that are really appropriate, not only trend-right but appropriate for Gap, I believe gives a much better chance to reverse the fortunes of the women's business inside the Gap brand. Janet Kloppenburg - JJK Research: How do you feel about it Old Navy, Glenn?

I'll be honest with you, Janet. I'm disappointed in the number of customers we are not getting into Old Navy to actually see the product. Janet Kloppenburg - JJK Research: So is that the marketing issue you talked about?

Yes, I think at the end of the day, to be quite frank, whenever we have a traffic issue like this, I always go to product first. Even though I, to be honest with you, I think our women's product at Old Navy in the last 3 months has improved, and I see that clearly. And I think right now there are some challenges in women's wovens. But in general, our women's product is actually pretty good at Old Navy. So I always go to that first because it's so easy to blame this on store execution and ineffective marketing. Now the ineffective marketing is certainly something we are fixing as we speak. But the women's business, I think in my opening comments, I've seen an improvement in this most recent flow at Banana Republic and I've actually felt good the last 3 months. There's always a category here and there -- of what the work that Nancy Green has done at Old Navy. So the biggest frustration is that we have to get more people in the store. We have to find all the different mediums and levers, we have to get people in, online and the marketing we spend, the social media work that we do to get more people in to give that product a chance to be experienced, tried on, bought and spoken about because word of mouth is still a powerful vehicle inside of our business. So I'm kind of disappointed in the brand. I'm disappointed in the leadership that we've been unable to get enough people in the customers we target to come in and see what Nancy has actually put into the store. With that said, it's always has room for improvement. But as I ranked them earlier, I think Banana Republic is the furthest ahead. I think Old Navy has been good, but has some room to still improve, but I think it's good right now. And Gap is a redo, which I hope to see noticeable improvement in holiday. Janet Kloppenburg - JJK Research: Can you change the marketing for Old Navy in time to make it effective for third quarter?

Here's what I'll say to you. Basically, the campaign that we have been playing with since March, we shifted formats and platforms, everybody knows. We tried to make it stronger in the last 5 months, and last weekend, we decided to just put it on the back burner. We had another campaign we are working on. And I think this weekend, you're going to see a new campaign come forward for Old Navy as we put the other one on the back burner, either it will be once and for all as a platform, fixed to drive traffic. Or when we come out very strongly in October and November and December, we'll a brand new campaign. The one we have now, I think, is a nice stopgap you'll see this weekend, but if we can't fix what we have, we'll have a brand new one.

Your next question is from Michelle Tan with Goldman Sachs. Michelle Tan - Goldman Sachs Group Inc.: Just first, Sabrina, maybe you could clarify just on the comments around positive comp and being confident in the achievability of your goals if you get the positive comp. I know it's a comment about leveraging rent and occupancy. But is it also applicable to your broader financial goals for the year as a result of leveraging rent and occupancy, or is it just specific to that component? And then Glenn, I had a follow-up for you as well.

Yes, tell me if I'm not hitting your question correctly, Michelle, because I'm not sure I'm understanding it. But my comments were all with regard to how we would leverage rent and occupancy and operating expense. So we're always going after the discipline in reducing square footage, shedding unproductive rent and occupancy and trying to leverage that. As you've seen though, both in Q1 and Q2, if we don't positive comp, so both Q1 and Q2 negative comp, we don't get broad leverage. So it's very difficult to get a broad leverage if you don't positive comp. And then on operating expenses, we've done better in Q2. We actually leveraged with a negative comp, but it's not easy. So my comments were very specific to that. With regard to kind of our view overall for the rest of the year, just to underscore what Glenn responded to in the last question, we have not given up on our goals, certainly, of total revenue growth for the full year. That's an important goal for us goal, and even with a first half comp at negative 2, we have achieved total revenue growth. So we're pleased with that, and we're definitely focused on delivering that for the full year. The comp piece of it is challenging given that the first half is in at a negative, and the second half we brought our units down and it's kind of bumpy road ahead, but we're going to aspire to that. Michelle Tan - Goldman Sachs Group Inc.: Okay. Got it. And then Glenn, kind of in a related question. You've talked about some of the challenges that the consumer has been living with and the sector's been living with for a little while now. Can you give us any perspective on what you're seeing in the last several weeks or in the back-to-school season in terms of volatility? I mean, do you signals that some of this turmoil is taking a greater toll on the consumer in terms of traffic or in terms of just those consolidated trips or whatever?

Let's answer this in 2 parts. I'll give you sort of a broader answer about, I think, the consumer, more midterm from now to the end of the year. And Sabrina can speak more specifically about any recent volatility we may have seen in our business. Okay. There's been a lot of mixed economic news and there was a bag full of mixed economic news today, and there's issues across the pond which affect the stock markets here in the United States. So we're certainly thinking the sentiment in the back half relative to the first half will be neutral at best. So it would be a similar sentiment from a consumer perspective. We are certainly nowhere near that it's going to be an improving sentiment to what we had to operate in and compete in, in the first half. And if you were advised to lean on one side or the other, I'd say it's more likely to be slightly more negative from a sentiment perspective in consumers in the United States. So I'm not speaking globally right now, just in our home country, which is a significant part of our business, more likely to be slightly negative than it was in the first half. But we'll see how things progress over the next number of months. And all keeping our fingers crossed that good decisions get made and that better economic data comes forward and that maybe the holiday season could be slightly positive. But we're not counting on it right now.

Your next question is from John Morris with BMO Capital. John Morris - BMO Capital Markets U.S.: Question I think for Sabrina. You did talk a little bit about SG&A and really good job there on controlling the costs and managing it. But stepping back and looking at the my model and with the increased marketing that you do have going on. First kind of part to check with you is, is there -- are you also including in some of that spending some of the upfront costs for international expansion? And if so, all the more reason to suggest that you're doing a great job managing costs there. Where is that coming from? Where are some of those improvements coming from given the weakest comps?

Good question, John, and yes, definitely all of our expenses are included in our operating expense number, including our investments in international. Now that's not necessarily putting a whole lot of pressure on this year because of course, we began those investments last year. So we're anniversarying the investments, but they absolutely are happening within that bucket. And then of course, we have increased by about $13 million in the quarter the marketing spend. So there's no really big one factor that's helping us deliver all-in flat operating expenses. I think it speaks to the culture that we have been developing over the last few years together, and that the company has fully embraced. And I think all the teams just do a fantastic job, and it's just $1 million here, $1 million there, making sure we're responsible in every form. There's really no big call out other than that, but the total expenses definitely include the investments in international as well as marketing.

Your next question is from Erika Maschmeyer with Robert W. Baird. Erika Maschmeyer - Robert W. Baird & Co. Incorporated: You mentioned that Banana was further ahead. Have you done more across your teams to maybe take some of those learnings to the other concepts on the design side? And could you also talk about on the speed side on the initiatives there, where you're at from a speed perspective with each of your concepts and how that might help as we get into the spring?

The comment about Banana was that I think we would all collectively agree from a women's perspective that team, which -- the women's business has been soft for quite a while now. They have really -- I mean, everybody in the company, when there's a missed opportunity, whether it's we're off fashion or the trend is not right or somebody competitively is beating us and doing a better job, that, in this company, at least, that brings a lot of focus to where the big light shines on it. In think Banana's been at fairly aggressively now for the last 6-plus months trying to get better momentum on their women's business. We'll see if it develops any momentum. But when you walk in the store and the consumer comments, and how many stores -- a lot that we hear from our store manager and our teams, is that they feel this is a much better flow that was received 10 days ago than they've seen in a while. So I think that's positive news. In terms of cross communication in the business, our merchants get together in a regular basis. I mean, my job is to make sure that they spend a lot of time, when necessary, speaking to one another about each other's businesses, talking about broader trends. But then really go into their own corners because each brand has to stand for something completely differently. The only thing the 3 brands have in common is -- well, there's 2 things they have in common. One, they're owned by Gap Inc., and secondly, they're American brands. But after that, their consumers are different, their age profile can be slightly different, their average household income is different. So I think it's good that they get together and compare trends, but then apply that and how do you bring that alive within your own brand and aesthetic guardrails. In terms of speed, we've been, for the last 6 or 9 months, really questioning our merchandising model inside the company. And the first thing we did when it comes to our merchandising model was to push hard on speed. We're getting some benefit coming through this fall and holiday. And again, some brands are further ahead than others. So I'm actually anticipating that in this holiday season, when we take our pipeline, which we cut down by third of the weeks, and then you take our speed pipeline and that's another 40% less weeks than our core pipeline, we're going to make better decisions. Those are better decisions, and a lot of it is fashion product. Better decisions on fashion and trend, better decision on the inventory buys, better decisions on allocations to stores. I mean, this is not rocket science. So there's been 2 outstanding retailers in the last 50 years who actually built their business on this. This is not the Gap Inc. model. But as we continue to evolve our merchandising model's speed and getting much faster, making much better decisions, getting closer to customers is key to us delivering on our modest, steady growth in our North American business. Erika Maschmeyer - Robert W. Baird & Co. Incorporated: Is it Old Navy that's further along?

It's Old Navy that's further along. Erika Maschmeyer - Robert W. Baird & Co. Incorporated: Great. Could you rank the other 2 behind that or...

Let's just say that Gap has work to do.

Your next question is from the line of Brian Tunick with JPMorgan. Brian Tunick - JP Morgan Chase & Co: I guess, so 2 quick ones. Sabrina, did you mention sort of what your lead times are on buying at Old Navy? So when should we expect some relief on the AUC side? Is that second quarter next year? And then maybe, Glenn, you talked about some hope that AURs will be up at Old Navy. Have you or Tom been testing any specific categories, looking at some of the competitors and seeing what they're doing, maybe denim? Just give us some confidence that you guys have some visibility there.

Okay. So on the first part, Brian, we're not going to get too far into 2012 since it's just the Q2 call. But certainly, we're in the midst of doing some of our spring 2012 buys. I think it's a good thing, obviously, that we've seen most commodities, including cotton, of course, come way down from their peak. I think it's important to remember though that for spring '11, when we made those purchases, cotton was probably $0.90, $0.95 and today, you're looking more like $1.05, $1.10. So it's fabulous that it's come down. It's still up year-over-year a little bit, and we won't try and have a crystal ball on upcoming seasons. But we would certainly hope when we anniversary the very sharp peaks we experienced for fall and holiday next year, we're going to look at some significant easing. But again, these are volatile times in the market, so it's too early to say.

And on the AUR front, AUR in the business in the second quarter was up. So we are seeing our AURs are up LY. And just specifically about Old Navy, I think when it comes to AUR and when you start stretching price points, there's a lot of tools in AUR. One is, as Sabrina mentioned earlier, managing inventory very tightly, not only to the economic conditions, but to traffic in which we're seeing, that's one measurement of AUR. Second thing to your point, Brian, is can you get more initial price, which is what's known, as everybody knows, as AIR. And I think the Old Navy team has probably been a little conservative on that front on the first half, which I'm supportive off because I think we've mentioned in the last call, if we felt, which we did at the time but luckily we were not wrong, that we were going through a cyclical change here when it comes to our input cost on cotton and we didn't want to make any midterm or long-term decisions to our most important value brand on something that's going to pass and as a moment in time. So while there were some selected pricing decisions made in the second quarter and then probably a few more that Tom has certainly been testing, and when you test these pricing challenges with your consumer in the value segment, you hope they work. And in some cases, to be quite honest, they don't. And if they don't work and you can't get the reaction you want, then you have to stay at that pricing level because consumers have -- muscle memory is a lot greater than you might suspect it is when it comes to pricing in this particular environment. And a third thing is just looking at the assortment and what do we want to do on better pricing and best pricing in terms of the assortment, and Nancy has made some changes at Old Navy as all the merchants have. But our value business, which is greater than 50% of our North American business, they got to be careful. Because there is a halo effect if you start to get too much assortment in the better-best category, it can be negatively viewed on your overall value proposition inside your stores. So while I encourage them to do it, and all brands are certainly doing that and making good decisions, I think in our value business, they should do it but be careful. So I think that AUR up in the second quarter, and hopefully, that's a trend that we could count on going forward.

Your next question is from Adrienne Tennant with Janney Capital Markets. Adrienne Tennant - Janney Montgomery Scott LLC: Glenn, I just was wondering internationally as you pursue that strategy, how are you feeling about the strategy of franchising versus owning the stores? And then Sabrina, if you can just talk about, you've been very aggressive with the share repurchase activity. Typically, you guys step it up in the back half of the year when you have more free cash flow. And I'm just wondering if we should expect ongoing aggressiveness on the share repurchase activity.

On the franchise versus corporate, we agreed with our board about 3 years ago what the criteria is. What are the criteria of each country, and there's multitudes of ways to do this, so what -- determine whether we should go in as a franchise operation in the channel or go in corporately. I think I might have mentioned at a call or a conference a while back that we had this debate when it comes to Russia, we had a debate when it comes to China, because these are not clear decisions. Big countries, and obviously, China was not only a big country with the growth and the potential. In Russia's case, when we through our criteria, we decided to go franchise. In China's case, we decided to go company-owned. We have 2 very large countries, which we have not determined yet, but down the road we will be faced with decisions in those countries. That will be Brazil, and that will be India. So I think that we've made some really solid decisions right now. I feel very good about the decisions we made in China. The other thing worth remembering when it comes to our franchisees is we always have the option at a time of a mutual choosing between ourselves and our franchise owners to turn that into a joint venture or to take it over completely corporately, which has been something Inditex has done a very good job of. To date, all our franchise arrangements continue to be franchise. But if we felt there was a country down the road that tipped in from a criteria perspective and therefore was more appealing for us to operate on our own or in a joint venture, we're happy to do that any given time.

And then with regard to the share repurchases, Adrienne, you're definitely right that in more kind of normalized market conditions in our history, we have tended to repurchase probably more in the second half that matches our cash -- our free cash inflow. I think this year, what you've also seen from us is we've always taken a position that's opportunistic, and we've always told our shareholders and investors that we try and really buy on depth more aggressively when we feel like the stock is at a particularly good value. And I think those opportunities presented themselves in Q2. So we were out there delivering on the same principle we always; have, which is to get excess cash off of our balance sheet and utilize it. Our authorization is $2 billion. We're pleased we still have about $670 million left. I think if and when we complete that authorization, we will review the circumstances and conditions that exist in our company and in the market place at that time and decide whether it's appropriate to go back to our board with another ask.

Your next question is from Jeff Klinefelter with Piper Jaffray. Jeffrey Klinefelter - Piper Jaffray Companies: Glenn, just a follow-up on the international comments that you made. I mean, given the growing importance and visibility of this, of the growth of international, both franchise and company-owned, could you talk a little bit more about the profit consideration here? At some point, we're going to see an inflection, I think, in your consolidated operating margins given the more profitable nature of some of these markets. Can you talk about where you are, what sort of contribution it's having today and at what point you could see that accelerating?

Well, Jeff, I think the one thing we've talked about is that we really wanted to make sure that the model we went into in our new countries was different than the model we went into in the mid-1990s. And the difference there is that we go in right now with city strategy when it comes to our high-street stores. And then that's followed, which is a very strong brand message, you heard me mentioned in the call Milan, Rome, Shanghai, Beijing, Hong Kong; get really flagship locations in that city center on the right street, on the right corner. Now on to itself, if we emulated that as we did in our past, that alone is probably not a path to create profitability. But when your second tier core stores, which are in malls, which are smaller stores in a lot of cases on percentage rent deals, where the return of capital and the presentation of brand is still strong but not as strong as the flagship, you further the next ring, complement that with outlet stores very quickly. So in Italy, we went in 6 months after we launched the brand, market it, got it done, we opened our first outlet store. We're going to be opening our first outlet store in August of next year in China, and the outlet opportunity in Italy and in China are going to be robust. And last and most important to me is the online business, which when you look at the numbers Sabrina gives out, well, I think at the last conference we were at, we talked about getting our online business in the United States up to 15% by 2013. And when I started, that penetration was just about 5%. So the key now is look at these countries and say, one, because it is part of our multiple brand, multiple channel, multiple geography strategy. But also, the outcome of that, to your point, is the economic return: return on sales and return on capital is so much better. So right now, early days to tell. We like the start we've had in the 2 new countries, in Italy and China. We love our franchise business because it's what we call internally a capital-light strategy, and it's cost very little to no capital for us to do what we've done. So you've heard me on the call say that we're going to go into 7 new countries in the back half, and you heard Sabrina say we'll probably do close to 75 stores this year. That's a big program for us in the franchise business. So it's also a different way of going in. It's smart. It gets the brand out there, but also, it's a very good return on sales and a very good return on capital. So I think we're thoughtful, and to me all this stuff starts with strategy: What are the right countries? What's the competition? Can we go in and win? Will our multiple brands that are American that stand for different things that are truly brands and not retail stores, can our 3 brands as part of Gap Inc. go in and win in these new countries? And once we feel strongly through the work we do that we can and look at the competitive landscape and do a research, then coming in with the formula I just described gives a chance to produce for the total company incremental earnings. Jeffrey Klinefelter - Piper Jaffray Companies: So Glenn, all in, today, is your international business more profitable than the domestic business? And what are your targets going forward?

Yes, we don't give that out. Here's what I said before, is that where we've taken a component of that formula -- Let's just give you an example, Paris, where we just have a city strategy, selected stores, core mall stores complementing it. That is very profitable business relative to our total company business. I'm not talking about a country. I'm just saying we've obviously -- before we decided to go down this path, we had little pockets of examples about how our international business, as we roll it out, could become an incremental contributor. But we don't break out for purposes of these calls the difference between the 2. Suffice it to say, we're not in the international business just to drive sales.

Your next question is from Paul Lejuez with Nomura Securities. Paul Lejuez - Nomura Securities Co. Ltd.: Just continuing on the international theme. Just wondering which countries you would say you've had your strongest openings. And I guess I'm also wondering if there have been any openings where -- that you would kind of, call it, not so well received?

Well, it's mostly very positive, Paul. I mean, the difference between an absolute phenomenal start like we had in Italy and maybe some odd countries, very few in the franchise side where maybe we didn't register as strongly, it really comes down to brand awareness. And in Italy, our brand awareness was always very strong. I think there's a natural connection between the 2 countries, obviously, it's proximity to Paris and close proximity to our business in London. So Milan and Rome, both from Banana Republic and Gap, have been outstanding openings. We feel very good about that. China, I mean, we said before, I don't know if we -- I think we said how pleased we are. I think we've said how it ranks in the top 5%, the first 4 stores, we did of the total Gap Inc. portfolio, 3 of those 4 stores in the top 5%. That really speaks to how big the opportunity is and size of the cities in which we're dealing with. Again, the marketing we did was great. So I think we're off to a very good start in China. I'm looking forward tremendously to our opening in Hong Kong, which is one of the best corners in the world. We're going to open on November 1 of this year. There's probably been a few countries in the franchise business, not a lot as I mentioned earlier, we're struggling in Greece right now, but I think that's a common problem for everybody. We got off to a nice start, but right now it's not going that well. And there's a few franchise businesses that didn't get off to the start we wanted. And I think we mentioned, probably well over a year ago, the reason we went franchise first was to go into some countries to learn. Learn how to open a store, how does the American casual style component of Gap come through and how do we make sure that it gets registered and we win competitively. And as we take those lessons, those can easily be applied to the current countries were opening and the future countries we plan to open it. Paul Lejuez - Nomura Securities Co. Ltd.: I'm sensing you don't want to share those countries with us, but just figured I'd ask again what those were.

Well, let's say that in the early days of the franchise business, when maybe this plan I talk to you about, about going in with a great high-street store first to really identify the brand and get great traffic and great awareness from people who might be more closer proximity to the second or third store you might open, some of those were in -- by the way, we're on fire now in Southeast Asia. But 4 years ago, when we opened in some of the smaller countries there, we had some of those issues. We're doing very well in the Middle East right now, but 2 of those countries we opened in 4 years ago didn't get off to the best starts. But we're doing very well now, which again proves to me that you're going to learn as you make mistakes. You can recover. And if you are willing to put the money behind it from a marketing perspective and if it doesn't get off to a good start, change your real estate plan or reintroduce yourself to the customer, these brands are so strong, on Gap in particular, worldwide but doesn't take a lot to get it back on track. So those I'd say were 2 geographical areas around the world, maybe the start was not as good as we hoped, but they've since clearly recovered.

Your next question is from Dana Telsey with Telsey Advisory Group. Dana Telsey - Telsey Advisory Group: Glenn, on the process of the business changes, you've talked about changes in vendor base to help reduce the AUC pressure and the new design center to facilitate the flow of ideas between domestic and international. Can you talk about how each of those are going, how it's impacting the business and what changes you expect?

Well, we talked the last call coming off of the holiday buy that we were disappointed. And that we made some decisions that going forward, we wanted to make some adjustments to our supply chain. Now some of these are not going to be happening immediately. They're going to happen over a period of time. But initially, the first things we wanted to do was deal directly with mills as oppose to just vendors. And I think, I guess, in our defense, for the better part of 2 decades, with the fabric pricing being pretty constant for the most part, because our #1 commodity price was constant, the negotiations that really took place were through vendors and through vendor relationships. But as the commodity prices went up and yarn pricing went up, we were probably less quick as we should have been to deal directly with mills. And that's -- going forward, we've made some changes to that in the New Year, for the New Year buy. We've made some changes to that 3 months ago, and we're going to continue to make more changes with direct mill relationships. I'd also say that there's some consolidation going on. We're taking our volume as Gap Inc. more than we have in the past. Sometimes, we do act as one total conglomerate, sometimes we act as separate brands. But in order to leverage our size, I think the supply chain team has worked more closely going to meet with the vendors and offering up our entire book of business as opposed to by brand and by style. And that is certainly something we've done going forward and want to do more of in the future. And there's a lot of other changes that I think that I've been clear on that were probably changes we could have made a year ago, but with cotton and the commodity crisis we're going through, it was better to just stay as we were. But now we've made some with a lot more to come. When it comes to New York, I mean, that's a major change that we went through back in the spring, putting our whole global design team, our whole global marketing team, which was nonexistent, we created it, and our global production team in New York. And I think under Pam's leadership, I'd be lying to you to say there wasn't some dark days in order to bring that together, but we're in a really good place now. The reason this was done was very clear. This is an American brand with an American aesthetic with global aspirations. And putting -- as I think we're going to eventually introduce that team to some people in the call today, but putting them together in one office and thinking about the larger business and getting input from our Asian business, from our European business, from our franchise business, to come into New York. So now instead of the New York product design being 100% driven out of San Francisco, it is its own independent body. Again, that takes time. It's certainly a big shift inside the business strategically to make that the creative center for the brand. But after 5 months, I'm actually quite pleased. I'm going to be there on Sunday meeting with the team to go through some progress. I've not been there well over a month. But indications to me is that we can expect some pretty good work out of New York City, certainly in the spring. But as I highlighted earlier to Janet, I have some expectations that things will get slightly better in holiday. But for spring, which I will be seeing on Sunday, there's certainly some good signs.

Your next question is from Betty Chen with Wedbush Securities. Betty Chen - Wedbush Securities Inc.: Glenn, I wanted to go back to the marketing topic if we could. I think you've mentioned that you felt the Old Navy marketing was somewhat ineffective in the first half in driving traffic. Have you been able to get any learnings on maybe what elements of the campaigns were not effective? And also, as we shift into the back half, how should we think about the marketing dollars and in total and how does that breakdown by brand? And then I had also follow-up in regards to the international business. Are you seeing any differences in the online customer base versus some of the brick-and-mortar locations?

I'll just start, Betty, with a quick answer on go-forward spend. So we don't give a lot of color on the marketing breakdown. But I will tell you that for Q3, you can probably expect overall marketing to increase in the same ballpark that Q2 did versus LY. And it probably will be driven by the same 2 divisions that drove the increase over LY in the second quarter, which is namely Old Navy as we really try and get that really hyper started again and get the traffic in the door; and then also, our direct business including online media spend. So those are the 2 areas that are probably going to come up a little, but it's relatively modest and within the same ballpark as Q2.

And on the marketing, I'd say a couple of issues happened. One, as we switch to the new platform, the actual messaging to our key customer was more about her and less about her family. And when we do marketing that registers about her family, she tends to respond quite well. And I think that in fairness to the team, and you've heard us say this before, there's always this ongoing balance when you have a value brand. I see it when I watch Target's marketing, as when I watch Kohl's and other people. There's always that balance between brand marketing and what's the strong value message. And you've heard us that we've been trying to find that right balance. The environment got a little worse than we have anticipated. And the message, while people thought it was good and they remembered it, it wasn't anywhere near the call to action it needed to be to get somebody to get into a car and make a trip to Old Navy. And that's critical for this business is, the store is the brand. The product defines the brand. The people in the store define the brand, and the marketing, certainly, tells the voice and the story of the brand. But one thing that Old Navy will never ever lose is its value proposition. So it has fun, it has fashion, it has family. But all 3 of those are -- step on top of a foundation called value. And sometimes campaigns that you put together are good. But in this environment, and as I mentioned earlier with what seems to me to be some slight reduction in the number of trips that our key customer's taking, the value part and the aggressiveness that Old Navy can demonstrate and needs to come forward and that's the change that I would -- that's the comment that underlines the point I made on being ineffective. So now as I mentioned to, I think, Janet, we're making quick adjustments. And we're going to -- I think the tapping on the edges of the platform wasn't good enough. We had to really just get rid of it and bring something else forward in order to get the traffic that, that brand deserves. On the international front, it's a little bit what I was answering earlier. I'm not sure if it was Paul I was answering the question, but no doubt about it. We -- if you could do it all over again, you would set up your structure in your existing countries and make sure your online business was set up for a much bigger share of your total business. So as I said, by 2013, in the U.S., we're planning to get that penetration of 15%. Sabrina and I and Katrina agree that we don't give out too much information on certain areas of our business. What I will tell you though is that in Canada, that has been opened less than a year, it will get to the 10% very quickly. While it took us 9 years to get it here in the U.S., it will get there very quickly. In China, it's unfair to give the number because we only have 6 stores. But say just for hypothetically, if the steady-state in China was a couple hundred stores hypothetically, I would be very disappointed when we had those stores if we didn't have a much more significant penetration in the mid double digits in China. So our goal is to market it and keep driving it and keep reminding people that the stores talk about online. And so I think that it's a different breakout of the tools and the channels the company has. Now we're catching up very quickly in the U.S. But the new countries or existing countries that just recently received online, it's going to become a much more significant part of our business.

Your next question will be from Kimberly Greenberger with Morgan Stanley. Kimberly Greenberger - Morgan Stanley: Glenn, I think I understood fairly well in the late '90s what the casual American aesthetic was for the Gap women's customer. I'm just wondering if you can help us understand today what that team is looking at for inspiration because it's dangerous to go back to what made Gap great, let's say, 10 years ago. You've always got to move forward. I'm sure the team's doing just that, and I'm just not sure I understand exactly where Gap fits within the mall today in terms of its brand positioning.

Let's say if you're in the mall today and you're thinking of women's only, then I might completely accept your comment at face value. Let me just take it up a notch. I think the first thing is that this is a multi-gender and multigenerational brand. And that's key to the overall brand, and women's is a big part of that business. And I think everyone on the phone knows that we are more disproportionally invested in the women's business than most other retailers. But I think I don't want them to lose sight of Kids and Baby, of Body, of men's and of women's, which creates the holistic message and brand positioning for Gap. So we start at that point and then you bring it down. The words are important to me. Some people may not think they are. But American casual style, and there's other words we're using to make sure the aesthetic is right, is something that we've proven in a number of cities in the U.S. even as we negative comp in the second quarter. We have a number of stores -- and I'm not going to give you the number -- we have a number of stores and a chain of 889 stores that had very nice positive comps. We are positive comping in a lot of places internationally, franchise business as I talked about earlier. So I think that when -- and this is what product we don't feel great about in women's. It's off, it's not on trend. And I've sat down in New York and the team and we brought in a lot of people who were with the brand recently and people who we've added to the brand in the last year. We've run through the aesthetic. We looked at the competitive set. We talked to lots of customers. And Kimberly, there's an interpretation issue we went through this spring and summer. But the pure definition of American, first and foremost, casual, secondly and style and there's other words. To me that still resonates, and this has not to do with going back to the past. So we're not going to go into the bag of tricks and pull out crazy stripes. This is not what this is about. There's -- and I'm not sure if that was exactly the filter that drove the aesthetic in the 1990s, all I know is going forward, that filtering mechanism, focusing on that and making sure that, A, it's relevant for today's consumer; secondly, there's competitive advantages to it, and that's the reason you open up a studio in L.A. because under American is the word denim. And if you're going to want to be dominating on denim, you go to L.A., you make a bold move, you hire a whole bunch of great designers, which is in the marketing campaign as we speak, you create an environment for them to be close to the customer to develop one of the more important categories, if not, the most important category we have that defines American casual style. I'm just using denim. I could take you down back through knits. I could take you back through to khakis and chinos. But there's categories that just belong to that brand, and that's not going back to the past. And there's other new categories we're going to be bringing in. So unlike you, when it comes to the question, when you walk the mall most recently and you run it through the filter of aesthetic and relevance and where I know the brand needs to go, it doesn't register. And this is why design guardrails and clarity is so critical in our business. And I'm obviously the one who is 100% accountable over the last 18 months that I allowed what was coming out of New York, driven by San Francisco, to not deliver 100% to the filters we had in place. I mean, I don't run the brand. But ultimately, I'm accountable for anything happens in the company. That's why I feel confident that Pam Wallack, the new design team, the new marketing team and the design executives from around the world we put together in Europe with the key merchants for international and North America, are actually going to get that clarity and they're going to deliver it, season in, season out. Because some of the brands that I have a lot of admiration for and are consistently delivering every single season are the ones that actually stick to who they are. We know what that feels like, and every now and then a brand gets off. There's other brands who we can talk about today and I'm not going to, who have gotten off recently. It can happen. Inexcusable. Nobody's happy about it. But I think you're going to see that team get back to the core part of what I just talked about the brand really stands for. Katrina O'Connell: All right. I'd like to thank everyone for joining us on the call today. As a reminder, our earnings press release, which is available on gapinc.com, contains a full recap of our Q2 results as well as the forward-looking guidance included in Sabrina's remarks. And as always, the Investor Relations team will be available after the call for further questions. Thank you very much.

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