Katrina O'Connell Glenn K. Murphy - Chairman and Chief Executive Officer Sabrina L. Simmons - Chief Financial Officer, Executive Vice President of Finance and Principal Accounting Officer

Barbara Wyckoff - Credit Agricole Securities (USA) Inc., Research Division John D. Morris - BMO Capital Markets U.S. Brian J. Tunick - JP Morgan Chase & Co, Research Division Dorothy S. Lakner - Caris & Company, Inc., Research Division Randal J. Konik - Jefferies & Company, Inc., Research Division Evren Dogan Kopelman - Wells Fargo Securities, LLC, Research Division Adrienne Tennant - Janney Montgomery Scott LLC, Research Division Betty Y. Chen - Wedbush Securities Inc., Research Division Paul Lejuez - Nomura Securities Co. Ltd., Research Division Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

Good afternoon, ladies and gentlemen. My name is Jemariah, and I will be your conference operator today. At this time, I would like to welcome everyone to the Gap Inc. Second Quarter 2012 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 2012 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're 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 16, 2012, and we assume no obligation to publicly update or revise our forward-looking statements. Joining us on the call today are Chairman and CEO, Glenn Murphy; and Executive Vice President and CFO, Sabrina Simmons. Now I'd like to turn the call over to Glenn. Glenn K. Murphy: Thank you, Katrina, and good afternoon, everybody. As has been customary in the last number of calls, I'm going to provide some color on the performance in the second quarter and then I'm going to hand over to Sabrina, who will take you through a much more detailed review financially. Now the second quarter, there was a lot of bright spots inside the business that we feel good about. There's been a lot of effort, a lot of energy being directed to get us to where we are today. So I think the best thing for me to do is maybe take you through some of those bright spots and give you my sense of what we're doing and to give you a little more information behind the P&L. So let's start with sales, which was very positive in the second quarter. We had a 4% comp, and that was made up by our 3 North American brands: a 7% comp in Gap North America, 7% Banana Republic and a 3% comp at Old Navy. And that's the second quarter in a row where the disbursement of our comp was very much driven almost equally across all 3 of the brands. That's very positive. When that happens, our business does very well, as you can see by the $0.49 earnings per share the company accomplished. Now there are a number of reasons why our business has been consistently positive for the first half of this year. The number one reason is product, and where there's been a lot of focus, a lot of effort starting late last year with our product teams. I'm really proud of the work they've done in the first half, whether that's on the right styles, which, obviously, we've had great success with so far, particularly in the second quarter. The color trend has been good for the industry, but we've capitalized on it. I think we've really focused on fit and consistency of fit, and our scores on that front are improving into the second quarter. And lastly, we've made these targeted investments in key categories, categories where we want to dominate, where we want to win. And those are our product assets. And we’ve put the money behind those assets. And our customers are noticing it. Second thing when it comes to sales is, I think we're flowing our product in a much more seasonally correct way. One thing that I've always been frustrated about is that July and January, in particular, have never been our best months. I think the teams are doing a much better job of reacting to that and putting seasonally, more correct product that customers want in our stores this past month. And lastly, I'm going to take my hat off to our store teams. Our store execution in the second quarter was very good. There was a lot of stores in the second quarter. I saw not only the enthusiasm behind our store associates, but I think the standards, the execution, the visual merchandising, the windows were all a step above. That's been a big contributor to the company's performance on sales. Gap Inc. Direct was up 24%. That obviously helps. When you look at our 4% comp in the second quarter, that was a good performance by that team. And the only thing that we're focusing on is our traffic was negative. And we know for the business to fire on all cylinders, we not only need to have AUR happening, store execution, the right product investments, but we need to have positive traffic. So you’ll see some further focus in that area in the second half of 2012. Now we did end strongly, which I felt great about. I mean, that was a 10% comp in July. It's been a long time since we've had a double-digit comp like that. The calendar shift helped a little bit. We're a very holiday-driven business with so many outlet stores and Old Navy. Regardless of that, a 10% comp was a very nice way to end the quarter. Next I want to talk about is our International business. We had a minus 5% comp in Q2. And they expected, and we expected, a better business. So let me give you a little further color behind that minus 5% performance. It's obviously difficult in Europe right now. But what we feel good about our actual store distribution in the European market is we're very concentrated in key cities. London, Paris, Milan and Rome is a big percentage of our European business. As Europe begins a recovery at some point in the future, I think we're positioned properly by being much more dominant in those key cities. In Japan, this was the first full quarter that anniversaried the disaster of 3/11. And us, like other Japanese retailers, were clearing through spring and summer product as traffic dropped significantly in the Japanese market. So we were up against that very aggressive clearance quarter. And I believe that, that will be behind us more in the third quarter and in the fourth quarter. And we have expectations that we'll have a better performance in Japan in the second half. And China's too small right now to be material to our comp number. Our total sales in the second quarter were up 6%. International business was up 7%. So even though the comp was negative, total sales were up 7% internationally. Our Franchise business, up 25%, continues to go from strength to strength. Athleta opened 11 stores. I'm going to pause for a second. That's just a really good number for a young team to execute and deliver on. I was in a lot of those stores this summer. I think the store teams have executed well, and customers are responding very positively to have a physical presence of the brand in their neighborhood. Our global outlet business added 10 stores in the second quarter. That contributed to the 2% spread. And lastly, we opened up our first Old Navy store outside of North America, in Tokyo. I was there the week after it opened and was really impressed not only by how well we translated the brand into a whole new market, but the response of customers and families, in particular, which is the cornerstone of the Old Navy brand, was great to see when I was in Tokyo. So that will lay a nice groundwork. We're testing ideas, we're trying different things, but I think that sets us up nicely for the rollout of Old Navy in Japan in 2013. From a margin perspective, we had a very nice lift in the second quarter. We are working aggressively on ticket integrity, selling product at full, regular price. I think that's been helpful to us. That doesn't just happen through a great product, although that's the initial first driver. It happens through words in the store or how our store associates sell it, what goes in the window. It also helps that the marketing investments we are making, we are creating demand on the first day. It either shows up online or shows up in the store. And this was the first quarter since late 2011 where our average unit cost, our cost of goods, were not significantly above the year before, and that contributed to the performance. As a business, we are still very committed to making the right thoughtful investments in our SG&A line. One is marketing. Gap North America has been receiving some incremental marketing in the first half of this year, driving the Be Bright campaign. That has had really good feedback. Whether it's online we've heard through social media or in our stores, the campaign is resonating. Our digital investment, like other retailers, we're putting money behind digital. Whether that's online marketing or other tools, we understand where customers are shopping, we understand where they're getting their information. We've done some very good work on that front. And lastly, some money’s gone into store labor. We've got some service models we're looking at selectively in key stores. We're testing some ideas as I think there's an investment there in the second quarter that helped. And in closing, when you perform and deliver $0.49 in earnings per share over last year's $0.35, a 40% increase in EPS, of course, I think overall, people here are energized. It's a good feeling inside the business. What I have to do is make sure everybody stays focused. And that's what's critical, is what got us here to this performance. I just keep doing that. I keep repeating it. We mentioned on these calls before, the last fall was an important moment in the company: make sure that Gap Inc. comes out strong at the beginning of 2012. And that's what we've done. But we know that sustained performance is what matters, and everybody here is working hard every single day to make sure we maintain the momentum in the back half that we enjoyed in the first half of 2012. So with that said, let me hand over Sabrina, who will take you through the financial results of Q2 2012. Sabrina? Sabrina L. Simmons: Thank you, Glenn. Good afternoon, everyone. We're very pleased with our second quarter performance as we again made meaningful progress against our 2012 priorities, including driving increased sales, investing in our business and growing earnings per share. Here are some highlights. Consistent with the first quarter, net sales were up 6%, comparable sales were up 4% and our North American divisions, again each posted positive comps. Operating margin was up 200 basis points. Earnings per share grew 40%. And in addition, we generated strong free cash flow and returned approximately $410 million to shareholders through our share repurchases and dividends. Please turn to Slide 4 for our earnings recap. In the second quarter, operating income was up $91 million or 27%. Net earnings were up $54 million and earnings per share were $0.49, up from $0.35 last year. Turning to Slide 5, sales performance. Second quarter total sales were $3.6 billion, up 6% with comp sales up 4%. Total sales and comps by division are listed in our press release. Turning to Slide 6, gross profit. Gross profit dollars grew by 14% to $1.4 billion. Second quarter gross margin was up 300 basis points to 39.9%. Our merchandise margins were up 210 basis points driven by the combination of growth in average unit retail and decreases in average unit costs. Rent and occupancy leveraged 90 basis points. Turning to inventory on Slide 7. As foreshadowed in our July sales press release, inventory per store in terms of dollars was down 6% on last year's up 5%. Please turn to Slide 8 for operating expenses. We’ve noted throughout the year that we plan to invest more in our businesses in 2012 and highlighted that it's likely we'll deleverage operating expense. In line with that framework, second quarter total operating expenses were approximately $1 billion, up $85 million from the prior year. The increases were focused on our Gap Inc. Direct division, which grew sales 24% in the quarter, as well as marketing and store payroll investments across our other channels. Marketing expenses grew $33 million to $147 million, with the biggest increase driven by Gap brand's investment in windows, outdoor and digital media. Please turn to Slide 9 for capital expenditures and store count. Second quarter capital expenditures were $149 million. With regards to company-operated stores, we opened 9 stores on a net basis and ended the quarter with 3,035 stores. Net square footage was down 2% compared to Q2 2011. Store count and square footage by division are listed in our press release. Regarding cash and share counts on Slide 10. Year-to-date, free cash flow was an inflow of $673 million, and we ended the second quarter with about $2.1 billion in cash and short-term investments. In the second quarter, we repurchased 13.1 million shares for $349 million at an average price of $26.65. We ended the quarter with 479 million shares outstanding. And now I'd like to discuss our outlook for the rest of the year. Please turn to Slide 11. Given our progress during the first half of the year, we are raising our estimate for full year earnings per share, which includes the 53rd week, to $1.95 to $2. In addition, we are increasing our full year operating margin guidance from about 10% to about 11%. As a reminder, it's our objective to drive consistent top line growth while delivering healthy merchandise margins. A few things to keep in mind regarding our margins. While our average unit costs are improving in the back half versus 2011, they are not back to 2010 levels. It's also important to remember that in each quarter of 2011 and through Q1 of 2012, our average unit retails grew as we decreased units in the face of escalating product costs. Therefore, our plan to introduce more unit inventory in the second half of 2012 primarily at Old Navy may cause our average unit retail growth to slow compared to the first half of the year. Regarding inventory. Although we plan to add units during the second half because the cost of each unit is lower, inventory dollars per store at the end of Q3 are expected to be down in the low single digits to last year. Regarding operating expenses. Given the progress we've made on our product, as evidenced by customer response year-to-date, we believe it's prudent to continue to invest in areas like marketing and store payroll. Specifically, we expect the increase over last year in operating expense in each of the remaining quarters to be at least as large as it was in the second quarter. As a result, we continue to expect to deleverage operating expense in the second half. Moving on to cash. Our principles remain intact. Our stated priorities for the uses of cash are, first, to reinvest in our business to the degree we have projects that will deliver appropriate returns; and second, to distribute excess cash to shareholders via dividends and share repurchases. Given the improvement in our operating performance, we are increasing our full year capital guidance and are comfortable spending up to $675 million versus our previous guidance of about $600 million. Consistent with our strategy, the increase will be focused on remodels that accompany store consolidations and downsizes, as well as other store-related projects. We also plan to continue repurchasing shares opportunistically, though it's important to note we've consistently stated we expect the level of share repurchase to be more modest in 2012. Finally, we plan to repay our $360 million term loan. This repayment, which has no prepayment penalty, will eliminate negative spread and further support our investment grade rating. The following full year guidance metrics remains unchanged: net square footage down by about 1%; company-operated stores, net of repositions, about 120 openings and about 115 closures; depreciation and amortization, about $475 million; effective tax rate, about 39.5%. In closing, we're pleased with how we executed against our strategies during the first half of the year and our focus on delivering on our goals for the remainder of the year. Thank you, and now I'll turn it over to Katrina. 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. Thank you.

[Operator Instructions] Your first question will come from the line of Barbara Wyckoff with Credit Agricole Securities. Barbara Wyckoff - Credit Agricole Securities (USA) Inc., Research Division: Can you talk about China and potential expansion in China? How many stores are you going to open over the next 3 or 4 years? Can you compare some of the metrics on those stores relative to, say, the U.S. stores or Japan? Glenn K. Murphy: It's a little premature to talk out 3 to 4 years what -- just as a sort of reminder to everybody on the phone, we're going to do 30 stores this year. That's our commitment. The news within that 30-store profile is that we're going to open up in 5 new cities. So we'll be in 10 cities at the end of the year, which sort of part of our real estate strategy was to go into Beijing, Shanghai, Hong Kong. And then last year, we opened up in 2 other cities, which were Tianjin and Hangzhou, and we're going be in 5 more cities by the end of this year. Such newsworthy because it allows us to answer your question actually, Barbara, which is, I'm not saying anybody, but brands, if you have a brand positioning globally, you can go into Shanghai, Beijing and Hong Kong and likely carve yourself up a decent-sized business. But to find out how big can China become given the fact that it's the second biggest market for apparel in the world, just passed Japan about 12 months ago, we decided to go in and make sure how well can we perform. But again, to your point on productivity, on return on capital, on sort of overall sales, how can we do in markets that we're going to need to get into and penetrate and be successful in order to have a meaningful business. So that's important for us to learn that. Second thing we did, we went online day 1, which we'll have our second anniversary this November. That was also important to find out: how would the Chinese consumers buy online, because it's different than it is here in the U.S., and that's not uncommon. In a lot of countries, the online penetration, the reception of it, yes, can be different. We've been very pleased with our online business. That's good to our overall strategy. And the third leg, to answer your question, in the future is we're opening 3 outlet stores this year. And I was actually just in China, and I was really impressed. I did outlet centers before, but I saw our 2 stores, 2 of the 3 that are under construction, and the quality of the sites, the quality of the cotenancy, which is really good for us. You're talking about Coach and Nike and people who we actually have nice cotenancy relations with here in the U.S. So I think I was impressed with that. So the answer, we'll know probably a little bit more at our analyst meeting next year. We'll be able at a -- figure out more about our strategic plan for China, where that's going to go. And -- but I'm -- I've always been a believer that, that was a great market for us because of our multiple brands, which we've not decided yet beyond Gap if we're going to do anything. The only decision we made so far is one brand with multiple channels. But I've always felt good about the market because of the American component of our brands and how well that resonates with Chinese consumers. And the last part will be that we do very well, and our marketing has skewed towards the millennials here in North America, and a version of that in China is the golden generation. And I think our marketing, our positioning, what we stand for, what this company believes in those brands -- our brands have -- our brand so far has done very well. So more to come, but we're off to a very good start.

Your next question comes from John Morris with Bank of Montréal. John D. Morris - BMO Capital Markets U.S.: I wanted to ask a little bit about the plans that you have talked about with respect to taking some of the savings that you've had from lower product costs, cotton and whatnot. You mentioned and touched on this in some of your prepared remarks, but maybe go a little bit deeper where we might expect to see that reinvestment deployed. I think we've talked about fabrics before, but you're pointing to labor, payroll and, it sounds like, marketing. So knowing those, maybe go deeper on each one of those and how you see the returns from those investments coming in, what gives you the confidence that you'll see the returns? Clearly, we see the improvement in product, but more color there would be great. Glenn K. Murphy: I'll take them in the order in which you put them forward, John. I'd say in the product side, which is -- and you add together the amount of money that Sabrina and I were comfortable, working with our brand presence this year, reinvesting in 2012 given, one, our -- a sort of stepped up level of confidence. We are nowhere near where we want to be, but we'd start feeling more comf [ph] than last fall as we look towards the spring and what our teams were able to get done and some of the changes, obviously, we made to get the confidence we started to feel internally last fall. So it starting with the product piece, that's the larger amount of the reinvest we're making in product. You saw some in the spring, and we were able, in the spring, to get an early read and we have ways these days to get a little earlier read than we used to. So I would say that, that encouraged us to continue on the same path. Maybe a bit of a step-up in investment in the third quarter in product, and the fourth quarter will be about the same as the third quarter. So the majority of this is, if you talk to our teams, and you've heard me say this before, but it's always worth repeating, to me the success ultimately of us selling products at full price and driving the kind of AUR performance that we believe we need to have inside of this business given our brands starts with having the right styles, and that's -- belongs to our design team, and having the right color. That's in spite of the move towards a color trend this year. We were not happy with the colors we put forward last year. So style, color, fit is critical, which, again, our design team and our production team owns. And there were some decisions made on categories that we want to be more dominant in. And I've listed some in the past. In Gap, it's get -- be -- being dominant in babyGap, being dominant in denim. That's important. For, obviously, Banana Republic, it's in suiting, and that's in woven shirts. But taking some of those categories that we can go out and we can give them the space they need because if you're going to put an investment in quality, that should come then with an investment in inventory, which should come with an investment in space in the store, which should come with an investment of the service model inside the store and, lastly, investment in marketing. So what we've been working on since last fall is the continuum of that, taking a product asset in each one of our brands and not just putting quality for the sake of putting quality because, in some cases, that could be money unnecessarily being spent. But being disciplined in how we do it, and then take it all the way that continuum I just took you through. So I'd say the difference you'll see in fall and holiday versus spring and summer is some decisions we’ve made on categories that we're able to chase into or some speed categories where we still think there's an opportunity to ultimately get. The goal here is to drive our value proposition, which is not overpaying for quality. So putting the quality where it makes sense, making sure of the right ticket price and driving right-price sales. Marketing, early days. I made -- I mentioned in my opening comments that if there's a metric that Sabrina and I are staring at and going, "We'd like to see a little bit more of that" is traffic. And there's no need to unnecessarily beat ourselves up over 40% increase in EPS, but we are always looking for the next opportunity. So the marketing piece, and I'm sure people have heard this maybe from other retailers, but as you shift your business model ever so slightly, we're still going to offer value, we're still going to have promotions. That's important particularly at Old Navy and in our outlet business. But as we shift to marketing, what is the acceptable lag effect until that pool of traffic gets replenished so maybe it's a better quality pool of traffic. So Sabrina and I are working with the brand presence. We'll make sure those investments. First of all, it's good quality marketing. In the past, when we have not spent money in marketing, because we weren't happy with it. And our marketing leaders know that if we're happy with the marketing and it makes sense and it's going to drive traffic and it's going to inspire customers, we'll put the money behind it. So I think the Gap will continue to be, I'd say, the focus in the back half, Gap brand, mostly in North America. As Barbara asked earlier, China will continue to be a focus because it takes a long time to build your brand in China. And maybe it's a little smaller but still important to us is Athleta as we're starting to build that brand and put the stores out. After all, a physical store is a manifestation of the marketing investment to create the brand. So back half, we're committed to it. And look, first call in February, we said we'd take it quarter by quarter. But now that we've seen -- and we look at a lot of research besides traffic. We're feeling comfortable about the back half, about some investments in marketing. And the labor piece. That one, I tried to say in the opening call, it's really just some tests we're doing right now in our labor modeling. We made some tough decisions on labor during the heights of the recession in 2008, 2009, and we know that ultimately, our store environment, our store experience is critical. So whether that's the capital investments we're making, the right ones, but also labor investments, I would say that's more predominant inside of Banana Republic and Gap, and more predominant inside big markets. And so you look at the top 10 DMAs, you look at those 2 big brands, and that's where the labor tests and trying to step up our service model is taking place.

[Operator Instructions] Your next question comes from Brian Tunick with JPMorgan. Brian J. Tunick - JP Morgan Chase & Co, Research Division: I guess, Glenn, we know we're still a month away, I guess, from the new Old Navy President starting, but wondering if you can give some of your thoughts of -- how you thought the 2Q numbers looked at that business, and then how you think that brand is positioned today and sort of what's your hopes maybe a year from now of what you and the new President can do for the positioning and also what he brings to the overall company. Glenn K. Murphy: Well, I have -- I have a lot of thoughts on that, but I'm going to keep it short because, obviously, for the company to step up and hire somebody as impressive as Stefan from such a company that we respect like H&M just because we do believe, through multiple meetings with him in the spring before he made the decision he was going to join us, we liked how he was thinking about retail, about product, about winning and what he's done in his past and his global experience. So as I said in the previous call, we're just very excited for him to join us in October. In advance of him joining us, and I'll get back to him in a second, I'm quite pleased with what Nancy Green and Tom Sands have done. You've got to give them credit. A lot of times at retail, when a leader leaves, businesses tend to sort of stay status quo, in some cases even flounder, because leadership changes can be impactful on a brand. And so kudos to them. We might step in to help out as much as I can, but they've really led that business and that team. I'd say the thing that they've been doing is, I think, that they've been really cleaning up and keeping the business simple, because I'm a big fan of taking on new initiatives in the business, and at times, you may take on a little bit too much and Old Navy is cleaning that up. They've gotten very, very focused on 3 initiatives. That's all they talk about. I'm not going to share those on the phone, but just 3 key focuses that whole business had, and that's what they brought. Another thing I will add, I believe our agency and our marketing team, which right now Michelle DeMartini is overseeing for us, she's one of our most senior merchants -- our marketing at Old Navy, which I love the positioning of the brand, we've talked about, but has not changed since I've been here, but the new platform and how to communicate the voice of the brand has really been good. I've been pleased since June. And you've seen their business, and I think that's helping their business quite a bit. I mean, obviously, it starts with product like every other brand. But more than any other brand, I think their marketing has really resonated with their customers, and I've been very happy with that. What's Stefan going to do, it's -- I said I -- in fairness to him, he's had many, many months to think about it, but until he gets here and meets the team and works with them and figures out what he believes strategically, he's going to do matches up with what's -- what the team was able to get done. It's a little too soon to tell. I do know, and I'm -- so just an appropriate forum to share it with you, I do know what his vision is, having talked to him back in may. Obviously, he's away from us till October, but the last time I talked to him, whatever it was, 6 months ago, 4 months ago, I know that he definitely has a vision of what he wants to. So we'll see how that plays out and translates inside of our business. I -- but I want to make sure, one thing that's important to me to make clear. His coming into the business was not driven by the most recent global ambitions we have for the brand. That's a given. I mean, he opened in a number of the countries at H&M. Obviously, they're a global retailer like Gap is, a global brand that is. So that, I think, is icing on the cake. I believe he is going to come in with a very strong perspective and position when it comes to product. That's what he knows, having worked in that business. So that's not taking Old Navy to H&M because he's understand the difference. But I believe he's going to really help us between the design conceptually to the merchandising, to the process, to the cost part, all the way to in-store execution. I think that part of Old Navy he is going to be super strong at, and the global piece will come over time. We only got one store in Japan. I think that'll just be a nice story to talk about in 2, 3, 4 years from now.

Your next question will come from the line of Dorothy Lakner with Caris & Company. Dorothy S. Lakner - Caris & Company, Inc., Research Division: A question for Sabrina. You gave us a lot of detail about how you're looking at gross margin and the various components, particularly on the merchandise margin side, in the second half of the year. And I know you had said after first quarter, don't expect that kind of leverage on rent and occupancy that we saw in the first quarter. And we didn't in second quarter. So my question is how should we look at that component of gross margin in the second half? Sabrina L. Simmons: And are you talking about, Dorothy, the ROD component in particular? Dorothy S. Lakner - Caris & Company, Inc., Research Division: Yes, yes. Sabrina L. Simmons: Yes. Yes. I guess to try and be helpful because we don't guide explicitly to ROD. I did take note, as you mentioned, in the first quarter that, that was an unusually high amount of leverage, and it would be not prudent, in our view, to extrapolate that. Sure enough, the ROD leverage was the same kind of level of comp at plus 4. It was 90 basis points in Q2. There are many variables that we've talked about that quarter-to-quarter could impact ROD, including the timing of our store openings, settlements with landlords, when amendments come through. So there's a lot of variables. But what I would say is the Q2 relationship to that level of comp is certainly a more appropriate level than we saw in Q1. So that would be a good kind of starting point to think about it for the rest of the year.

Your next question comes from Randy Konik with Jefferies & Company. Randal J. Konik - Jefferies & Company, Inc., Research Division: Glenn, obviously, your tone is very upbeat. What did you think you have to -- where you could have improved during the next quarter to get to that next level for the company? And it looks like obviously, you're going to start to grow again here. So it feels like a more sustainable basis. Where do you think the organization at this size can grow if we think about a normalized growth rate? And then lastly, do you -- what's your long-term kind of vision for Athleta? And do you think we're going to get some more concrete long-term vision on what you think -- how big you think that organization can be at your analyst meeting in the fall? Glenn K. Murphy: Okay, let me try to deal with that one at a time. I'd say the first one, Randy, is something I -- to be repetitive, that's what I said to John, I think the traffic number was a number -- and I'm not here to rank necessarily all the metrics in order. Let's say you know the company, and a lot of people on the phone do. We're never really happy. And I think that our team has definitely embraced that sentiment. If there's a -- this is a quarter where we celebrate a few small wins. And we had some small wins, but the team executed well. We're particularly pleased, as I said in my opening comments, coming off last year where we were not at all happy with the business. Even though there was some circumstances outside of our control, we just weren't happy. Traffic is a number that we would prefer to not see negative. It's a number that we do look at holistically between our specialty business, our outlet business and our online business. If you look at it holistically, it's probably a different picture. But at the end of the day, our store traffic, being negative in the quarter, is something that all of our teams, our store leaders, our brand presidents all know that in order to be happy as a business, we'd like to see all our metrics in positive territory with the with the exception of AUC. Such is the way we have to start looking at the business. And -- but we also know that businesses' comp is an outcome. What -- how you get to comp is by taking certain strategies and really trying to take them deep. So this is just hypothetical, but maybe one brand is working more on AT, one brand is working more on units per transaction, one brand maybe working more on AUR. They have to pick the metric that supports their overall strategies. And as long as the key metrics they're trying to move in a positive direction to get to an outcome, like comp, is the framework of their performance, is meeting what they tell us they're going to do, then Sabrina and I are happy. But yes, we're always looking for -- knowing this business as well as I do now, coming from obviously different industries, what I do know as a metric that is going very well for you for a period of time, you'd be foolish to count on it for a number of years. So you always have to make sure there's other metrics that could get to the outcome of comp, that you're putting plans in place to strengthen them. As one of the outcomes, we're trying to get to your second question, can we grow long term. It's obviously our goal. But when I think of growth, one thing I do want to put forward only because it's a number I asked Katrina for the other day, is in Q2 2011, we had 163 more stores than we do today. By that, I mean we closed 163 stores between Q2 '11 and Q2 '12. When you think of growth, I always think comp is a metric that everybody should look at, but I'm all about top line sales. So that's a number we've said publicly that we're closer to the end of our real estate strategy, which involves closing down square footage at a time necessary, consolidation from Kids and baby [indiscernible] Gap into Adult, and also closing stores. We've done more. We have more to do, but we've done more in the last 3 years. We're closer to the end than the beginning. That will certainly help top line growth. And that's a number that's important to me. Comp plus spread equals total sales. While I'm not -- I have huge appreciation for comp, I have always been about top line sales. So I think growth, I think, will look more promising in the future when we get to the end of executing our real estate strategy. And lastly, Athleta, you heard me pause on my opening comments. I mean, 11 stores in one quarter to a team that 18 months ago didn't have a store, it's pretty impressive when you think about it. I mean, some people, obviously, open 150, 200 stores in a quarter, but for that team to come where they've come, and I've been to a lot of real estate to hear the comments from customers in particular who wanted a physical manifestation of that brand, I'm very proud of that team in Petaluma led by Scott Key. They've done a great job. And this is early days. Well, I'd to tell you in the spring about what our plans for 2013, but we will open our 25 stores in 2012. We feel good about it right now. Great customer response. And I think that they think, and I'm more willing to support them than not, although it's early days, they feel they've got a bit of a tiger by the tail. And let's them feel that way. Nothing wrong with a little bit of confidence from our latest brand. We'll have more to talk about from Athleta in our meetings in the spring.

Your next question will come from the line of Evren Kopelman with Wells Fargo Securities. Evren Dogan Kopelman - Wells Fargo Securities, LLC, Research Division: I wanted to ask about the Gap outlet channel. Maybe we see, I think, a lot of the time -- more of the time the products and the full-price stores and the marketing. Maybe talk about the products and marketing initiatives for the outlet stores. And how's store traffic there? Is it also negative? And how many stores are you at now? And where do you expect the growth there to be? Glenn K. Murphy: Thanks for asking about outlet because that's -- I can talk about that business again. And like I said about the Athleta, we're very pleased and proud of our 2 leaders, Ann Doyle and Andi Owen, who run our 2 factory store outlet businesses. Is the traffic better there than in a specialty store? The answer is yes. So that's why I said earlier that if you take specialty plus outlet, plus online and bring that together as one traffic number, our traffic is actually not that bad. But we have to look at it at channel by channel by channel. And our outlet channel is definitely, the traffic is better. So that's good. I think that's a little bit about the -- just the overall traffic that is in that genre of real estate. But the other thing is our team -- I'm glad you mentioned marketing. Our team is actually -- again, for a team that had no marketing when I started here and don't have a big marketing budget, but they're very, very scrappy and smart about how they spend their marketing, and they have great customer connections, whether that's through emails or through some of the partnerships they've done. So I think the marketing there, which is not a big driver of this increase in our SG&A, but they are getting a little bit more marketing than they have in the past, so they're making good use of it. And what we don't talk about, and that's -- I think everybody on this -- on the phone always wants to focus on our specialty business, particularly Gap, which I understand. But the product improvement at the -- in the outlet channel has been equal, at a minimum equal if not, some feel, they argue, better. But the step-up in the product and the investments, what they've done there, has been great. Very, very impressed. I've been in those stores a lot. I'll be out on Friday in some of them. So those merchant teams, those marketing teams under that leadership of a channel which we feel we have a competitive advantage in, we would -- we will continue to drive globally, is nothing short of impressive. So that's -- it's good to see. And we have high expectations for them going forward, but that's -- they're off also to a very good start so far this year.

Your next question will come from the line of Adrienne Tennant with Janney Capital Markets. Adrienne Tennant - Janney Montgomery Scott LLC, Research Division: Glenn, my question is it sounds like you're happy with the Old Navy television advertising. And I was wondering if there are any changes to the fall season marketing plan for Old Navy and if you'll be adding Gap TV back. And then, Sabrina, just a clarifying question. On your operating expense guidance, was that year-over-year or was that by percentage of sales? Glenn K. Murphy: On Old Navy, as I -- as far as I know, that -- there's going to be maybe one last week of television in the third quarter. But what I'm happy about is that as you put this new platform together, back -- what has it been now, just less than a year, I'm really liking the new creative. So people, which is our core customer, are responding positively to what they've seen over the last couple of months, which I think has really helped our traffic profile. And let's see how -- what transpires in the fall and holiday. I think that the messaging, how it resonates, how well the creative is showing the product, goes back to what I said earlier. If you're making an investment in product, it has to have a follow-up investment in store space, in service model. And ultimately, marketing has to show the investments you're making in your product. And I think Old Navy team has done a really good job of that, as well as our agency. So maybe one last week, but I think it's better quality of marketing that we're putting out there. And I just saw the holiday and the Thanksgiving ideas the team has, and I actually feel really good about it. It's a lot of work still to be done, but they've put forward not only good Q3 ideas, but the early ideas behind Q4 certainly motivate me to make sure that their spend stays, at a minimum, equal to last year. But I think that's good. And I think you'll... Sabrina L. Simmons: And to clarify, Adrienne, thanks for asking the question, what we meant is in the second quarter, operating expenses were up $85 million. That translates to about 9% increase over LY. So we mean that in Q3 and Q4, you'd expect at least a 9% increase in operating expenses over last year's quarters. Adrienne Tennant - Janney Montgomery Scott LLC, Research Division: Okay, perfect. And then Gap TV? Glenn K. Murphy: No plans right now. I think one thing you should look for this fall is our new campaign just came out as we did shoot some film of the new Icons redefined campaign, which supports Be Bright. So it's the fall campaign for the Be Bright platform. And we're going to be in cinema with that and definitely on social media. And I think it's some of the better work we've also done. So is there television in Gap's future? Maybe. I mean, we never said we'll never do it. But at the same time, right now, we're very happy with the mediums we're using. We're being very effective. And digital's been a great medium for us. I think our new marketing team, our team here in San Francisco, our teams around the world and our team in -- teams in New York really have embraced digital. And if you can great content and use digital, I think that, that can be very effective, too. So if you do get a chance in the next week or so to see some of the film that was done and the content, it is really -- it's really well done. And it supports the brand, and I think it resonates very strongly. And could that lead to television? Only time will tell.

Your next question will come from the line of Betty Chen with Wedbush Morgan Securities. Betty Y. Chen - Wedbush Securities Inc., Research Division: Glenn, I was hoping you can talk a little bit more about the core product categories for each of the brands. I know that you had mentioned that the team is certainly focusing behind them in terms of style and fit and many of the other categories to make sure that the consumers continue to really be compelled to buy them at the right price. So I was curious on so far, now that we've got 2 quarters down, how do you think about -- how is the team executing in those core categories in your opinion? And how is the team able to get earlier reads, as you had mentioned, I think, earlier in the call? What are some of the message you're using? And then lastly, I was just thinking in terms of the International business, certainly, we're going after many of the markets with different models. Now that we're -- still early on, but now that we're in some of these markets, have your thinking in terms of how you're going into these markets varied at all? And can we look for some changes in the future? Glenn K. Murphy: Okay. It seems to be the day of 3 questions. So on the first one, what I do feel good about is that the stepped up performance in our top line sales, for the most part, has been driven by the categories we identified to make some reinvestments in. I think I was giving my theory on comp earlier. The same thing applies to product. Comp is an outcome. If you're -- if you have a 4% comp, like we did in the second quarter across our multiple brands, that was a 7% in Gap, a 7% in Banana Republic, a 3% at Old Navy, let's just take Banana Republic for now. So you had a 7% comp. To get to that, the team has to plan certain categories they really believe and want to invest with all the reasons I gave earlier to try to get to 10% comp in that business, a 12% comp. Because if you try to get everything at a 7%, you're going to make some mistakes and the outcome will not be a 7%. So what I do like about the business so far is where they decided to stand behind what they believed in. This is not new. We've always had categories we want to have a competitive advantage in, we want to be dominant in our competitive set and want, therefore, to find product assets. Those have not totally changed since I've been here. We've just been more focused on them. And this next slide was putting some money behind it, and I think that's really worked out. And I think the comp numbers are being driven in a large way by those categories we believe in. Early reads, all of our stores, we don't have a model like some other businesses. But the early reads where they help us but we're doing it through social media by getting us some early reads on products that's not quite bought, which has been a helpful tool to us, or finding a way as product goes on our online site earlier and goes on our store, get early reads we could chase in, that's the most effective form of speed we can do. Early read, I [indiscernible] go through again, by crowd sourcing, let's call it for lack of a better word, and getting some feedback to help us better understand if that's the right product, whether it's a pattern, a print, a color, a style. But really, when you get in season, that's when I get excited. You get an early read online and read quickly through the fabric platforming we've done to be able to chase back in a very short period of time back in the goods that are going to be in our store more than 6 weeks. That's a process that we've been talking about in these calls for a number of years. We slowed speed down last year and chased down because with cotton being so unpredictable, we didn't want to have a -- change our business model too aggressively in 2011. In '12 now, we pushed our teams, and they've absolutely embraced the fact that there's a way to get some early reads, albeit probably not used in our past, and get to react more quickly. So faster pipeline, a speed pipeline and a way to get feedback from either a form of crowd sourcing or immediately through an online channel and then reacting to it much faster than we used to. That's in the early days, but it's helping us. The last part, the International formats we use, the only thing we have ever said, and then -- I don't think we ever changed any market we went corporate in, and we wouldn't change any market we've gone franchise in. It's the only thing we've ever said, is as we look forward, are there markets we consider joint venture. We don't want to take that off the table. That may be an option. Look at a markets like India. If we were to consider that at some point in the future, the only way to go with India right now is through a joint venture. So we're not against that if our franchisees wanted to turn it into a joint venture, if there's a franchise opportunity to go to corporate. We're not looking at those today. But I would say as our business continues to evolve and we look at our performance, we don't want to be completely married to the format we have. But there isn't a single decision we've made so far to go franchise in a country that we would ever change. I think every one of those was a good decision, and there isn't a single corporate country we went into -- we are in today we'd ever turn to franchise. So for the most part, what we've done so far is we're going to stick with. But let's look at the next 2, 3, 4 years and see if there's any change to the franchise relationships we have. I doubt it. But I'm just sort of saying that will be the only way we change any kind of relationship that we currently have in a market.

Your next question will come from the line of Paul Lejuez with Nomura Securities. Paul Lejuez - Nomura Securities Co. Ltd., Research Division: Glenn, you talked about traffic being down. Can you just clarify, was traffic down at each brand? And regardless of the answer there, can you maybe talk about what the comp drivers were at each of the brands, whether it be conversion, AUR, UPT, and how that might be likely to change as we move into the second half? Glenn K. Murphy: I think you answered your first question rightly because I can't give it out by brand. We were just sort of -- just given you a "total across the business" number. Sabrina can shed some light definitely on all the different metrics. I mean, I have the metrics, and I -- what I can say before I hand it to her is to repeat something I said earlier, which is important, that our teams definitely realize that you have to be at a -- look a little deeper into your -- into their business and say "Where do I want to drive something across some of the different metrics you mentioned," Paul, "to get to the right outcome?" But at the same time, they're always looking in the rearview mirror and going, "What are some other metrics" they may want to strengthen because something could happen to UPT that's not of our making, whether it's the economy or macro events. So they're always trying to find a way to make sure that the delta between our highest-performing metric and our worst-performing metric is not too wide. In our past, that's been a problem we had. so I think here, they're trying to make sure that they tighten that up. I'll let Sabrina give you some color on the metrics. Sabrina L. Simmons: Yes, and just a little bit more color on traffic because Glenn has been talking about that a bit, I mean, as he mentioned Gap outlet in particular. But the outlet and Old Navy relative to the other divisions, I think it's fair to say that value segment has had better traffic than the specialty segment, broadly speaking, on traffic. With regard to the other comp lever metrics, again, we don't put [ph] division by division, but it's generally true that average unit retail being up and conversion being up are the 2 strongest metrics that drove the performance across the quarter.

Your final question for today will come from the line of Lorraine Hutchinson with Bank of America Merrill Lynch. Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division: I just wanted to follow up on the operating margin guidance of 11%. You're running nicely above that year-to-date. I understand there are some investments to continue to be made. But what are the drivers that would cause the operating margin to fall below 11% to get to your full year target in the back half? Sabrina L. Simmons: As you know, Lorraine, I think there's just a lot of scenarios we run, and I think we landed on about 11% because of the architecture of how we're looking at how the year will unfold. We obviously have said it is our primary objective to drive consistent top line growth with healthy merchandise margins. So we definitely want to see that nice expansion. Offsetting some of that, we tried to be very clear that we expect to deleverage on operating expenses. So between that combination, it's how we get to about 11%. What we're pleased with is we started the year with about 10% guidance, and it's obviously another objective of ours to expand our operating margin back over time. So this is a nice step back, standing here in Q2, that we feel comfortable bringing it up a whole point. Katrina O'Connell: I'd just like to thank everyone for joining 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.

Ladies and gentlemen, thank you for your participation in today's Gap Inc. Second Quarter 2012 Conference Call. You may now disconnect.