The Gap, Inc. (NYSE:GPS)
2013 Investor Meeting
April 17, 2013 11:30 am ET
Glenn K. Murphy - Chairman and Chief Executive Officer
Sabrina L. Simmons - Chief Financial Officer, Principal Accounting Officer and Executive Vice President of Finance
Stephen Sunnucks - Global President of Gap Brand
Jack Calhoun - Global President of Banana Republic
Stefan Larsson - Global President of Old Navy
Arthur Peck - President of Growth, Innovation & Digital
Oliver Chen - Citigroup Inc, Research Division
Adrienne Tennant - Janney Montgomery Scott LLC, Research Division
Matthew McClintock - Barclays Capital, Research Division
Roxanne Meyer - UBS Investment Bank, Research Division
Dorothy S. Lakner - Caris & Company, Inc., Research Division
Richard Ellis Jaffe - Stifel, Nicolaus & Co., Inc., Research Division
Stephanie S. Wissink - Piper Jaffray Companies, Research Division
Irwin Bernard Boruchow - Sterne Agee & Leach Inc., Research Division
John D. Morris - BMO Capital Markets U.S.
Good morning, everyone. It's so nice to see all the faces I talk to often. Welcome to Gap Inc.'s 2013 Investor Meeting. Glad you could make the trip, and you brought great weather for all of us, so we appreciate that as well. The objective of today's meeting is to provide insight into our new global brand structure and our associate business strategies while giving you a chance to hear some from some of the key members of our management team.
Before we begin, I just want to remind everyone that today's presentation and the accompanying press release does contain some forward-looking statements. For information on factors that could cause our actual results to differ from the forward-looking statements, as well as any reconciliation of measures we're required to reconcile to GAAP financial measures, please refer to today's press release, which is available on gapinc.com, as well as our most recent Annual Report on Form 10-K.
This morning, you'll first hear from Gap Inc.'s Chairman and CEO, Glenn Murphy; and then Sabrina Simmons, EVP and Chief Financial Officer. In addition to hearing from Glenn and Sabrina, you'll also hear from our global brand presidents, which include Steve Sunnucks, Jack Calhoun and Stefan Larsson. You'll also hear from Art Peck, President of GID. You'll have an opportunity to ask questions after each of the brand presentations, and Glenn and Sabrina will take questions at the end. After the formal presentations and Q&A, we will have lunch in the lobby, and we encourage you to visit the product areas. The brand presidents will be available for Q&A for about 30 minutes following. As you guys have lunch, please feel free to join them.
And now I'd like to go over a few other details. The presentations today are being webcast, and an archive of the presentations will be available on gapinc.com. And in addition, Sabrina's full presentation will be available for download on gapinc.com following the meeting. We'll have a 15-minute break around 10:15, and if you need to use the restrooms, they are to the right of the reception desk. And since time is limited, when we do, do Q&A, we're going to ask that you limit your questions to one per presenter.
And now I'm pleased to hand it over to Gap Inc.'s Chairman and CEO, Glenn Murphy.
Glenn K. Murphy
Thank you. Thank you. Good morning, everybody. I want to thank you for coming, especially those who may have come from Boston. Our hearts and prayers are out to everybody who either knows somebody or was affected by the events of a few days ago.
I'm here to do 3 things today. But before I do that, just a public service announcement. Anybody who didn't get a chance to go to one of our stores, if you came in yesterday or are not leaving until later today, we have 6 within walking distance. That's not too bad. It is our hometown, after all. And -- but if you can only get to 3, you can get to our 3 flagship stores, the Gap store, the Banana Republic at Grant and get to the Old Navy 4th & Market. If you can only get to one store, can you get to the Old Navy at 4th & Market? Because that's our latest look in terms of design, fixturing, merchandising, visuals, and it's our new signature store that's in Chicago, here, that we just opened up in Japan, with more to come. So if you get a chance to get a sense of where the brand is being taken by Stefan and his team.
Okay. So I've got 3 things I want to talk about today, and I'm going to talk to you about an evolution of The Gap Inc. strategy. I'm going to talk about market share, which we don't talk about a lot, but I think it's very important to set the stage about how the company is looking at market share going forward, both domestically and internationally. And last thing I want to talk to you about are 2 very important levers the business has to drive more operating leverage. So I'm going to try do this all on time and try to avoid stealing people's thunder, which I'm told from the presenter coming up after me I have a lot of. So I'm going to try to avoid doing that as best as I can.
At the bottom of this slide are 10 of the largest cities in which Gap Inc. operates, and why that's important is that more and more, as we look at our real estate, our strategy in every one of these countries, it's so much dominated by cities. And the city, because they're interconnected with
are moving into cities, therefore, through urbanization. We have to be great in the cities. The only 2 big significant cities missing on this list, which Steve may talk about, is São Paulo. We just opened in -- we're open in Brazil this year. And he may talk about India, which would be Delhi, which would be the other missing city. Why the city is important to us is because the business has had this strong position for the last 24 months. We at Gap Inc. have every intent and are putting together our plans to be the world's favorite for American style.
We believe, relative to our global competitors, that this is really a competitive advantage. It's a point of differentiation, and when we think of customers around the world, what resonates with them when they look for their cultural cues and their fashion cues is American style. So it's very important that the team that speaks to you today gives you the strategies and the plans they have to make sure we can dominate on this front and be the world's favorite for American style.
At the bottom of this, internally we talk about a lot, but not externally, is this business has always have been about more than just selling clothes, whether that's on corporate social responsibility, whether that's women in underdeveloped countries, whether that's youth, whether that's community. And as an investor, what does that mean to you? Obviously, it's a very big push inside the company to make sure that we're not just seen as a business that is commercially successful. How we go about our business is very important to Gap Inc. It was something our founders passed down to us and something we live and breathe every single day.
As an investor, what does that mean to you? We have a very engaged employee base. People want to work here. More than just the beautiful view from San Francisco, because we have offices all over the world, they want to work for a company that cares about more than just selling clothes. Secondly, the generation that's coming in place now within our sweet spot, and more importantly, the generation to come, this is very important to them about how you do business and how you conduct yourselves. So this is a cornerstone and a foundational part of what Gap Inc. stands for.
Now 3 things I want to talk to you about. One, the first, the evolution of the business and how we've been evolving. So you saw this in 2007. Our plan back then was to look at our multiple brands, 3, into multiple channels, into multiple geographies. This was a very siloed organization in 2007, and I'm glad it was, because we were able to do, from a presidents perspective -- if you look at Gap brand only, in 2007, there were 6 presidents on one brand. So the brand was being pulled and twisted in different directions. But it was important back then, because in order to get our global outlet business established, we needed leadership to make that happen, to build the infrastructure, to put the team in place. In order for online, which operated in one country, to go global, we needed a focus, and we needed one single person to make that happen. In order the franchise to go from only 2 countries back then to 40-plus countries now, we needed a singular person to make that happen. And that was the right structure for the time.
And you could see, from a multiple geography perspective, we were an American company. The word "global" may have come out in 2007. We were not a global organization at all. We're an American-centric business. The structure, however, from an operating model, was not efficient. It was slow and it was complicated, but it was right for the time.
Now if you look into 2012, the changes the business made, and this is important for our investors, we've now gone to a single person in charge of every single channel. Now we've moved at a pace that's appropriate to us. Some brands, some businesses make changes all in 12 months. That could be their approach. Our approach has been, as the milestones have been achieved and as we've had proof points, we've changed our operating model. What were the proof points in outlet? What were the proof points in our online business? What were the proof points in our franchise business that allowed us, 6 months ago, to make this change, to have a single global brand leader representing our specialty business around the world, outlet around the world, online and franchise? What do you get out of this? You get speed. What do you get out of this is a single person who decides where do they want to put their investment, in capital or SG&A, to drive the business. They've now been handed multiple levers to drive the business forward to win, to gain market share. For the brand to be represented not consistently around the world, but with continuity. And this was a big change, because in 2007, what the business we had was channel-led and was channel-centric, and the business going forward, starting 2012, is brand first, channel second. It's all about the brand. But we had to go on this journey to get to this place right now.
So now we have 3 people, led by Stephen, Stefan and Jack. And as they say in retail, "one throat to choke." That's a retail expression. Maybe it's only one in Canada, but it's one I've heard of.
And I'll get to some of the other parts later on, but that's big change for us to have the one team responsible for all of the brand activity around the world.
Now this is the progress we've made to get us to this milestone and to the change in structure. If you look at the growth that's happened, this is country growth in each one of our brands. So you start with that Gap and what the progress they have made, Old Navy, Banana Republic, our outlet business and our online business. So what's important about this is the company, in that 5-year period, built the infrastructure. The infrastructure is in place now. So if somebody wants to go into another country, if one of the brands, the infrastructure is in place to go global in outlet, global online, franchise. It's all in place. It's put there so they can now move at a great speed and with efficiency. All of that cost to get this set up for the new structure was buried into the company's P&L from 2008 to 2012. The other most important thing is that talent is now in place.
We didn't have global talent in 2007. We had some. We didn't have anywhere near the global talent we have today. We're not talking a set of people who come from countries or markets outside of the United States. People with global experience, people who have operated in multiple countries, people who appreciate, while you have a brand, and we have 3 global brands that have an American aesthetic and are American brands, you need to appreciate the differences and the nuances in other countries around the world. We brought people in. We had people already, we've brought more people in. So now you have the infrastructure in place, the talent. We took a lot of Americans who worked in San Francisco and New York, and we asked them to move to Japan, move to Europe, go to China. A lot of them are still there. Learn those markets, because when you come back here, if that's the intent of your career, you will serve us much better by looking at our business through a global lens.
So this is important, because if you think of the business up until 2012, Sabrina and myself carried a big load inside the company. We like to say internally that we led the business and we ran it simultaneously. But the changes that have been made now is to spread that responsibility out. And now you have 4 presidents, but definitely, the 3 global people responsible, we're spreading that responsibility out. Sabrina and I are still going to be still involved. We're still going to lead the business, set the strategy, have clear expectations for the brands. But this is a change in how the business is going to operate going forward.
So last thing I want to update you on this is this is how we're looking at the business today. So you have the 3 global businesses on the left-hand side that I've talked about, and you're going to hear today from those 3 presidents what are their plans. Traditionally, in this meeting, I would talk to you about Old Navy, Gap, Banana Republic. While that's painful for me not to do that today, we're going to let the 3 of them come up and speak to you about that because, as I said, that infrastructure is set, and they now control the direction, the pace and the strategic execution. We're going to hold them accountable for their plan.
Two things I want to talk about. On the right-hand side, we have what we're calling developing brands, incubation brands, starting with the Athleta business. That's a difference, and both of those businesses sit on Gap Inc., which offers, and always has offered, scale, leverage and expertise. But if you think of Athleta, Athleta was a catalog business. It was a catalog business when Art in his old role, who you'll hear from later, and myself spent time looking at potential acquisitions. When Athleta came forward, of course, we liked it because it had a brand. It was a different category than we were into and had a great team when it came to product and marketing and what that brand could stand for. However, there was a line that it hit and a wall that it hit, and the wall that it hit plays to our strengths.
What did Athleta need? Athleta needed cash. We have cash. Athleta needed to be on an e-commerce platform. It's one of our core competencies. Athleta needed to have stores. It's one of our core competencies. Athleta needed to have a supply chain. That's one of our core competencies. Athleta needed to have some injection of talent. It's one of our core competencies. So we looked at that business and what they could do on their own. Although we love the business and love the brand and love the potential to gain market share we didn't have today, its positioning was great, but it needed a lot of support to get to what it truly could become. That's where Gap Inc. comes in. Athleta, one day, we may stand here in front of you, either here or New York, Athleta could go from the developing side to the global side. And [indiscernible] a completely different set of expertise and scale and leverage. But that's the first one we bought.
The other 2 businesses, in Piperlime and Intermix. As a starting point, one has what the other one wants. Piperlime is a business that was founded in e-commerce and on the web and through social. It has one store. It needs stores. Intermix was founded on stores through great marketing, catalog, phenomenal work from the team that actually curates it. It's weak when it comes to e-commerce. And I'm sure Adrienne, who's here today, just went through the list in her mind I talked about in Athleta, it all fits for her: cash, supply chain, real estate, commerce, talent.
So that's how we're looking at the business. The most important part of this chart to me, though, is at the bottom. We've never really talked about, what is Gap Inc.? Is it a holding company? Do we just count the money that comes from the brands? And I think that, up until last year, we really viewed ourselves as, again, as leading the business and running it to some degree, but providing services to -- sorry, less than services, providing great leverage in key areas: supply chain, IT, real estate. But now Gap Inc. has had to change itself, and this is the work that's going on now for Gap Inc. to truly become a world-class service and innovation center. Art Peck's going to come up later on to talk to you about the [indiscernible] business, and what can we do from an innovation perspective to bring and basically serve up on a platter to the brands. Running these businesses is all-consuming.
If you run any of these brands, just doing the product, the marketing, the stores, holding on to talent, competing to win is all-consuming. The new Gap Inc. is the service center, and it's bringing innovation to these brands. Art will talk to you about omni-channel today, just as one example of what Gap Inc. can bring to the brands. We challenged ourselves, for those of us who are in The Gap Inc., and I've sort of got a foot in both camps. But on the one side of the camp, on The Gap Inc. side, what are we doing to make sure we're adding value every single day? We're not a bureaucracy. We're not a company that just holds the brands accountable. That's one dimension of it. How do we bring services to them so that they can be successful? Because we can bring the expertise, we can do it, and we can serve it up to them. That's a big change inside the organization. You're going to hear only one part from Art today. I'm going to talk to you about a couple other areas in which Gap Inc. can do work on behalf of the brands to bring them opportunities for them to win in their markets against their competitors. That's strategy. Let's talk market share.
So this business in which we operate is a $1.4 trillion business. It's a big business, second biggest consumer market in the world after food. Big, big business. This is how it splits between the North American business, the $300 billion, and the rest of the world of $1.1 trillion. Market share. Let's look at it 2 ways.
There's the North American market share, which is our home market, which we're established in, and then there's the rest of the world. In 2012, we ended with a 3.9% share of that $300 billion, approximately. And we gained 20 basis points in 2012 of market share. These are just to show you directionally. Do we believe we can get to 4.5%? Absolutely. This is a very mature market. There's one mall being built in all of the U.S. in 2013, one mall. In 1990, we were the kings of square footage. We invented -- us and Starbucks and McDonald's invented that. Every corner, every square footage, say yes. Real estate presentation, yes. Where is it? I don't care, yes. How big is it? Doesn't matter, we'll take it. In the last decade, a lot of people took our playbook out and did the exact same thing. Lot more square footage. Landlords were drunk, and a lot of square footage went into North America. Those days are over. That's over. You might see some lifestyle malls turn to power centers. There's some mix going on, new square footage, maybe a few outlet centers. That's it. New entrants, totally different business, too.
There's a window here for us where we don't see a lot, if any, new entrants. There'll be the odd person that'll come in, says, "I have 5 stores and I'm going to have 1,000." Don't believe that. So it's difficult now because the square footage is limited. There's a window for us, and I'm going to talk in a second how for us to get at that market share. In the rest of the world, we're at 25 basis points, and we have markets where we have a very nice market share: Japan. We know we can do it internationally. We have some franchise markets that Steve's led for us. We know we can get to 50 basis points. We're on the path to there right now. And we have the plans I'll touch on briefly, the brand presence will truly go through how we see the rest of the world opportunity unfolding for us going forward.
Second thing, so let's -- sorry, 2 things on market share. First way to get at it is because of the diverse portfolio the company has. We cover now from value all the way over to luxury. This is how we're looking at the business. Every one of these brands has to have their aesthetic, what they stand for, how they're going to win. And we know this is nothing new. It's a motherhood statement. It's a mix-and-match world. Nobody wants to wear uniform. We now can cover this total $300 billion from one end to other with still opportunities. You see the delta between Piperlime and Intermix. But if you go from value on one side to the other, how does each one of these businesses distinguish themselves, in the marketplace but also from one another?
There's going to be a little cannibalization. We get asked that question every now and then. It's a $300 billion market. We have just under a 4% share. It's super-fragmented. What you saw today in the lobby, I hope, is you get a chance to see this is why Old Navy is different than Gap, why Gap is different from BR. Athleta is a completely different category. Why Piperlime is different from Intermix. You cover this continuum from $0 to $300 billion. It's an opportunity for us on the market share front in North America.
Secondly, at the very top, which, again, a year ago, I would have talked to you about the product and talk to you about marketing, but the presidents are going to talk to you about that today: compelling product marketing, consistent product. Not consistent being the same, consistently great. That's why a lot of people you met today, that is their job. We know what we stand for every single season: consistently great product. We want to be the go-to for that customer, the go-to store, because that starts where trust is such an important word in our business. Do you trust the brand? Is it reliable? Of course, you don't want the same color of denim you had last season. Do you trust it to be relevant, to know exactly what you want? They're going to talk about that today and compelling marketing.
We have the money. I mean, we own brands. We don't own stores. This could be a presentation from somebody else, they have no marketing. That is their strategy. Our strategy is at the end of the day, a brand will trump a store, and we have the money. The money's just got to be used properly and invested properly and be provocative in order to be successful. Today, for us to win, we've got to win on 2 dimensions. I was telling somebody in the lobby, 10 years ago, the top is all you needed. Great product, great product, great marketing, and you're a winner. You can't win on that today. You might survive. You're not going to win.
What Art's going to talk to you about is how we're going 2 dimensions. We need integrated customer experience. Integrated, one experience. One brand, one experience, whether that's online, whether that's offline. Whatever we can do to satisfy customer needs, because it's our belief the customer today is running a little ahead of us. Traditionally, retailers -- I've been doing this for 25 years, we've always brought ideas for customers when they weren't ready. Building a grocery store of 150,000 square feet seemed like a brilliant idea. Nobody wanted that. It worked for a while. It's a dinosaur now. The customer in our business is running ahead of us, and this is the work under the innovation group that Art is leading that is going to be bringing the ideas and the services to the brand presidents so we can win on 2 dimensions. That's how we're going to win in this business.
Global runway, not going to spend too much time. Obviously, we have a significant runway in the business. I'm just going to -- this is just a flash shoot [ph] , but from one end of China, China is a big opportunity for Gap. We'll have over 80 stores by the end of this year, closer to 85, of which 10 will be outlet. And that's just one brand. We love the Chinese market. When we first got into it, it was one step forward, 2 steps back. That's -- we used to just say to ourselves, "That's China." One step forward, one step back. Now we're taking 2 steps forward, one step back. We're really believing we understand the market. We have a great team in Shanghai, a combination of local people who get it, who know the consumer, who know the market, who know the nuances, and people from either this office or New York. That combination, that team, is really doing great work for us. One brand only, this is where they are to their potential. Then you have the international businesses. Steve's only 50% of the way to his potential. Excluding China, excluding outlet, excluding online, Gap's specialty is only 50% of the way there. You see BR. Jack's -- he'll talk to you about -- Jack's been in the shadow of Gap. He'd go to franchisees, it used to be we pitch Gap first, and by the way, could you take a couple Banana Republic? Banana Republic in those markets is as unique as Gap, if not more unique. There's nothing like Banana Republic.
When I travel to these markets, there's nothing like Banana Republic, and Jack and Julie and Simon keep doing versatile work, the new work, which can easily be applied, because there's more in common between these people in big cities than they are in the same country between different cities. There's a lot in common when you travel. Huge opportunities. Stefan will talk to you about we did, I think, 8 stores so far this quarter in Japan. Old Navy, look out.
We'll see. Well, Stefan will talk to you about that. Big opportunity. Still not at 50% in outlet. We're just waiting for more outlet centers to be built. We believe this is still a huge channel globally and online. Early days. It's big here, with more to come under the brand presidents with Art's support. But internationally, big, big opportunity. So that's the market share opportunity globally.
Two more things, and I'll let you go. This is the case for higher operating leverage. And there's 2 points I'm going to make today. Art has omni-channel he's going to speak to you about and a few other components under innovation. This is what Gap Inc. can do. Gap Inc. can work on one big opportunity called "seamless inventory." Today, we have pools of inventory trapped around the world. It first gets trapped in a country. So Japan inventory, when the PO gets cut and goes to a vendor and it goes to Japan, it's Japan's inventory. It's trapped in Japan. Then it goes to stores, and it's trapped in 150 stores.
We're now going to unlock the power of our inventory where any unit that leaves a vendor should go to where that unit could be maximized the most. It starts with having a global assortment. Old Navy, which is the last -- it's kind of like we were holding Old Navy back. Sometimes people wonder, why would Old Navy not have gone internationally faster? Why is it only in Japan today? Because Gap was tangled, and to be quite frank, a bit of a mess. Because too many people, the 6 people I mentioned, in 2007 had say. It was a time we had our own design teams in other countries. So we wanted to see the path that the Gap team could look at to untangle that. Once we got clarity on it, then we started moving on Old Navy. A global assortment -- Old Navy is global assortment. Outlet's a global assortment. Gap will be a global assortment. BR is pretty much a global assortment with some changes. It starts at that, goes to universal fit. It's a big change for us. Old Navy is a universal fit. Outlet's a universal fit. Steve's looking at his business at Gap. Jack is doing the same thing. It's a sizing game, not a fit game. It's a sizing game. Now start picturing a unit that is from a global assortment, because it's global local first. The regional people still have to get the items that are right. Certain trends are stronger in Japan and in Europe and in China than they are in the U.S. What are those trends, because local people know what they are, but it's one global line. It's a universal fit. Regional distribution centers. We have one in Europe today that's all set to go. We're going to have one in Hong Kong all set to go. And then lastly, Art will talk a little bit about this in country AUR maximization. I'll steal, Art, sorry, 20 seconds of thunder. Art will talk today about ship-from-store and ship-from-DC. Units trapped in a store, remember that. So now we have stores where you can ship an -- you can ship a unit from a store to satisfy an online customer. That's going to become seamless.
Now the inventory can go anywhere. Now the inventory is untrapped. It starts with being untrapped by country. Because when it leaves the vendor, it will go to the country where we can maximize our sales, our growth and our AUR. Then the next step is inside of a country, you have to maximize that profitability. This is such a huge unlock for us. It'll take us a number of years. It's there to be done. It's not overly -- it's not rocket science. It's there to be done.
Second one is responsive supply chain. This is all about speed. You've got to move in this business. You've got to move. You've got to move. You've got to move. We've been known to be a little tardy. So first thing we did was we took our big core pipeline, we cut it down by 1/3. Now we're looking at fabric platforming everywhere. Fabric platforming, not hundreds of fabrics, the right amount of fabrics, because they can be washed and treated in so many different ways. Fabric platforming is a big change that's coming in the business, and then you get the vendor-managed inventory, which we're doing already. Then you get to Rapid Response. So vendor-managed inventory is a style that's around 52 weeks. It's a style that's 52 weeks, the fabric is platformed, the vendor sits on 6 weeks of finished goods, you got 2 weeks in the DC, you got 2 weeks in a store, done. It's a continuous cycle. It's how a lot of other retail businesses work. Huge opportunity for us. That's been built. Now we've just got to feed units into it. But it's been built.
Rapid Response is a style that's 4 to 6 weeks. You don't buy it all at once. The fabric is sitting there. You go and do a short, some are pleated, some are not pleated, get a read, make your adjustments. Fabric is sitting there. Not rocket science. That is on the way to being built. Test and respond. Getting in 6 months ahead of time, going to certain stores, trying to get a read on a style. It's so important. The goal here is as much as possible, for those who've known me since I've been coming here, how do you reduce the volatility in the business which, for people haven't worked in businesses with this much volatility, can drive you crazy?
How do you reduce the volatility in the business? These 3 under responsive supply chain and the seamless inventory will be done by our brand presidents, but who's bringing the process? Gap Inc. Who's designing it? Gap Inc. Who's building it efficiently so everybody can use it? Gap Inc. That's the service we're providing to the brand presidents.
Lastly, The Gap Inc. advantage, a portfolio of distinct American brands. That was that continuum I showed you, an American brands. We know how well that resonates internationally. The goal for our teams is to make sure it resonates strongly in our home market. We're not the only American brand in the United States of America. What is our competitive advantage, our product distinction? What's so unique about us in our home market to make sure we hit on that? We're entering a period of global growth. That's that sort of soundboard I showed you. We're entering a period of global growth. We see it particularly in some countries where in our category, you're talking about double-digit growth just to keep up with the market. We like those markets. We like Vietnam. We like Cambodia. We like Indonesia. We like China. We see the real growth.
We have a world-class e-commerce platform, world-class, that you can add omni-channel to it now. We have the talent. We have the investment. We are 30 minutes north of the epicenter of development, and Art has done a phenomenal job getting to know those teams and bringing some of those ideas into our business. Multiple operating levers untapped I just talked about. Strong fiscal discipline. Sabrina has done an amazing job in everything she does, whether it's cash distribution, whether it's share buyback. And the 2 of us, I think, have proven to people in the room, if there is a bump in the road from a macro [ph] perspective in particular, we know how to pull the levers to hit a P&L. We've proven we know how to do that during very difficult times.
And lastly, a seasoned management team. People have been here a long time, know the business. The right injection of new talent into the company, understands global, has an appreciation for the business is going to win on the global stage. We really, firmly believe that. We have 3 global competitors. We believe we have advantages over them. Now it's up to us to do what? To execute. We execute. We stay focused. We keep bringing the right talent in the business, and this is available for us to do.
I'd now like to introduce to you Gap Inc.'s Chief Financial Officer, Sabrina Simmons. I'll be back later on for a few questions. Sabrina?
Sabrina L. Simmons
Well good morning, everyone, and thank you for joining us today. This is the fifth time I've had the honor of standing before you, and I hope you'll agree that we've been consistent about the strategy and economic model we're focused on to deliver shareholder value. We're pleased with the results that we delivered last year with net sales growth of over $1.1 billion, operating margin expansion of 250 basis points, earnings per share growth of nearly 50% and distribution of $1.3 billion in cash. And over the past 5 years, we expanded our operating margin over 4 percentage points and grew earnings per share at a 17% compound annual growth rate despite facing a deep recession and cotton prices that hit historic highs in 2011.
Additionally, we generated $6 billion in free cash flow and distributed $7.5 billion through share repurchases and dividends over that same period of time. We realize 2011 and '12 were unique years, given the impact of the large swing in cotton prices to our margins. Last year, gross margin was our largest lever in expanding operating margins. Going forward, we plan to use a balanced approach to driving value. Specifically, we plan to balance revenue growth with healthy merchandise margins and leverage expenses to deliver operating margin expansion.
As Glenn discussed, our strategy is to grow our portfolio of brands across multiple channels and geographies. I showed a version of this chart for the first time back at our Investor Day in 2010. The point of the slide is to show that, given the size of our global footprint and the level of our operating margins, we're more similar to the largest global apparel retailers than we are to the U.S. specialty retailers to whom we're often compared. However, this year, in addition to pointing out the similarities in size and footprint, I'd also like to highlight what we believe makes us unique versus the global apparel retailers.
Namely, our multichannel strategy is stronger and further advanced than that of our global competitors. Customers are increasingly demanding easy access to our brands anywhere, any time. Our experience and understanding of multiple channels and their interaction with one another is a real competitive advantage that we plan to continue to build on. As you know, we've been in the specialty business since 1969, but as a reminder, we've also been operating in the outlet channel for nearly 20 years, the online channel for 15 years and the franchise channel for over 6 years. We've learned many lessons over the years, and we're proud that we've honed the model in each of these channels to drive healthy returns.
As we've stated previously, our outlet, online and franchise channels have higher returns than specialty, and it's our intention to shift our sales mix into these higher-return channels over time, where customer demand is actually naturally moving. That said, each channel plays a specific role in our strategy of driving growth. Let's start with stores, our biggest channel at $13.4 billion in sales and 86% of our total revenue. In our stores channel, which includes both specialty and outlet, our goal is to improve the productivity of our fleet. There are 2 primary drivers enabling this. First, optimizing our North America store count and square footage, we fully expect to meet the goal we articulated several years ago. Specifically, our goal at Gap North America is to reduce the specialty fleet to about 700 stores while growing the outlet fleet to 250 for a total of 950 stores. At Old Navy, the goal is to reduce square footage by 2.5 million square feet through downsizes.
As you can see on this slide, since 2007 through this year end, we will have reduced Gap specialty square footage by over 3 million square feet through closures and consolidations, shifting the mix toward our higher-return outlet channel. It's really important to note that, despite having fewer stores, the number of markets in which we have a presence is nearly the same today as it was back then.
At Old Navy, our optimization strategy has been a little different. Our store count has remained roughly the same at about 1,000 stores, but we decreased square footage by 2.5 million square feet, primarily through downsizes. Having shed our least productive square footage in North America means the remaining square footage should be more productive.
The second driver of improved sales per square foot is adding highly productive new square footage. In 2013, we expect total square footage to increase by about 1% on a net basis but actually 4% on a gross basis. Our new square footage is in our newer brands, Athleta and Intermix, both of which have higher productivity than our 3 larger brands. Additionally, we're growing in our healthy outlet channel as well as opening specialty stores in Japan and China.
We believe that over time, through consistent modest positive comps, we can return to our recent sales-per-square-foot peak of over $400. For context, we ended 2012 at $364 per square foot, which was an 8% increase over '11 but still 15% below 2004. Even moving from $364 to $400 per square foot is worth over $1 billion in sales at constant square footage.
Moving on to our next channel, online. Our online business delivers strong returns and continues to grow quickly. Despite a sizable base, we're pleased with our 5-year 16% compound annual growth rate in sales. Since 2007, our sales in this channel have grown by over $1 billion, and the runway ahead of us is still long. For example, we have the opportunity to continue to grow online domestically in all 6 brands, including our newest brand, Intermix, which by the way, I'm wearing head to toe, courtesy of Adrienne, Art and the Intermix team. But as you can see on the slide, we also have international opportunity. Our online penetration in Europe, Japan and China is much lower than North America, and we're excited about the global growth opportunities ahead of us.
Our omni-channel capabilities that Glenn mentioned are a critical part of our future growth, and Art's going to speak to this in detail in the upcoming session. Capabilities like ship-from-store, find-in-store and reserve-in-store, which will launch later this year, provide opportunities for margin accretion and incremental sales.
As an example, ship-from-store allows us to fulfill online demand using store inventory that might otherwise go to markdown. Find-in-store and reserve-in-store gives our sales associates the opportunity to increase a customer's basket as she comes in to try on and pick up her selection.
The next channel is franchise. We prefer to own and operate our stores in larger countries where the sales potential is substantial. We tend to deploy the franchise model in smaller, more complex markets. This is a high-return, low-capital channel, and we've seen significant growth. Since launching in '06, we've grown the franchise fleet to over 300 stores, and we expect another 75 in 2013.
We believe there is ample growth ahead as we continue to expand geographies and potentially add channels like online and outlet to Gap and Banana Republic and also look to add Old Navy in 2014.
As we continue to shift our mix to outlet, online and franchise, our operating margin should benefit.
Now that I've taken you through some of the existing growth opportunities by channel, let's discuss our financial model. Consistent comp and revenue growth is our #1 priority. Our goal is modest positive comp driven by increased productivity in our existing stores, combined with highly productive new stores and continued growth in online and franchise, as I just discussed. And importantly, we aim to deliver this growth while maintaining strong merchandise margins and growing gross margin dollars.
Going forward, as product continues to improve, merchandise margins opportunities will come from drivers like more regular-price selling, shallower promotions and shallower markdowns. Each brand president will be addressing their specific opportunities in their upcoming remarks.
Moving down the P&L to expenses. Our objective is to leverage not only rent and occupancy, but also operating expenses as a rate of sales. With a fleet of over 3,000 stores, about half of our operating expense base relates to stores, and over half of that varies with sales. Assuming we achieve our goal of revenue growth, we would naturally expect total expense dollars to increase. As a rate of sales, however, we expect operating expenses to leverage.
With the balanced approach I've described, healthy gross margins combined with expense leverage, we're confident we have a path to operating margin expansion into the future.
As always, inventory management will play an important role in our ability to achieve sales at the gross margin levels we're targeting. We will continue to maintain a disciplined approach, with the goal of keeping inventory dollars per store in a close relationship to our comp sales. Disciplined inventory management also serves to support our strong free cash flow.
Our philosophy regarding cash remains unchanged. Our first priority is to invest in projects that we have high confidence will deliver an appropriate return. You've seen us modestly increase our capital expenditures as our business has improved, and we will remain focused on improving return on invested capital as our operating income grows.
Second, we maintain enough cash on our balance sheet to fund of our working capital needs and hold a reserve. Cash in excess of our target is available for shareholder distributions through dividends and share repurchases. We look to increase our dividend as our net earnings increase, keeping our yield and payout competitive. Remaining cash gets distributed over time through our share repurchase program.
Since 2004, we've generated an average of $1 billion each year in free cash flow. As evidence of our commitment to shareholder distributions, we have utilized $12 billion to repurchase over 600 million shares at an average price of $20 per share. This means we have reduced our share count by over 50%. Further, our dividend has grown nearly sevenfold from $0.09 to $0.60 per share over the same time period.
In conclusion, we're pleased with our accomplishments, but we're fully aware that it's all about delivering consistently in the future. We're committed to driving shareholder value and remain focused on our model of growing sales while leveraging expenses, resulting in operating margin expansion. When we combine this with our share repurchases, earnings per share should grow at an even higher rate than net earnings. This is, in fact, how, for nearly a decade, our earnings per share growth has outperformed net earnings. I'm very confident in our ability to drive results, and I'm looking forward to delivering this quarter after quarter.
Thank you, and I will turn it over to Steve Sunnucks, our Gap Global Brand President.
Thanks, Sabrina. Good morning, ladies and gentlemen. My name is Steve Sunnucks. I am Glenn's throat to choke for Gap brand. My background is more than 30 years in apparel retailing, and I joined Gap Inc. back in 2005. For the last 8 years, I've been leading the international development of our brands and channels, and now I'm very proud to be leading the Gap brand globally.
So let's have a look at who we are. This is who we are now. We're a $6.3 billion business with around 1,650 stores in 47 countries. We had a good 2012. We comped in every one of the quarters and finished with a positive 3% comp. Our total sales growth was positive 6%. And that's just the start. We know there's lots more opportunities, and we know that we have to continue to deliver those sort of numbers.
So my aims. Here's my aim. My aim is to deliver consistent sales growth profitably -- consistent, profitable sales growth. And I've set my business 3 priorities. The first is to deliver our brand relevance, to continue to build on 2012. The second is to deliver product consistency and consistently deliver that. And thirdly, our multichannel growth strategy to deliver that globally.
Let's start with the brand. It all starts with the brand. You have to have brand relevance with your consumers. We are an American brand. We always have been. This shot here is from 1990. We're about iconic products. We're about delivering consistently on our iconic product categories: khakis, tees, sweaters. And we know that, that is what our customers want. We've updated that now. This is from our summer campaign. Our summer campaign is modern, a modern positive take on our brand.
Just sort of think about marketing and the role that marketing can play in our brand. So the way that we think about it strategically is this: We start out with how do we build the brand in a consistent way, and we start with this framework, which is in our Out-of-Home. So who are we, and how do we build the lifestyle? We have to get customers to buy into our lifestyle so that they consider us when they come in to the market. So our Out-of-Home, this is one of our billboards from the summer campaign, along with our magazines, is how we do that.
Once we've built the lifestyle, then when we know when the customer come in to the market, the most important part is the windows. Our windows are our major traffic driver. You can see here this amazing window experience, which is in Harajuku store in Tokyo. We're investing in our windows. Over the next 2 years, we're planning to update maybe 200 of our windows in the major cities. What I'm really thrilled about is that our head of visual merchandising in Japan has moved to New York and is leading our team out of New York for our global visual experience.
So the customers buy into our lifestyle, then they come into the cities and malls and they experience our windows. Once they're in-store, then, my experience is there are 3 areas that we really have to focus on: the till points, amazing service at our till points; secondly, our fitting rooms, we've got to deliver our fitting room service immaculately; and thirdly, you can see here in this photograph, it's all about our visual experience. Our customers are saying to us that if we can show the versatility of our iconic products, we can show them how to wear it, what the end use is, then they'll come back time after time. So you can see here the way that we've styled our most recent Skimmer campaign. We started at the front there, back for wovens, which is a slightly more smart aesthetic, and then as you go through that to knits, more casually, and then back to denim.
We've now got them in the store and the store experience and, of course, one of the things that we've built up over the years is these amazing collaborations and partnerships, very important part of our marketing mix. So this is DVF, which you saw outside. It launches next week across the globe. And we've also had great collaborations with GQ in the past, Stella McCartney, and this will continue to be part of our marketing mix.
But, of course, probably the fastest-growing area of marketing at the moment is digital and social media. And as Glenn was saying, customers now mix products and brands. So in order to deliver fashion relevance and to be more relevant to our fashion customers, this is one of our programs called Styld.by. And it's a site where bloggers put together Gap products with products of their own, product with other brands. It's been an enormous success for us across the U.S., and we're rolling this out globally at the second half of this year.
So our investments. We talked about our marketing strategy. We start with the lifestyle. Building the lifestyle, you come in to the windows. You're then in-store. We've got our collaboration, and we've got our digital strategy. And our investments are certainly beginning to gain some traction. These are some of our research numbers from 2012, looking at talking to our customers between spring and holiday.
So in terms of some of their clothes, "Gap is for someone like me," okay? 56% of our customers agreed with that. That's up from 47% last spring. "Ads are relevant to me." 64% agreed with that, up from 42% last spring. And then in terms of social media, we look at positive versus negative sentiment, we call it. We've got a positive 9 sentiments in terms of our favor, that's up 3 points, one of the biggest movements we've seen. And conversations about Gap are up 59%. So our Be Bright campaign is beginning to get some traction and, through 2013, we'll continue to build on that.
So that's brand relevancy, #1 priority. #2 priority for us is to deliver our product consistently. We know we haven't done that always as well as we should in the past, and we're absolutely focused on it this year.
It's about this. This is what I use internally. I talk about arts and science a lot, because if you're going to be creative and have innovation, you also have to have a framework. You have to have discipline. You have to have consistent execution with a great talented team and, also, you've got to be maniacally focused on the customer.
It starts with the brand aesthetic, consistency in the brand aesthetic. Hopefully, many of you managed to meet Liz and Rebekka outside. And these are some of the terms that we're now using for the framework for the brand. It can't be about individual interpretation. We have to stick to our aesthetic. Our American heritage, our American optimism, with a casual style. That's what we use internally. And these are some of the frameworks and filters that we put in place: we've got to be current but not trendy; we have to be classic but not conservative; we have to be youthful but not young; and we have to be reliable but not predictable; and above all, we have to be authentically American.
So with the framework built around the filters for the design teams, how do we execute? This chart here, this flowchart here, is to explain how we've built the simplicity into the business over the last few months. So if I start from left to right, previously, we had 7 regional merchandising teams who would all feed their ideas directly into our design teams, almost unfiltered. So that was an incredibly complex and cumbersome model.
What we've done now, and the new news is, that we've built a co-located team in New York. So I have personally based myself in New York. My office is actually just next door to Rebekka's and just down the corridor from Liz, our head merchant.
And then underneath me, we've got our global merchandising team, our global design team, global production, and we've got our global marketing team, all co-located in New York. So the way this works now is we still have the benefit of our regional teams. But our regional teams feed their needs and requirements now into the New York global center. So the merchants into Liz, the VM and marketing teams into Seth Farbman, who is our great head of marketing. And then we have one, as you can see here on the left, one global vision. So their job is to build the global vision, but with the needs filtering through. And then as you move to the right, then the teams from around the world come and select the product from that wider assortment. And then as it goes into the stores, you still get the local needs delivered, but with a global brand expression. So it's about a global brand, but still locally relevant. So we've got our design filters and we've also now got our process in place.
But finally, then, it's about discipline in our assortments. So we've got our filters and structure. Now we're looking at a much simpler unified approach to the business. We're looking at probably something like 70% to 80% of our product being the same consistently globally. Bestsellers are bestsellers. You've seen our Skimmer campaign. That's been a bestseller in Tokyo, in London, in New York, here in San Francisco. So it's about consistency, but it's also between 20% and 30% we're leaving open for local requirements.
It's more about analytics now on product architecture, so let me just talk -- I'll give you a couple of examples of some of things we're working on. Starting with market share, as Glenn said, it's one of our focuses now is category-based market share. That's how we're looking to build this business up.
So Kids/Baby. If I look at Kids/Baby versus Adult, our Kids/Baby has a very strong market share, actually bigger than our Adult business. Something we've built up over the years, got great brand equity. We've also got then, within Adult, a very strong bottoms business versus the tops business. But, in fact, tops to bottoms are roughly 4 to 1 in terms of market size. So we're focused on, firstly, building our Adult business, and then within Adult, keeping our bottoms and our great bottoms business, but starting to build our tops categories. So wovens, you've seen in the stores now. I think hopefully you've seen them outside, looking great. Dresses. And then for holiday, we'll continue to build sweaters and outerwear. So we're focused now, category by category, on how do we gain market share.
And then secondly, I just want to talk about the opportunities to localize our product assortments. It's quite interesting. Now that we're joined up in this global model, we can look globally across all of our markets and all our market shares. And it's very interesting when you do that, because what you see is actually fundamentally the markets are quite different to each other. So for example, here in the U.S., I feel I could look at women's, it's a very big knits business. If you look at Europe, they like dresses and they like wovens. If you look at Japan, it's all about outerwear, particularly in the wintertime. So now that we're joined up, we can take into account all of those needs, and we can build a product assortment that can deliver the needs consistently across the world.
Another interesting thing that we found as we've been doing this is we're looking at seasonality, and we never get it right as retailers. So we're always sort of like it's too warm, it's too cold. Spring is too hot, it's too cold. But when you look across the world, you can start to see some synergies. So clearly, you've got hot markets in the U.S.: Texas, Florida, parts of California. Then if you look globally, you can start joining those up with Saudi Arabia, with Dubai, you can look at Singapore and you can look at Hong Kong, and we can start to deliver real scale within those seasonality markets. The same in our cold markets: parts of Canada, Russia and so on, Tokyo in the winter. All are very, very cold, so we can deliver, perhaps, a collection which is more outerwear based. And then for the hot markets, we're just beginning to look now at spring, we can give them a slightly more wear-forward collection, which they can put in the stores. We're looking at a modular-based approach to the way that we're going to build our business now with this new assortment discipline that we put in place.
The other thing it leads us to is an ability -- as Glenn talked about, some of our inventory gets stranded. It allows us to reinvest some of our inventory. So as we narrow down the assortment that each of the 7 teams used to deliver, we can reinvest some of those dollars, those inventory dollars, in the big ideas. And we know that the big ideas turn faster and they're more profitable for us. So we're also looking at how we can use that global experience.
Okay, so brand relevancy, critically important. American brand. We've now looked at how we deliver the product consistently. And I think those 2 things, when you look back over the years, are probably some of the issues that we've had as we've moved around from one aesthetic to another.
So with that, those 2 things allow us to really focus on our comp growth, both here in North America but also in our comp markets across the world. But they also allow us to grow globally.
Growing globally in this multichannel experience for us, and we've got some of those channels up here, it really allows us to access all the different consumers. So our specialty business, cities, malls, towns. Our value business is our outlet business. We can access our value customer. And of course, online allows you to shop whether you're at home or on your mobile devices while you're traveling. So we really do have this incredible opportunity to build our holistic business. And as Glenn said, we feel this is a unique opportunity for us. And if I think back to the brand aesthetic I talked about, you look at the 4 big global competitors that we're up against. We are -- we do have this unique American Heritage. Uniqlo, Japanese; Zara, European; H&M, European. Gap brand is really the truly the biggest and the most unique American business that we have to go globally.
So this is a quick look through some of our opportunities. So online, as Sabrina was saying, this really does deliver very strong returns for us. And the way we're thinking about this globally, if you look at some of the market shares, I know that it came up quite quickly on Sabrina's presentation, but we have between 11% and 12% of our business online in the U.S. But when you look out internationally, in Europe, which is still, despite its problems, the largest of the power markets in the world, we only have 6% of our businesses online. And you look at Asia, we've only just really got started. It's a big opportunity globally. And then it's a great opportunity, which Arthur will talk about in a while, to be more bricks and clicks, to use both channels to build out our business. So we're already shipping from store, as Glenn said, and we're going to have find-in-store, and then we're going to have reserve-in-store coming up, where you'll be able to click online and then go and pick it up in the store. So really trying to generate the traffic that we need through all those channels.
Secondly, our outlet business. We've got roughly 325 stores across the world in outlets out of about 1,650 stores. It's growing fast. It's a very profitable channel for us, and we see lots of opportunities, both here, domestically, in the U.S., and as we grow our businesses through our international channels.
Franchise, a business that I've also been intimately involved in, in the last few years, growing fast. It's a very low-capital business. Where we need a partner, we can take one. So we get that great balance of local expertise and, obviously, our global brand experience. And for 2013 and beyond, we're focused on building out both our existing markets, some of our big ones like Russia or Mexico are doing very, very well, but also entering new markets. As Glenn said, we'll be entering Brazil at the end of the year, 2 stores in São Paulo, which is really exciting. And we're sort of just in the early stages, Glenn hinted at, of looking at India. These are the 2 big remaining markets that we're not in.
And then finally, of course, China. China is an enormous opportunity for us, as Glenn was saying, close to 80 stores. Growing something like 35 a year, and still plenty to go for, clearly, there in China.
So to sum up, we've got a lot on. We're working hard, a lot of hard work to be done. Whether that's growing our adult market share business here in the U.S., whether that's building out our multichannel business in China, everything leads towards this aim of mine, which is consistent, profitable sales growth.
So with that, I'd like to hand it over to Katrina, thank you very much, for any questions you might have.
So we have a few minutes for questions for Steve. And if anyone has questions, I'll go ahead and call on you.
So my question is regarding the -- I think you said that you're leaving 20% to 30% open for local requirements. So when you kind of think about the product, globally, and this goes back to a little bit what Glenn was talking about regarding the one size for all countries, I guess I'm just trying to get my arms around how you plan on delivering what people want in different areas and still having consistent merchandise, and kind of your thoughts around that because, historically, you had different products in Europe than you had in the U.S.
We did, yes. We've been a fragmented brand. We had different products in Japan to Europe, to the U.S. as you said. So the way the model is now setup is we absolutely believe the local teams are a competitive advantage. So we will remain with the local merchandising teams in Tokyo and London and San Francisco and so on. Now that Liz Meltzer, who you met outside, is our global head of merchandising based in New York, the way to model will work is that each of the local markets know their local customer, and they will feed their requirements, based both on their hindsighting but also what they know about the market, into Liz. And then Liz's role -- because they dual-report both into their geographical head and also now into their functional head, which is Liz in New York. So then Liz's role with the teams, and they do this face-to-face, is to sit down, and they discuss what are the big ideas. What big ideas have worked globally? Then also, then, these local opportunities that they may have, as I said, whether it's outerwear in Japan, whether it's dresses in Europe. And what they have to do is work through that really carefully and come up with a global plan, which then they can turn over to design. So that's a pretty -- well, it's an extremely important meeting. It's a pretty exciting meeting when you have the guys together, because for the first time, we've got 7 different regions all able, face-to-face, to share their ideas and the opportunities that they have. And then Rebecca's role is to build the global brand, to make sure that's what consistent across the globe is also reflective of their individual needs. As I said, we're doing it in a modular way. So we will have modules. So we'll have, for example, a logo module for stores that like logo business. We'll have a hot store module, as I said, for stores across the world, whether it's Texas or Singapore, who might need the hot product assortment. So we're working this in a category-based sort of modular approach to our business, which we haven't done before.
I guess Glenn talked about, earlier, the universal fit. I'm sort of confused what universal fit might mean in, let's say, Japan versus the U.S.?
Yes. What universal fit means -- and what Glenn was referring to is, when I set up Old Navy internationally and put it through Japan, we had to make a decision. Do we have a secondary fit, Japanese fit, or do we use the U.S. fit but recognize that consumers may vary in terms of height and so on but reflect that through our size curve rather than through the fit itself? And so that's how we set it up in the end, because it's a simpler model to have the same product. But we'd introduced an extra size. For example, we'd introduce extra, extra small or extra small. And maybe they didn't take XXL into Japan. So what Glenn was talking about is we're now reflecting our global business through a size curve rather than through a different fit. Once you get to a different fit, it's really complicated because your warehouses and your DCs have to have 2 -- you almost like double the space because you have to have one set of fit in one part of the DC and a second set in the other part. So that's how we're thinking about it. Gap is a complex business, and so we're not quite there yet, but we are working through some of our fits to see if we can get to a more globalized and simpler assortment. But outlet in Old Navy, which we set up later, we set up in that way.
Oliver Chen - Citigroup Inc, Research Division
Oliver Chen from Citi. How do you feel about your SKU brand versus competitors and your mix of good, better, best? Also regarding Be Bright, is that a multi-multiyear endeavor of we should think about in terms of the evolution of the Gap brand?
Yes. Let's take the second question first. Yes, we are starting to gain some traction. We're not complacent. We know we've got a lot, a lot to do to get the -- to continue to build the brand relevancy. But yes, Be Bright, as a platform, has got off to a good start, and we'll continue to run that as a multiyear umbrella for our marketing. In terms of assortments architecture, and you talked about good, better, best and discipline, absolutely. We look very carefully at our competitors and our positioning by market. So again, for the first time, now we're global, we can look at our price architecture across the world. And the way that we do this now is that we start from our consumer proposition, so prices we need to compete in Japan, Europe, the U.S. And then we work back from that to the cost things and the goods. In the past, it's been a little bit more, probably, cost-plus in markets. So it's a much more strategic approach now we take to good, better, best, which is one of the key architectures that we look at. We also look at an assortment architecture by fashion. So you can -- we call it this name but you've got basics, seasonal basics and fashion. And the way I think about it is it's almost like a triangle. So your fashion is at the top and then your mid is the seasonal basics, and then obviously, because we're the Gap brand, our iconic product sits at the base. And so we're really, really thinking about that base. It's got to be perfect product. Got to be absolutely great fabric. The fabric platforming that Glenn talked about is so important, too. It's got to be great fit. So those iconic products, this Gap Oxford that I'm wearing, which would be absolutely perfect with jeans. And then we build the seasonal basics, and then we build the fashion on top. And that does vary a little bit as we think about the distribution. So the major cities, as Glenn said, the top 20 cities across the world are a very, very large part of our business. That's where the opinion formers live, that's where the tourists are, the very affluent cities. So sometimes they will have a slightly different assortment, probably slightly more fashion forward than some of the key mall stores. So as you get to this more modular approach, it's allowing our inventory teams to think about the cities and the malls and the towns in a different way to the way we thought about them in the past. And also allows us to think about flagship in Ginza in Tokyo versus Oxford street or Champs-Élysées in Paris versus New York and L.A. can join up. There's more similarity we're finding between the key cities probably than there is actually between countries.
Adrienne Tennant - Janney Montgomery Scott LLC, Research Division
Adrienne Tennant from Janney Montgomery Scott. Steve, you made a comment earlier in the presentation about the tops-to-bottom ratio -- I think it was bottom-to-top ratio, and I think it was 4 to 1. But I was wondering which direction that was, if I got it correct, was that bottom-to-top? And then does it differ men's to women's? If it was bottoms to tops, there seems like a huge opportunity, so if you can talk a little bit about how you convert that into a ratio where the transaction side can go up?
Yes, I mean depending on which market base you look at, tops is roughly -- the market size globally is roughly 4x the size of the bottoms business because particularly women buy a lot more tops than bottoms, because that's how you change your outfit. So as we look at the categories, that's what we're focused on. We, for the third time, we've got this great market share data. So we're taking each category, like women's wovens, where we've got opportunities to build that share and we're thinking about how do we build it out. So I'm sure you've been in our stores. We've got a great cotton oxford, #1 seller for us in women's at the moment. So we're building these foundational products/items in wovens, the same addresses and so on. Did that answer your question?
Adrienne Tennant - Janney Montgomery Scott LLC, Research Division
Yes. How does that match up versus industry average, because typically, it sort of just goes to 2 to 1 or 2.5 to 1. So how do you drive that -- the bottoms transactions? How do you sort of translate that into a bigger basket?
Right. So well, the way -- I mean, if you -- certainly we can talk outside, maybe afterwards, I can take you through some of the mannequins. We're thinking -- we're a key item business, but we're also thinking about the whole outfit. That's how we're planning to do it. The photograph I showed you, which actually was in Harajuku in Tokyo, where you had the Skimmer styled in all the different ways. We're showing them with all different tops to the same bottom. So trying to get up the UPT and average basket size by inspiring customers not just to buy one top and a bottom, maybe you could by 2. Maybe you can wear our Skimmer out, so you buy a nice woven, or you want to wear it casually when you're out on the beach, so then you buy it back to a knit or a T-shirt.
Where do you think the market share will come from that you hope to gain over the next few years?
Where do you think the market share comes from? Look, if I think about it, I was going to say globally. Clearly, we've got opportunities here in the U.S. We've got massive opportunities from that sort of 0.25 globally. So if I think about it geographically, there's definitely comp growth here. There's also enormous opportunity, still, in our International market. If I think about it by category, what we've talked about, then, yes, absolutely, we have this incredible brand equity. We haven't really talked about our Kids and Baby business. Our Baby business is just extraordinary. Everywhere I go, whether it's franchise partners or malls, they want our Baby business. So there's still massive opportunity there to build some of our big categories like -- and capitalize on our equity in our Baby and Kids. Our bottoms business, you can see, as we keep reinventing the categories, nobody else, I'm sure, I was talking to one or 2 of you, nobody else has got Skimmers. That's a Gap innovation. So that was taking khakis and denim and thinking about what's that in a modern context. So that's gaining market share. And then as I said, in terms of our tops business, definitely looking systematically at each of the categories and going after market share season over season are the ways that we're thinking about this. And you have to talk to Rebekka. I'm sure some of you did. She's an incredible creative force. The thing I really loved about Rebekka when I interviewed her, she's a deep, deep design -- she's from a design -- kind of that was her background. But also, she worked for advertising agents sort of thinking about trend prediction and brands holistically. So the thing about Kohl's -- it's not that Gap is like Kohl's. But as you've seen this in Europe, the thing about Kohl's is it was a brand experience. It wasn't just about the product. It was about the service. It was about the store environment. It was about the way you showed up. So that's what I'm excited about Rebekka bringing to us as well, is how do we join up the brand? How do we get the store experience, as far as the product experience and service, all joined up together?
Adrienne Tennant - Janney Montgomery Scott LLC, Research Division
I'm wondering how you think about the outlet business and managing the brand as you continue to expand in outlets. The opportunity in outlet from a financial return perspective is really, really clear. The risk, obviously, is to the long-term health of the brand. And secondarily, as the landlords look to develop more outlet malls within urban centers or within major metro markets rather than having to get into a car and drive an hour to get to the outlet mall, does that change or increase the risks, in your view?
Yes, I mean, look, on our outlet business, I don't see it's a risk at all. I'd quite like to know what's behind your question. It access -- it allows a value customer to access our brands, and I think that's great. And as we continue to build our own brand and evolve it with the fleet size that we've got to, as Sabrina said, and we start to evolve the cities, I think they're complementary. Now to answer your question, as outlets come closer to city centers, they tend to put them in value areas of the city center, whether that's a suburb or so on, and in those sort of places, obviously, absolutely, we will succeed. But we see the channels as complementary, the 3 channels. The specialty business we're positioning very much as a specialty business in affluent cities, in malls, and so on. We've got our value brands in our outlet centers. Again, big opportunity globally. The U.S. and the U.K. and Japan are relative, yes, relatively mature outlet countries, but the rest of the world is only just starting to understand the outlet business. And of course, the enormous growth that we're seeing through our online business through all the initiatives that we've talked about, starting to join up the bricks and clicks. So I think we see them as complementary to each other and not really overlapping.
Steve [ph] will be available after the session as well, at lunch, for more questions, because I know, everyone has lots of questions, but we're going to keep going. So thank you, Steve, very much.
And with that, I'm really pleased to announce that we have Jack Calhoun, our Global Brand President for Banana Republic, up next.
All right. Thank you. Good to be here. Good to see a lot of you that I've gotten to know over many years, and welcome to Banana Republic's headquarters. I also know that Gap Inc. is headquartered in this building, but this is Banana's headquarters, so welcome. So look, I'm going to talk about a couple of things today. I'm going to talk about our brand vision and how it helps drive our business at Banana Republic, our competitive advantages for our business and our new global structure, obviously you want to hear about that, and our growth opportunities, what's our runway?
But first, I got to start by talking a little bit about our performance in 2012. You know it, but I got to talk about it. Last time we all got together, 2011 in New York, remember back, I talked about that we have a very strong operating model at Banana Republic that I feel confident about. But to do well in 2012, we needed to do a couple of things, right? We needed to leverage our strong model. We needed to drive moderate top line growth, and we needed to be consistent in our product and our marketing. Well, I'm happy to report, and you guys know, that we delivered on this in 2012, and we had a great year. It was, obviously, led by our largest market here in North America, which I'm proud of. But specifically, when I look at it, we positive comped each month last year, which was a great accomplishment; we had our women's business back on track, great accomplishment; and we continued our streak of multiple years of really strong performance in our men's business. And then we did some great collaboration. Think back to last year. We had Trina Turk, Mad Men, Virgin America, a lot of good things that complemented our brand.
So let me go on the record also and just state I'm also really happy that I've got an amazing team at Banana Republic, an amazing and tenured team that has really helped drive this success. So that is phenomenal. But equally important to my team and our result is our brand's alignment around our brand vision at Banana Republic. It provides, for us, clarity and focus, and so I want to spend a couple of minutes talking about our brand vision at a very high level, so to make sure that you're grounded on what is Banana Republic about.
So our brand's focus, what are we about, is versatile work. Hopefully, not a surprise to anybody in this room. We know that our sweet spot is that idea of desk-to-dinner. Nobody goes home, changes their clothes from work to going out. And we know that people and work are more flexible than ever before, and we need to accommodate that. And, in fact, our entire brand, if you look up here, is centered, our brand vision, our pyramid, is centered in this idea of a world that we call "new work": the idea that your personal life and your work life are more intertwined than ever. I don't know if that's good or bad, but it is what it is, and we need to play to it. And that is why our brand vision fits in this idea of new work, and I think we're perfectly positioned for it.
Our brand essence. So what is our brand? What do we stand for, and why are we different? It's based on an aesthetic of 3 words that we use as we do our brand, our product and our marketing: modern, covetable and accessible. Let me just explain what those mean to us. Modern. It means it's contemporary, it's trend-right and it's in-the-know. That fits for marketing, and it certainly fits for product.
Covetable. For us at Banana Republic, it's more than just high quality, it's those little details that mean you just got to have it, right? That's the retail magic. You've got to walk in and say, "I've got to have that now." That's the covetability that we have to assort to everyday.
And then accessible is a big part of our brand. But to us, it means 3 things. It means it has to be affordable, available anywhere, easy to access, and instantly wearable, accessible in its fashion. So those are the 3 things that we assort to, and those are our brand essence.
And for me, the soul of BR is this word that we use, which is joyful. It's about wit. It's not taking ourselves too seriously. Look, we're a joyful brand. We like to smile in our marketing. A lot of fashion brands don't like to smile. But we're okay to smile, it's okay. And when that doesn't exist, and I see a piece of marketing for BR that doesn't have that, it just doesn't feel like it's Banana Republic. That said, I actually think we're doing a pretty good job in our marketing and our imagery in bringing this to life.
So if you go back to our pyramid and our brand vision, at the very top of that pyramid is our North Star, which we call achievement. So in strategy terms, what does that mean? It's the ultimate customer benefit. Why are we in this business? What's Banana Republic about? That, for us, is achievement. Helping customers achieve in their daily life, be it at the office, out for drinks with friends, maybe on a date, where do you need to achieve? It's that idea of when you look great, you feel great, you have that extra boost of confidence, you have that extra spring in your step. Barbara told a story about her daughter today that was exactly the embodiment of this. I could have her come up on stage and tell it. It's our strategy. I hear it all the time from our customers' letters, I hear it from our stores associates. This is what we're in business for. It's the ultimate customer benefit. Because they know that when they look good and they feel good, that they are going to be a little more confident. It doesn't make them succeed or achieve, but it's that extra little boost that makes them feel better. So it makes me really proud of why we're in the business.
So we know that our brand platform works for 2 reasons. You've got to ask, is that working? Is it good? Well, obviously, the first proof is in the pudding, and 2011, we put this into place. I think it was a big driver of our success in 2012. So proof point #1.
I think second, our brand vision aligns to thousands of decisions we make in retail every day. It's not one decision. It is thousands of decisions that hundreds of people make, and they all have to add up to a greater whole so they equal our brand. Our brand vision helps us keep all those people and decisions aligned. And I think it's making a big difference in our brand.
So looking ahead, we know our brand vision is going to be that anchor for telling our product and brand story globally. This will keep us aligned globally.
So look, while Banana Republic has a very great positioning and it resonates well with our customer, I think we've got 5 key advantages that give us the ability to win in the marketplace, and I want to review those 5 with you now in a little bit of detail.
First, our first competitive advantage is, luckily, our brand. We're known for work. More specifically, we're known for versatile work. This is who we are at our core. To be clear, we're already known for this. It is what we are, but I think it's an advantage versus other competitors out there.
Second we're, dual-gender. Most specialty stores cater to one: men or women, mostly to women. The fact that we cater to both and have a very strong men's business, a competitive advantage. And we have shown that our brand is globally relevant, that we have a nice beginning international. Travels to Europe and Japan, my biggest takeaway is that with some small nuances, our target customer is very much the same. As Glenn mentioned it earlier, people in the big cities around the world are more similar than not, and our brand positioning about achievement and our aesthetic resonates with our customer globally.
Second competitive advantage: product. Good thing, right? Our strong product point of view and our brand aesthetic resonates with our customers and ultimately helps us gain and keep that market share. So our brand vision helps drive that clarity and, most of all, consistency. Look, I'm very proud, and we're very proud of the consistency we've had in our men's business. We're continuing to build on multiple years of comp in that business. According to NPD and then our internal sales, we remain the #1, #1 specialty player in men's sweaters, men's pants and men's woven tops. Obviously, those are the foundation of a versatile work wardrobe. We're the #1 player in those in specialty.
Our brand vision, our product filters, they clearly define what is a versatile work point of view. So in women's, our focus on versatile work, I think, helped drive our positive comps last year in 2012. What do we do? If you look at our store, our back-of-store, our more casual work section of the store, we polished that up a little bit. We added things like novelty item blazers, things that you can wear with jeans. In spring, it might have been a piped blazer or a striped blazer. At holiday, it was our hacking jacket. It was the velvet blazer. Those kind of things for our woman customer makes it versatile.
Additionally, dresses. For us, a dominate category, and we continue to gain share in this area. I'm very excited. Hopefully, you saw last week that we're going to introduce something that continue to help us dominate in dresses, our collaboration with Issa of London that will come out in August. I think it's going to be a home run.
And then our full collection, Narciso Rodriguez is working with us across the collection, but one thing he's specifically done in dresses with Simon and Tina is a new dress block that will be out in August/September. It's outstanding. And talk about dominating dresses, I think we're going to have one of the best dresses on the market in the fall.
Another competitive advantage for us is our product assets. So you might ask, what is it? It's a word we use internally. Product assets are those items that we're known for and customers can only get at Banana Republic. So think about in men's, our Gavin and Dawson Chino, our noniron shirts maybe. In women's, it's our timeless tee, maybe our Anna cardigan. We've got a long list of them. They're things that we own. They're quarter after quarter, they're consisted, they're big ideas, they're consistent over time. They're big enough to move the needle, so they're not small, and they motivate, hopefully, an initial purchase and long-term loyalty. So product assets for us are a competitive advantage.
An example, in men's, our noniron shirts are a key contributor to our #1 specialty market shareholder in men's wovens. #1 in all of men's wovens. In fact, Banana Republic holds the #4 market share in men's woven overall. The only places that are ahead of us are department stores. They're a little bigger, okay, but we own it. Men's sweaters, another dominate category for us. We are the overall #2 market shareholder. That's the entire market, only behind Macy's. So again, this is a dominate category for Banana Republic, and these are product assets that we own.
Petites, another thing we don't talk a lot about in our business, but petites is a huge win for our business. I know a lot of women in here ask me, I get asked all the time. Petites are a ferocious customer. They speak out a lot. But it's a big advantage for us in both our specialty and in our outlet business. In fact, if you look at our petites market share, it's actually 50% bigger than our core women's market share. So it just tells you how dominant we are. And we're also beating our major competitors in the outlet channel. We have equity in these businesses, and I think we can continue to grow them.
Another competitive advantage that we don't talk a lot about is our specialty retail, or what I would call our edited point of view, versus the department store. I think it's a big advantage. Department stores may have some of the market share advantage due to their size, but we believe that our kind of edited point of view, walk into the store and know what we stand for, a major advantage for Banana Republic versus some of our key competitors that are department stores, like Nordstrom. We know that our customers likes to shop in that environment.
Before I move off product, I want to make 2 additional comments just about product that fit kind of in with the competitive advantages, but it's about product. First, it's about the product development pipeline process. I think we have a very strong one. It's a foundation, obviously, of our business. Within our pipeline at Banana Republic, we've been working to become even more nimble and able to react quickly to in-the-moment trends and what's happening in the business, and I'm proud of the progress that we've made. We know that, especially in things like knits, about 1/4 of our women's specialty knits business is on this faster, more nimble pipeline. And it allows us to react to things and get into or get out of things more quickly. I think it's been an advantage, and we're going to continue to push into this area. And our factory business, we can chase things in about 6 to 8 weeks. That's a big advantage and something we didn't have a couple of years ago. Second point I would make is about our accessories business. I call it kind of the third leg of our product stool. While accessories is our smallest division, it's not insignificant. I think it's important. Accessories are brand-enhancing for us. And when you think about it, it actually helps amplify our versatile positioning. It certainly fits into our brand positioning and our mix. Our customer knows that he or she can come to us for the whole wardrobe. Some of our standout categories in accessories include our men's and women's shoes, which continue to outpace even our expectations and are delivering strong results, and our jewelry category, probably one of the things, when I'm out in the world, I probably get the most comment from women on. We have a great jewelry business, and we'll continue to dominate in this category.
Accessories for us, also, if you think about it, serves as a great brand ambassador for places that we don't actually have a full presence of Banana Republic or maybe even stores. A fact that I'm sure nobody knows, Russia is our #1 fragrance market for Banana Republic. We don't have a lot of stores in Russia. It is our #1, bigger than the U.S., fragrance market for Banana Republic. So it's a great thing to have these accessories. They are great for the brand, and I think it's a really nice thing. I actually think this is an exciting area and that we want to continue to see growth in this area because it amplifies our brand positioning.
All right, back to competitive advantages. Our third competitive advantage is our multichannel capability. Glenn talked about it, but for us, I think it's a huge advantage. Now that we're a multichannel brand under one leader, me, we are able to look holistically at our brand and maximize opportunities across all of our businesses. I've already seen the advantage with this with brand consistency. How do we show up in our online, our specialty and our outlet channel? This innovation has been great, and it's bringing brand, enhancing benefit across all of our channels. I'm really proud of how it's showing up. If you look up here, you'll get to see some of the images. This is current imagery that's out today on product from each of our channels. From left to right, it's online, specialty in the middle, and our factory store. You really can't tell the differences. It looks like the same product and the same brand. I couldn't have said that a couple of years ago. I think the teams are doing quite well of making sure we're maximizing our channels and being one brand, because the brand is what people are buying, and they actually do love our brand.
We're also leveraging our multichannel capabilities to integrate -- introduce innovative new programs to improve what I would call our brand's friendliness from a customer point of view. For example, tighter integration between online and our stores are offering things like we've mentioned, that ship-from-store, the ability to order an item online and then have it shipped for the store. Now that's seamless. As a customer, they don't know it. It allows us to maximize our inventory. Find-in-store, the ability to look on our website because before you go to a store to see if that item is available. We are going to give the customer a red, yellow or green to kind of give them an indication of what's in the store. But the good part is the customer wants to know this. About 25% of BR specialty in North America customers look on the website before they go to the store. That's just the right thing to do for the customer. And our newest feature that we're just getting into is this reserve-in-store, the ability to reserve an item online and then pick it up in the store. I think that's going to be a huge win for our customer at Banana Republic. Look, all these features are designed to ease the shopping experience and make it easy for our customers and deliver what they want, where they want it, when they want it. As long as they buy at Banana Republic, I'm happy about it.
All right. Our fourth competitive advantage, you all talked a lot with me this morning about it, is our partnerships. I think we've really hit our stride on partnerships. I hope that you think so also. We're working with brands that both resonate with our customer and combine very well with our brand of Banana Republic. The partners bring a fresh perspective and can expand our customer base. We do want to do that. Trina Turk, you think Mad Men, those have been very successful at helping us drive traffic into our stores and online and build excitement for the brand. Think about Anna Karenina. We tied in with the movie, and now the Academy Award-winning Jacqueline Durann. I think we actually helped her, and she thought we did. It's been a huge success. I mean, she called us afterwards, and she thought because we had so much PR, it actually got her noticed even more so it was great for us, great for her and great for the brand.
Bringing together Mad Men and then Virgin America, it was kind of like a mash-up, kind of like a Glee thing, that was amazing. It was a great way to take 2 different things and put them together. It was amazing. So you're going to continue to see us have ongoing relationships. Our ongoing relationship within Narciso Rodriguez working with our design team to bring expertise, it's just great for us and for our team. So I believe competitive advantages are a -- or partnerships are a big advantage. Partnering with the best and brightest in our industry and like-minded brands, it brings excitement to the brand and to our customer. So I'm going to continue on this strategy this year. Next up, Milly we're partnering with. That's going to be out in stores in May. And we just announced last week our Issa of London Collection, which looks amazing, and that's going to be in store in August.
All right. Final competitive advantage -- I've got a lot of them, right? -- real estate. We have an outstanding fleet at Banana Republic specifically worldwide, and it's a healthy fleet, including brand-defining flagships. You've seen a lot of them in Manhattan, Paris, Milan. We've got a really nice fleet. Specifically in North America, our biggest fleet, we have a very good fleet, and it's in a healthy place, some of the best location for specialty and outlet. Let's be clear, that's a big competitive advantage for Banana Republic.
All right, so coming off these great competitive advantages, in 2013 -- look, to be really clear with everybody in the room, our biggest opportunity on this brand is to drive more traffic into our brand. We need more traffic. I think we've got a really great story to tell. I'm a bit biased, but we have a great story to tell. We've got to ensure that we have the right excitement, what I'm calling internally "sizzle," in our specialty assortment, especially in women's. We've got to drive that customer into our business. And then we're going to have to support it through brand-right marketing that is delivered in innovative ways. Let me talk a little bit about that.
I think we've made some great progress in this area. We had a good year last year about creating excitement around the product. Our collaborations I mentioned are giving the customer a reason to buy. I don't think we need to change that much. We're working off a strong base in the business. Our customers like us. They shop us. But I kind of want to change that equation. I want them to love us. I want them to feel compelled to run to the store or run online and buy us now. That is the part of the sizzle and the provocativeness that we just have to have. I want to be provocative, not just dependable, for our customer.
This year, under the leadership of Simon Kneen, our Creative Director, who many of you know, and Julie Rosen, who you met this morning, we're going to work with our design team, especially in our women's product, to add that brand-right, brand-right, we know what the brand is, level of excitement into our assortment while fitting into all of our brand filters so that we actually take our target customer and stop her on her tracks, and she's got to have it now.
We also need to amplify some of our marketing efforts. As I mentioned before, I'm actually quite proud of the consistency we're driving across specialty and online and our factory stores. And I feel like our creative approach is right and brand right. We need to continue to look at kind of the diversity of our marketing mix, where we're putting our messages, to communicate to our customer in new ways with the right message into the right vehicle. I actually think it's kind of a new world in marketing. I grew up in that world. It's a new world. I think it's an exciting time for us to tell our many brand and product stories. Again, as I said, we've got a lot of great stories to tell. And now we need to tailor those to those unique environments that we can now tell our stories. So putting the stories and the right environments together is really going to be our path forward.
We're now leveraging our partnerships in marketing to extend our reach, get more people into the brand. I think we have a really nice formula that we're doing with other like-minded brands. Some of them are bigger and longer-term partnerships, like Virgin America, Mad Men or Starbucks. And then you will see the smaller ones, things like we did last year that are more seasonal, tie-ins with Bon Appétit, Fiat cars, Anna Karenina. We'll have a little bit of both of those. Overall, we know that we need to continue to push the envelope here to drive that urgency, to get them in to our brand now, but I actually think the teams are on it and we're moving in the right direction.
All right. Let me talk about global brands for a minute. This move to a global brand structure isn't just good news for Banana Republic. It's actually great news. And I mean it. It is great news. We now have a dedicated brand focus on Banana Republic, which is huge for us. It's great to be part of Gap, Inc., but it's also kind of nice to be able to step out of the shadow. Being the youngest of 5 in my family, it is nice to step out of the shadow. So it's a big benefit for us. Look, I'm excited to have the overall oversight of the global P&L for Banana Republic, and obviously, the accountability that goes along with that. As global brand president, I have the responsibility now for our BR specialty and our factory store business across in all of North America. BR International, which includes our 10 stores in Europe, 38 stores in Japan and 53 BR franchise stores in 18 countries. And of course, our Banana Republic Online business, now available in 74 countries. It's a good-sized brand but with a lot of potential.
While, look, it represents a strategic change, the move to global brand, and a change for me personally, it's not much of a change for what we do at Banana Republic. Much of what we do stays the same. For example, in many areas, we were already functioning like a global team. Number one area, in product development, we've always been global. Since we've launched our first store in Japan in 2006, we operated as a global product team. Simon Kneen and Julie Rosen under my leadership already ran a global product design and development operation and worked with our local teams to make sure we were relevant for those markets. So it's not a big of a change as you might think in our business at Banana Republic.
Look, I believe in Banana Republic's ability to expand globally over the long term, and we have big growth opportunity available to us. In the U.S., when you look at it, we are well established with specialty and outlet stores and, I'm proud to say, in a healthy, good real estate position. Since October, I've been traveling a lot internationally. I've been working with our BR teams and continue to immerse them in the global brand vision. It's even more clear to me now that our platform and our brand plays globally as well as our brand being globally relevant. It's also pretty clear, and you can see it from the number, how underpenetrated we are outside of North America.
Of the 10 stores in Western Europe, we only have one in Italy and one in France. To give you a little perspective, you probably know the numbers, in Western Europe, Gap has about 200 stores. Massimo Dutti, probably my most likely competitor, has about 400 stores. So let me be clear, we are not planning to open that many stores, even in the long term, at Banana Republic. Look, we're going to be cautious in the short term. We all know what's happening in Europe, and we're going to be measured about our approach there. We might even look at some different operating models for how do we operate in Western Europe.
That said, I see Western Europe and Europe as a growth opportunity over the long term. We've just begun in that market for our business.
Our specialty and factory stores in Japan, look, they're performing well. The business is reasonably sized. It's strong. Customers respond to our brand well. We now have a team specifically focused on Banana Republic in Japan. I think that's going to make a big difference. But I see a lot of opportunity there, and you're going to see us continue to open stores even this year on our factory and our specialty business in Japan.
We're just exploring China. Obviously, we believe that there's a huge opportunity in this market, but we're just starting to look at it with our new global structure.
Our franchise business is strong. In 2012, we opened 25 stores, nearly doubling our store count in just 1 year, and we had healthy performance in that business. So I expect that momentum to continue in 2013. It's an opportunity.
And then finally, this tighter integration between our BR Online and our stores is going to help us better serve our customers' evolving needs. As Glenn mentioned, our customer's quite a little ahead of us this year. It's going to help us serve those needs and help us continue to add to our growth. As I said earlier, we are just trying to scratch the surface of some of these things like ship-from-store, find-in-store. I think the big one for us is going to be that reserve-in-store capability.
But having our brand vision in place has positioned us quite well for a transition to a global multichannel brand. It provides us clarity and it provides us focus. I'm also really fortunate to have a stable and a tenured leadership team in place that's helped driving this shift. There's not a lot of change happening for us.
Our focus for the first half of this year, 2013, is going to be putting together the real specifics about what do the long-range growth plans look like for Banana Republic. The good news is we're planning to grow those areas at Banana Republic that are more profitable. So that's a good thing when you look at the overall mix of the business.
So in closing things up, 2012 was a great year for Banana Republic. You guys see those numbers. I'm really proud of where the team has gotten us, and there's every indication that we can continue this performance if we are vigilant on a couple of things. Number one, always applying our product filters, being true to our brand; building brand excitement with great product; maintaining that consistency and aligning the look and feel and marketing so that we are represented as one brand. And job one, driving traffic into our stores and online globally.
So I thank you for your interest in Banana Republic. And now I get to open it up for some questions.
So we'll take a couple of questions for Jack. Matt, you had a question?
Matthew McClintock - Barclays Capital, Research Division
Matt McClintock, Barclays. So I wanted to touch on International here. It sounds like you're doing a lot a work longer-term in Europe, and it's growing in Asia. How do you think about the need for a localized product in the varying regions? And then secondly, how do you think about telling a global story through these partnerships that may have varying levels of, say, consumer relevancy country-by-country?
Yes. The second one of kind of the partnerships, certainly, most of our partners have been driven through North America before the structure. We've always tried to say, "Are they globally relevant?" Some have been and some have not. Obviously, Virgin America, not really that international, but Virgin itself is. Our product collaborations have actually been more, and it's one of the reasons we moved into something like Issa London, we see that. We're trying to make sure that we have partnerships. Obviously, North America is our biggest market at Banana Republic and will be for the next couple of years. We've got to make sure we're doing the right thing for our home market. We are looking to make sure that our partnerships have more of a global appeal. That said, things like Mad Men, when we first did it and continue to do it, actually does well in all the countries around the world. So it's really, you've got to make sure that we've got a good brand partnership, but the product also has to deliver. Your second one was about localized product, is that right? Look, it's always a fine line between localized product and -- it's more expensive. It's more costly to the system to do a localized product. That said, we need to be relevant to the local customer. We're always going to look at the cost/benefit analysis of doing that. I want to make sure that we localize to the right level. So there's always going to be some of it because there are regional differences that we need to take advantage of. We just need to look at, on the margin, where does that start to become more costly that you're not getting paid back for it. I think it's just being analytic and clear about making those decisions rather than everything needs to be different because it's a different market. We, luckily, operate in the biggest cities around the world for Banana Republic. They are more alike than they are different. So the differences for Banana are relatively small, and I don't see that growing. I think we're about at the right level now.
Questions? Yes, Roxanne?
Roxanne Meyer - UBS Investment Bank, Research Division
Roxanne Meyer, UBS. In creating that sense of urgency and driving traffic, how do you feel about the balance of breadth and depth of your assortment? And how does any changes to your inventory strategy come into play, if at all?
I think those obviously have an impact on us. I still think driving traffic is, first, about having that right sizzle in the product so that you got to have it. I've got to run to the store, I've got to get it, or I've got to jump online and get it. That to me is job one. That's product, and then how do we show it in marketing. I think we're fine on the breadth level. I think breadth, we have looked at a lot of different things. We have tried a lot of different things. In general, I think we're good on breadth. Depth, I think there's always opportunity to get into those things that are the big ideas, the big sellers, and make sure that we're always on stock. Obviously on the basics, but on the big ideas, as I mentioned about our product pipeline, the ability to be more nimble only helps us in that one. I think we don't quite know how high is high because, when we're in stock on a great-selling item that is even still a pretty big idea, it continues to do well. So I think there's still opportunity there.
Are you running any different fit specs outside of the U.S.? And then a curiosity question: have you seen any change in the average age of your customer over the past 24 months?
We do run a different fit spec for Japan. So when we launched in Japan in 2006, we ran a different fit spec. But the difference on fit is a technical difference. It's the same style, it's the same idea, but you do have to spend money and time on the technical fit of it, and then you've got 2 different inventories, which certainly plays against kind of a global inventory play. We're going to take a look at that, because it might be more size than actual technical fit. I think there might be opportunity there now that I'm looking at it globally. I think it's more about sizing than fit, my own personal, and I am newer to thinking about that. Second question, on age of our customer. No, we've not seen a big difference in our age shift. I think we cover a great spectrum at Banana Republic. Our sweet spot is kind of that 30-, 40-something person that works, or a little bit older in our outlet business, but they're really kind of in the same. I said that globally. Our customer pretty much fits that profile globally. Depending whether you're in Milan, Paris or Tokyo, not a big difference.
So now, Dorothy?
Dorothy S. Lakner - Caris & Company, Inc., Research Division
Dorothy Lakner of Topeka Capital Markets. Now that the women's business is back on track and doing well, men's obviously continues to do well. Is there an opportunity to pull back on promotional activity?
Yes. So I'm always looking for the ability to pull back on the promotional activity at Banana Republic. It is one of our objectives over the long term. I think we're at kind of the right promotional level for the external market at the moment. I think we've got a -- I think we've learned a couple of years ago we got to play at the right level with our competitive set. So I think we're in there. I'm always going to look for opportunity to dial that back. We've been able to do it more in our men's, and we're starting to do it in our women's. But every opportunity I see it, I'm going to do it. But I still want to be competitive. I still want to be able to play in a marketplace with my competitive set, though I'll look for opportunities to pull that back.
Great. Thank you, Jack. So that concludes the first part of the morning. We're going to take a quick 15-minute break, and then we're going to ask you all to come back for the balance of the presentations this afternoon.
Ladies and gentlemen, please welcome Glenn Murphy.
Glenn K. Murphy
Okay. I'm back. I'm going to go through the second part of my presentation now. It should take about an hour, 2 hours, so hopefully everybody will be fine. Actually, I'm here to introduce the newest member of the company's leadership team. When we were talking about global brands earlier and talking about Old Navy, one of the things that we recognized, in order for Old Navy to become truly a global brand and join the path that has been blazed by Gap and followed by Banana Republic, is we need the right person. And certainly at Old Navy, this is not about finding the right person who only has international experience. Because of the global appetite the business has and how much we believe that Old Navy can play a significant role as a member of the family, it starts always with finding the right person. We've always been big fans of some of our global competitors for different reasons. We were fortunate to meet Stefan Larsson, and Stefan has been here just over 6 months. He has made a huge contribution already. I think you'll all enjoy hearing from him and his vast experience and what he has planned for Old Navy. So because nobody in the room or playing at home has met Stefan yet, I thought I'd come up and introduce him. So everybody in the room, Stefan Larsson.
Thanks, Glenn. Appreciate the introduction, and I appreciate the opportunity to speak with you all today, to meet with you. H&M, we didn't have these kind of forums. And I'm happy I got a break in between the other speeches.
So today's presentation is going to be about Old Navy, and it's going to be about my thoughts about Old Navy and all the opportunities I see for the brand looking ahead. It's going to be about 3 things. It's going to be about driving profitable sales growth, how do we do that, and it's going to be about strength in our already really strong and powerful brand, and it's going to be about building the foundation for our international growth. Those are the 3 areas that I'm going to cover with you.
But first, let's just give you a short background to myself. So for some of you, you know that I've spent almost 15 years with H&M. During that time, I touched almost every part of the business. We grew the company during that time from $3 billion yearly sales to $17 billion and from 12 countries to 44 countries. It was a great learning experience. It was an exciting journey, and then I had that coffee with Glenn. As you know about those kind of meetings that first, following the meeting, you realize that, that meeting actually changed the trajection of your life. But you don't know that going into coffee. But this was one of those meetings for me. So I remember coming home that night to my wife, and just casually asking here what she would think of moving to California. And luckily for me, she was positive to that, so we're all now here. She got some time to think it through, so she really became positive, and she's excited as I am to spend time in California.
So the reasons I joined Old Navy comes back to 3 things. It's a very strong brand already now, and it's a strong brand in the value sector. It's a brand in the value sector.
And I've always had a passion for the value sector. I love the idea of taking something great and make it accessible, taking something that is usually exclusive and separated from the many people and make it accessible. So I've always have a passion for that, and I've always have a passion for strong brands. And for me, Old Navy is the perfect combination of both.
Old Navy also has a unique position in the marketplace. I followed Old Navy throughout my career. I've been in trips to the U.S. every 6 months and I've spent 2 years actually based out of San Francisco for H&M. And the way Old Navy combines fashion to the whole family at a great price and do it in a fun and inclusive way really sets the brand apart. And combining that it's a really strong brand and it's a unique position and that most growth is still to be done, that's a very exciting combination to me, and that made me join.
So let's look at my first 6 months. So I spent a lot of time initially getting to know the brand and getting to know the teams. I've been out in stores. I've been visiting with a field team, I've been speaking with customers. I've been working a lot with the creative team here in Mission Bay in San Francisco. And my first focus has been to get to know what created the momentum for 2012, what drove the positive momentum for 2012 in order for us to keep that. And once we keep it, start to improve on that. And once I learned that, I started to develop the long-term growth strategy for the brand. And for me, that strategy has to be about finding a way to drive continuously profitable sales growth.
I also spent time with my leadership team, and I strengthened the leadership team. And I want to give you some highlights of that. So Ivan Wicksteed just joined us as our Global CMO. He has an impressive track record in marketing. He has been the Global Creative Director for Coca-Cola for 6 years. He's also worked with other iconic brands, like Converse. He has also worked with some of the best agencies out there. So he's going to contribute a lot in building Old Navy for the future.
I'm also excited to share that Jill Stanton, who you had the opportunity to meet earlier today, joined as an EVP of Design and Product Development. And her background is a great background. It's with Nike for 10 years. And her most recent role there is she headed the Global Apparel for them. And in addition to Ivan and Jill, I have a strong team of Gap Inc. leaders. So I have a big belief in the whole leadership team, and we all share the same belief that the great is brand -- that the brand is great, but more things are still to be done.
So winning in 2013 and beyond is going to be focused around our brand voice, about products, about store productivity and laying the foundation for our international growth. So let me start with the brand voice. And this is important for me to tell you as analysts and investors. Old Navy, for me, will always be about fun, family, value and fashion. And for some of you who haven't met me yet, you might have been concerned that with my background, that was going to turn Old Navy into a fast fashion brand. And I just want to tell you that, that would be a big mistake. And I'm a firm believer, and I've been a part of building a really, really strong brand before. And I'm a firm believer in that the only way you can build a brand stronger and stronger over time is to build it on its foundational strengths.
And the foundational strengths for Old Navy to me is about fun, family, fashion and value. And learning more about the brand, I went back to the first years. There was something that made Old Navy unique, going from $0 to $1 billion in yearly sales in less than 5 years, no other apparel retailer has ever done that.
So I went back and I found one of the early mission statements. And it reads, "Imagine that the world runs right and there's a store that offers clothing for the whole family and everything it sells has great style with great quality at a price you can't believe. This is Old Navy." And it really resonated to me, and it resonates to the team, because I've used this internally, because it's one of the original mission statements, and it kind of funnels down the fashion to the whole family at a great value and delivering that in a fun and inclusive way.
So when we formed our current mission statement, which is about making current American fashion essentials accessible to every family, it builds on that original foundation, because fashion essentials have always been the core in Old Navy's offering, and it should always be the core, and making great products accessible to every family and every family member has been and will be our strategy.
So how do we make fashion essentials accessible? What's the unique Old Navy way of doing that? So the way I've tried to show it to you here is that the way we create products with real value is that we take the look and feel of our best inspirational competitors. Our product look and feel should be on par with our best inspirational competitors. And then we take the price and the convenience from the best direct competitors in the value segment. And then we combine that into a great product at a great price.
And when we do that, and I've seen it over these first 6 months I've spent with the brand, when we do that, we consistently outperform even our best competitors. And let's give you a real-life example of when we are doing this. This is the Rockstar jeans. If you have been to our stores, any of our stores over the last month, you cannot have missed it. And if you have, you should take Glenn's advice and swing by our flagship of 4th & Market, because we have plenty of them there. It's one of the best fashion essentials we have right now. And it's a great product because it's a current fashion essential, it's a colored skinny denim. It's a must-have in almost every woman's wardrobe. And what makes it great is that we have it in a really good design, really good quality, and in more current colors than anybody else. What makes it accessible is that we have it in a size that fits everybody. And we have it at a really good price. It starts at $29.
So this is a good example of a fashion essential. And what I'm working with my team on is to make sure that we have several of these anchoring the women's assortments, several of these in the men's assortment, strong fashion essentials. And what we then do is that we take the fashion essentials, and you see it's the Rockstar jeans anchoring a number of different looks. I had the opportunity to speak with some of you this morning, and we spoke about the importance of a strong product focus but also showing our customers how to wear it. The customers are telling us all the time, "Make it more convenient and inspirational for me to shop." And our take on that is to be really clear on our fashion essential product focus and, around that, build fashion essential looks.
So the way this ties into how we build the shopping experience is that we have the must-have products, the fashion essential products, anchoring the different departments. And then we have must-have looks that we build around that. And that creates this combination of being clear, inspirational, and at the same time, very convenient. Because coming back again, it's about -- it's not just about competing on products, it's about competing on the customer's time. And the customers are telling us, "I want to have a convenient shopping experience, but I want to be excited. " And for me, it reminds me about when you get the seasonal issues from the big fashion magazines, you know there are 200 pages plus. It's exciting, but it's a little bit overwhelming. You read, and there's all these trends, all these styles, all these products, but then you come to those pages with the seasonal must-haves. You recall, you remember those? Like 5, 6 pages, the editors have funneled down the essential products for this season and the essential looks. And I love those pages. Because it's fun when you have time to read 220 pages, if you're really, really interested, but I have 3 small kids at home. So even if I'm interested, I don't have that time. And they won't let me.
But I won't -- I don't give up on those 5, 6 pages with the must-haves. And that's the same feeling. And speaking with people about that, they share that same excitement over those seasonal must-have pages, the products and the looks. And there's that combination of that it's convenient, easily accessible and very inspirational, and that's exactly how we want to build our shopping experience.
And if you go by our flagship store today, you'll see what I mean. Because I feel like we are moving in a really good direction to embody that experience in our stores. And when we do, we see that we drive profitable sales growth.
So this product focus also ties into enabling better marketing. So we're doing a good job when it comes to the marketing today. And the way to improve that, my belief is that it has to start with a brand. So everything we do has to tell the brand story of making fashion essentials accessible to the whole family in a fun and inclusive way, so first. Second is that it has to be rooted in a strong product and value message. And that strong product and value message has to go through all the marketing channels to the windows and create a big in-store impact. Sometimes we do this really well today. In the future, we'll do it better and better and better in order to tell our story and to create that massive impact when you come into the store. Because I'm a firm believer in that when you create impact through the products in the store, that's the best way to create this combination of convenience and inspiration.
Going further into our stores. So bringing products to life in our stores. Sabrina mentioned that we have right-sized half of our fleet, so we have taken away 2.4 million square feet, and we have a target of 2.5 million. So we're close to that target, and that makes our size of our stores much better adapted to the offering and to drive profitable sales growth.
But where we have a huge opportunities is to work with continues improvements when it comes to product placement, product presentation and different variations on density when it comes to how much garments to present in a certain space. And dollars per square foot grew 10% last year, which is good, but it's still 20% below our top peers. So we have significant opportunities to continue to drive the productivity in our stores.
Building the foundation for our international growth, this is -- I'm excited about many parts of having joined, and this is one of the most exciting parts. I just came back from Japan 1.5 weeks ago. And that's where we started our international growth journey almost a year ago in a shopping center right outside Tokyo. It's one of the most competitive shopping centers. It's a full global lineup, all the best competitors. And we have been doing really, really well from day 1. And I will say 1.5-week ago, which is almost 1 year into it, we are still doing really, really well. And when I was in Japan, we opened our fourth and fifth store. And even though there was a typhoon warning, saying that unless you have to leave your home, you should stay home, and that's not a good day to open, but we still sold really well. So it must have been some kind of fashion emergency that led people to leave their homes and to visit our stores. So that shows a little bit of how well-received our brand is in Japan. They love our approach to fashion essentials. at a great value and that we do it in this fun, quirky way. The goal is to have 15 to 20 stores opened by the end of this year, and the way I see it, it's just the beginning.
We're also looking into franchise. And as Stephen mentioned earlier, franchise has been very good for the Gap brand, and we believe it will be good for us as we are planning to launch franchise in 2014.
So parallel to taking the first steps in Japan and franchise, we're also working on a long-term global growth plan. And that long-term plan is for the next couple of years. Can't give you any details on that right now, but I can tell you that one potential country we are looking at is China. And the only thing I'm allowed to say is that I'm excited for that.
So with my experience working with many different countries and growing our brand and growing the sales profitably in many different countries and getting to know Old Navy from the inside, I can say that we have the opportunity to win in every country we enter. And that's really, really exciting.
So it's not all Glenn's fault with the coffee. It's also that the brand coming back so that the brand is really, really strong, and we have an enormous potential ahead of us. And it's about making sure that we have the discipline and the focus to stay true to our brand and step-by-step move to our self's full potential.
So that's the representation part. And now I'm ready to take your questions.
Great, thank you. Yes, John.
Stefan, could you talk a little bit about your approach to merchandising and allocation by store type thinking about is there a difference in how you're merchandising the larger stores in the bigger cities? Do you take an approach where you have a broader assortment, use your learnings from that and flex it across the rest of the fleet?
It's a good question. And it's -- for me, it's an ongoing -- it has to be an ongoing work to make sure that we match the composition of the assortment and how we allocate that with the local demand that's there. So it's something that I believe we do quite well. I was actually impressed. Again, there is only so much you can learn about a brand or a company before you join. And then you join, and then you see it from the inside. And it's been a really positive experience for me because we work with, same as Stephen mentioned, different climate zones, and I feel like we are doing a really good job there. But there are opportunities in that area as of -- as in other areas, to continuously improve that.
Richard Ellis Jaffe - Stifel, Nicolaus & Co., Inc., Research Division
Stefan, could you comment on your first 6 months and your observations regarding sourcing as compared to your prior 15 years? Are you pleasantly surprised, challenged, an opportunity ahead?
It's also one of those areas where I get a lot of questions, and I must say, and it ties into Glenn's presentation earlier, that I'm impressed by the sourcing capabilities that Gap, Inc. has built up. And I believe we have a competitive pipeline. I believe we have the tools that we need. And where I see opportunity is to making sure that we utilize those tools and that we integrate those tools into the assortment creation. So I was pleasantly surprised and a little bit impressed.
Stefan, just a point of clarification first on China. Would that be a market that you would franchise, or would that be a company-owned market? And secondly, if you could assess for us Old Navy's promotional strategies, if you think there's room for improvement there? Relative to your global competitors, I think Old Navy might be more promotional. And I'm not sure that it's a seamless promotion. In another words, the e-commerce channel may run differing promotions to the stores. If you could talk to us about your approach and strategies there.
When it comes to China, I'm coached to say that I'm very excited. When it comes to promotions, yes. So when it comes to promotions, I can speak more freely. I believe there will always be -- there's always an aspect of promotions that is connecting to the fun of the shopping experience, so we should never lose that. So there's a promotional level that's driven by the customers' expectation. And I believe it's really important to follow that. But then there are promotions that are driven by parts that we can do better internally in terms of -- I'm a firm believer in that one really important thing for us to do is to create a stronger, stronger assortment over time. And I see that when we start to do that consistently, we can take away some of those promotions that is the result of that we haven't done as good of a job as we had the potential to do. But it's about finding that balance.
Just hoping you could elaborate more on sort of what you're talking about from a competitor standpoint. First, when you talk to your customers, who do they view as sort of those inspirational brands and you think they can afford and who they look up to? And then, secondly, in the U.S., can you talk about the value competitive space right now? Obviously, if you put H&M in there or not, but just who you think the best-in-class players are?
What was your first question again?
About the aspirational brands.
Okay, yes, the aspirational part. I guess, it ties back to my passion for value. And it's about making great products accessible. And I love the idea of being in our stores and seeing that we have customers that shop on a budget, that their kids would like to have the same-looking jackets as a more expensive brand but that we can offer that look and feel, but at a price that everybody can afford. So we're not looking at any specific inspirational competitor. We're looking across the board, and we are looking from a women's, men's, kids and baby perspective. But we love the idea, and we believe it's within the DNA of the brand, to make those aspirational products masspirational and accessible. And Jill, who I mentioned, is going to work with her design team to refine our way of funneling down all these trends to what are those aspirational products that we can make masspirational. When it comes to the competitive space, it's -- in the value sector, it's really competitive. And what makes me excited is that the way we make fashion essentials accessible and the way we make the must-have products as anchors and the way we create outfits and the way we have a point of view and the way we funnel things down and make it easy and inspirational, I don't see anybody else in the value sector doing that. So I see that, that sets us apart. And I'm a big believer in focusing on what we can influence, given that we have a unique place in the market.
Stephanie S. Wissink - Piper Jaffray Companies, Research Division
Steph Wissink from Piper Jaffray. Stefan, I was just wondering if you could talk a little bit about the use of the word "American" or Americana and, as you think about going globally, is there a refinement or a potential leverage point in that heritage message?
It's a really good question, and it reminds me about my first 6 months here. And I have a short walk from my garage to the office. And every time I park, I walk, I tend to walk -- come at the same time as some of my colleagues. And they surprised me early on by complaining about the weather in the Bay Area. And I am telling this story, and then I always give them the opportunity to have an [indiscernible] to Stockholm in the winter, and then they will never complain again. But -- so there is something aspirational and inspirational in America. Something inspirational and aspirational in San Francisco, California, and it's not anything that anybody else can copy outside America. So it's something unique, and it is aspirational. And coming from Europe and spending a lot of time growing a business in Asia, being American. And also, in the Middle East, everywhere outside America, America is aspirational. And that's something that we should leverage, and that's why we have in the mission statement that we should make current American fashion essentials accessible. And we have seen that in Japan that we use San Francisco, California, we play on the American, and it works really, really well. And there, I think it helps to have that outside perspective, because I get into these internal discussions all the time, it's like, "Is it really aspirational?" Yes, it is aspirational. And the good thing now is that we have proof points in Japan.
We'll take one more question.
Stefan, I'm wondering if you can share with us the couple of areas that, in your first 6 months getting to know the organization, that you feel like you could personally have the biggest impact, or where you think the greatest opportunities are for Old Navy that you've identified so far?
It comes back to what I built the presentation around. I'm a firm believer in that the brand is very, very important, and always, always driving to us what the brand stands for. Second area, which I have spent a lot of time and will spend a lot of time, is around product and building a stronger, stronger assortment over time. Third area is to take the brand focus, the product focus, and make sure that the marketing is, yes, it should be fun and quirky, but it has to tell that unique brand story. Because when I'm in our stores today, I'm just so impressed by parts of our assortment. And I just want more people to realize that taking great products and making them aspirational is for them as well. So I believe that we can expand our customer base, that some of the customers that shop with us today, we can get them more to shop more often, but we can also get customers who are not shopping with us to start shopping with us because it's just smart. If you can buy these denims for $29 or $34, instead of $100, even if you are a customer that you could afford, why not?
All right. Thank you so much.
All right. Thank you very much.
Great. And with that, I'm really pleased to announce that we have Art Peck from our Growth, Innovation and Digital area coming to speak to us.
Good morning. I think I've stood before you in past performances up here and talked about the franchise business, the outlet growth strategy, and then last year with Stephen Sunnucks, about 2 years ago, about the plans we were putting in place to drive the resurgence of Gap in 2012. And why is that relevant? I think it's relevant because those experiences for me in my new role in GID, I think, help inform the opportunity, the imperative and some of the challenges of aggressively driving innovation inside of this company. And that's really what I want to focus on in this conversation this morning.
There's a lot going on in my new world in this new role. So it's -- we share responsibility for the big digital businesses and the platform and capabilities they sit on. It's our younger, smaller, higher-growth brands that we're obviously investing aggressively in and have high expectations for. It's our card and payments business, which we don't really talk about very much, but that's a material contributor in this company, and I have high expectations for that business as well. And then it's our innovation agenda.
And Glenn spoke a little bit to sort of centralizing, in some respects, innovation on behalf of the company. Obviously, innovation takes place across the entire corporation. But I think the new twist to this is, really in following where our customers are going, is in thinking about innovation holistically all the way through to the bricks-and-mortar customer experience. And I want to spend today mostly focused on that.
Let me first talk about some semantics. If I think about retail over -- well, really since probably the beginning of time, retail was a physical experience where you got -- where you shopped, you bought and you got in a physical environment. For the last 15 years, we've lived, really, in a 2-channel environments: the virtual space with the internet, where you shopped, bought and got on a screen and to your home, and the bricks-and-mortar experience. There is an immense amount of buzz words and everything else out there. I open up my NRF SmartBrief every morning and it's omni-channel this and omni-channel that. And there's a lot of talk about omni-channel and, I think, a lot of lack of clarity about what is really is. And that's part of what I really want to talk about today.
For us, omni-channel really is, off to this side, shopping, buying and getting seamlessly anywhere. And that's a mouthful to say. It's a mouthful to do.
What I will talk about to you today is probably not going to be terribly profound. I think the profound aspect is that for us, it is real here and now. And I want to just take you through that a little bit.
Two backdrop points I want to make about this, which is, we've all experienced technology coming into a retail space. I would challenge that very few of us have experienced technology that is relevant to the customer retail experience, the customer experience in a retail environment. If you really think about it, being a little bit harsh, but pretty much true, the primary technological change that bricks-and-mortar retail has ingested in the last century is the change from the mechanical cash register to the electronic POS terminal. There's not been a lot of other relevant technology that has showed up in a retail environment. Yes, we've always seen the iPad that's tethered to a pedestal that has the webpage on it that somebody has changed to Craigslist or something else. But it's gratuitous, and it's actually kind of dumb technology. And we've thrown a few of those things out there as well, and at the end of the day, they wither and die in a retail environment because they don't convey meaningful customer experiences, meaningful customer benefits.
The other thing I want to put behind innovation and technology is that it actually, to be relevant to you and to us, needs to deliver against the economics of this business. And so I'm going to post 3 or 4 things up there and anchor my conversation on what we're doing back to these things.
So I have run all of my businesses in this company with a mind towards what I call yield. Let me just explain that for a second. We obviously discount our competitor's discount. So I carry around with me a pretty good quantification of the difference between ticket and actual and how much money that adds up to. And we're not a hospitality business or an airline. On the other hand, we do have seasonally liable merchandise that's perishable over the course of the season, at least most of the assortment is, and therefore, yields the opportunity to get every penny out of every unit over the course of the selling season. And we've managed that very aggressively.
It's a big number. And I like big numbers because big numbers have that wonderful effect of, if you move the needle against them a little bit, they yield big numbers. And the wonderful thing about yield improvement in this business and any other business is that it's a top line benefit, so it shows up as comp, and it's basically 100% drop rate to the bottom line as well, price realization or yield.
So that's one of the things we're really focused on here. And I'll address some of my points back to that.
The second one is traffic. And I would connect traffic and conversion together. Traffic is something we need every day. And on and off, we have had our traffic challenges in different parts of the business. On the other hand, this industry typically runs at a conversion rate of feet over the lease line in-store of somewhere between the low 20s to the high 30s. So the way I think about that is that, pick a number, 75% of customers shopping apparel have an unsuccessful shopping experience.
So if I'm thinking that traffic is an imperative, I immediately go to conversion. And again, if you can move the needle modestly on conversion, you move the needle significantly on comp and traffic. And so we're focusing much of this capability on that metric as well.
And then the last is dollars per transaction, and I'll come to that. But in particular, you've heard reserve-in-store referenced several times today. Reserve-in-store is an opportunity to build a selling experience against highly qualified self-identified traffic coming into the store, and that is a dollars per transaction opportunity.
So let me just talk a little bit then about -- if I've talked semantics and where we are, let me talk a little bit about the substance of what we're doing right now, much of which you've heard. But let me try to lay it on a little bit of a map.
So we have foundationally built an engine, a brain, whatever you want to call, it that now knows where every piece of inventory is in this company. And that may not sound like a big deal, but in an environment where you have 3,000 stores, multiple distribution centers that service cross-channels, knowing where every unit of inventory is in almost a real-time basis is actually a big deal and a huge capability.
And what that begins to afford us the ability to do is to seamlessly connect demand, wherever it might be, to supply, wherever supply might be. So today, in the historical environment, if you allocate a -- units to a store, they sit there. And one way or another, they are going to leave that store down to the last potentially bloody transaction.
With a brain that allows us to connect supply and demand seamlessly together, ship-from-store is the first manifestation of that. So what we can do with ship-from-store, and what we are doing today in Gap and Banana Republic here in North America is that we are showing online demand to in-store inventory. So we are able to expose inventory that sits in our stores to eyeballs on our website in a way that, for the customer, is a seamless experience, and for us, it allows to identify effectively shadow demand that we've been seeing in our online business that we didn't identify before. Because in past, we were taking inventory off the website when we sold through it in our online inventory pools. The net of that was is that we were telling people we were out of stock online. And oftentimes, the inference of that was, for many people, that we were -- no longer had those units available in the stores as well, because many of those customers don't understand the notion that what they see online is not a literal representation of what they would expect to see in the stores as well.
So number one, we are able to identify shadow demand that we're now filling and buying into that we have seen because we've been exposing that inventory to online customers.
Second opportunity there, which we're just beginning to tease out, is back to yield. It's a rate opportunity. So I have high-yield online demand, potentially mapped against what would ultimately be low-yield markdown product sitting in the wrong place at the wrong time in the store. By starting to match that high-yield demand with those units, there's a rate arbitrage opportunity of pulling those units out of the stores, selling them and processing them effectively in the stores and shipping out of those stores in order to serve our customers better.
So ship-from-store is one step forward built on this brain that knows where our inventory sits. Next step, find-in-store.
So if you go to the Gap app, which I have here, you will find a find-in-store screen that is right on it. It's geo-located me already as sitting in this building, and it's highlighting the Embarcadero Center and the Flood Building store as the 2 closest Gap stores here. And I can find any unit scored on a green, yellow or red basis, which reflects the fact that there is a margin of error due to shrink and data integrity and those kinds of things in our inventory accuracy. It reflects that to the customer, has the ability to find that unit in the store. And I can now do that in a store. So if I walk in and I'm searching for a pair of 30, 32 1969 denim in the indigo selvage wash and I don't find my size, I have, in fact, checked and asked a sales associate to check on it because I note that it's in the store. So what does this convey from the standpoint of these metrics that are sitting behind me?
First, there's a traffic issue here, right? If 75% of the time, I, as a customer, am disappointed by going into a store and leaving that store empty-handed, I've now materially raised the probability of having a successful shopping experience by being able to find those items that I pre-shopped online in the store.
Second thing it does is, it provides -- begins to provide an increase of the service experience inside of the store. I can find those items myself. We all know that at times, it can be challenging in different parts of different retailers to find a sales associate who can help you. With this feature, I can actually figure out whether that inventory is physically present in the store and then ask somebody to help me on my behalf. And that's actually a big deal.
It also empowers our sales associates who have a smartphone or an iPad mini to be able to access our inventories in a seamless way versus having to duck behind the cash registers, look and do an inventory search across multiple stores to find it. So it's a material increase in customer service on both sides of the equation going forward.
On top of that, in late May or June, we will be turning on, on a beta basis, but this is a 0.95 beta kind of thing, reserve-in-store. So what is reserve-in-store? Reserve-in-store is I go online, I shop, I love something, I find it, I note that it's in a store near me, and I reserve it. Sales associate will pick it and set it aside. And as a customer, that unit will be held for you through the end of the next business day for you to come into the store, try it on, build a transaction and an outfit around it and take it out of the store.
Why did we go to reserve-in-store? Everybody says, "Why don't you just do pickup-in-store?" So here's why I would say we have not done pickup-in-store. I will not name who this is, but recently, I did a pickup-in-store with a large, well-known electronics company. And it was an amazing experience, and then I got a confirmation e-mail 17 minutes after I placed my order that my order was ready to be picked up. I went into the store up Market Street, I walked in at 5:00 on a Friday afternoon, I identified myself, they found my order, and I was out of the store in 4 minutes. It's an amazing thing for me from a transactional efficiency experience in that store. It's a crappy thing if you're actually running the store, because you just missed an opportunity to build a shopping experience around the fact that I was in there, I've identified I wanted to buy and -- but I was in there and I was gone in a heartbeat.
So for us, reserve-in-store, particularly since we're in a tactile business where people want to try things on, they want to feel things, they want to know that it looks good, reserve-in-store, for us, depending upon the brand, is going to be a tremendous opportunity, number one, to get traffic in our stores that identifies themselves at the beginning of the shopping experience. That's a wonderful thing. And it allows us to then build a custom shopping experience around that.
This will vary across our brands, of course. Adrienne and Intermix, that is going to be an amazing personal shopping experience. And in fact, she's really doing that today with a lot of customers who will call in and say, "I saw this on your website," or "I saw this in your lookbook, can you hold it? I want to come in and see it and try it on." And of course, they build a shopping experience around that. The Old Navy reserve-in-store will be different than that. It's a different service model, different price points, et cetera. But in every case, it affords us what is really a retailer's dream scenario, a customer walking across the lease line, self-identifying themselves that they're there to buy at the beginning of the shopping experience, and everything that can follow from that.
So that starts in June. We will debug it and build the structural capabilities around it. I will say it's not easy, but again, part of my experience and part of what we're doing here is acknowledging the fact that we're building capabilities that are cross-functional, cross-business and cross-channel, and that's not the way that we or many other retailers are wired. And I think we are very focused on making sure that this experiences show up in front of our customer in an absolutely seamless way so they have a great experience from the get-go.
I like to tell my story here that, at yet another large consumer electronics retailer, I have used find-in-store now 4 times, call me slow and stupid, only to go into the store and find out that the sales associates know nothing about the find-in-store feature, number one, and of course, the inventory that I was looking for that I drove to the store to find is not available in the store. Shame on us if we let that happen, and we won't. This is going to be a great experience for our customers. We're going to roll it out as fast as we possibly we can. North America is our starting point for doing it. Gap and Banana, 2 markets, 10 stores each, turning it on in late May or early June, and then a roll from there through the rest of the year.
That's the beginning. It's built on a foundation of our inventory capabilities building store capability. Let me then fast forward just slightly, but not into the realm of science fiction.
Big data, another buzzword out there. And stacked on top of big data is personalization, another buzzword out there. So we are working right now, heads down, on big data. The issue isn't having the data or having big data, it's turning the data into relevant information that then feeds a personalized shopping experience. This, however, is absolutely tangible. The technology is there today. We are already now starting to customize and test personalization of your website landing experience. So if you are always -- by either virtue of you sign in or the cookie you carry in your browser, if you're always a Kids and Baby customer coming into Gap brand on the website, we're going to test not making you click through the landing page and the other things you need to do to get to the relevant Kids and Baby information. That's a tiny little baby step.
For us, personalization really goes to what this thing does. So if you're not assuming that this will be, and in fact, really is today, ubiquitous in a shopping environment, you should be. We believe it will be. And we believe that this really will and has and is forming the bridge between the online world and the bricks-and-mortar experience. So things we should be doing that we're looking at. If you go on and shop, as most of our people do, and you don't buy, no reason today that your wish list on the website shouldn't port itself through to your iPad mini or your tablet or your smartphone and follow you into the store. That's an obvious no-brainer that, that shopping experience should be seamless across those channels and then show up and pop up in the store environment.
Personalization really comes to life when this device lights up when you cross the lease line, recognizes who I am, and the shopping experience begins there. And again, that's not a profound observation. There are a lot of people that are talking about that. It's real, it's doable, and it will happen very quickly.
The core, we believe, and I'm really passionate about this, to bring that to life is a great multi-tender loyalty experience. And it's different than I think how this industry is typically thought of a multi-tender loyalty experience, which I compare more to the coffee card that you get 5 punches on and you get a 6th cup or the sandwich card. It's not really what we're talking about here. What we're talking about with multi-tender loyalty experience is giving you, the customer, the incentive to self-identify at the beginning of your shopping experience. And that allows us to then initiate a personalized shopping experience, whether it's on the website or in a bricks-and-mortar experience. It allows us to personalize a promotional offer. You can derive individual elasticity curves on the basis of a pretty modest amount of data. It allows us to personalize product information as you're walking across the store. A sales associate today would have to recognize me, know when I was last in the store, know what my size is and when I last purchased 1969 denim to tell me that, when I come into the store again, there are new washes available in my favorite fit and size.
To do that, on a foundation of big data with personalization, is actually kind of a no-brainer. Transaction history matched with transactional -- transaction history matched with date and time of transaction and content of basket allows that kind of personalized message to tell me that there are new washes available, and shouldn't I try them on, and maybe a $10 coupon if we felt in the mood that day that, that was the right thing to do.
The other way that personalization comes to life, and I hate to call out Square, but I will, because they have that bilateral communication now that they've established, is the same personalization that is delivered to me crossing the lease line can also be made available about me to a sales associate. Again, used in a different way in a different environment, absolutely will come to life in our higher-end brands, will be a different experience in our more value-oriented brands. But the notion of a sales associate knowing, like they will today, that you're coming in after you've reserved-in-store for every customer visit, a really powerful way to create an exceptional customer experience in a world that has been essentially depersonalized today from a retail standpoint.
So I'm going to stop, and I'll take some questions, and I'm available afterwards to answer questions as well. Just summing it up. This is here and now, and we're doing the work. There's tremendous capabilities that we have in this company. I've been in this job now 3 or 4 months, and I'm blown away by what I actually believe is the competitive advantage that we have. Glenn mentioned that we're 30 miles away from Silicon Valley. We have here access to amazing talent, business analytics talent, big data, data mining talent, product management talent that you would see in a typical software company that manages the development of our e-commerce platform every day, terrific talent that we think is a competitive advantage and a very strong team to actually execute on the things that I just talked about.
So we're really excited. I'm super excited to be in this role. It's a very different perspective. But to us, it is a way to add,, on top of great product every day consistently, competitive differentiation through a unique customer experience. And we think we have first mover or at least fast mover advantage in executing it. Thanks.
Thank you, Art. So we have questions for Art. How about Steve?
[indiscernible] for me is, how much do you have to improve the conversion rate to make the math work on the economics of spending the money to access the data to move the data?
Almost a tiny movement would justify the investment, because the investment really is modest. And it sits there, for the most part, powering the e-commerce business that we have today. And so we're not talking -- we're really not talking a very large amount of money at all. That's why we are very good in this company at developing business cases to look at investment opportunities. This is one where -- what do you have to believe for this to make sense? The math is so easy to get your head around that it really didn't merit a lot of debate in terms of pushing forward on this.
How about over here? Ike?
Irwin Bernard Boruchow - Sterne Agee & Leach Inc., Research Division
Ike Boruchow, Sterne Agee. When you talk about your omni-channel capabilities and the reserve-in-store rollout for June and later this year, does this change your methodology on how you manage per-store inventories and how you inventory those brick-and-mortar stores?
It's all connected. What I would say is there's probably 2 parallel paths that are moving right now, and that is that we're working, I was working, Steve's been working, Jack and Stefan, all along the way to make sure that we're properly allocating inventory into our stores, even though that's obviously an uncertain task. One of the things I did in Gap was we pulled back on our presentation minimum so we were not overly allocating in the initial flow, which gave us much more flexibility to allocate to demand downstream in the product flows. So I won't say that this changes it, necessarily, as much as it does these 2 things are supporting each other. And we're doing things in the kind of core inventory management function to improve how we manage inventory and improve the yields off of our inventory. And at the same time, we're effectively virtualizing the inventory that we have across our entire physical footprint.
Art, can you talk a little bit about the management of in-store labor as executing on the reserve side and how you guys have improved that maybe with ship-from-store?
So ship-from-store, last year was really when we started getting into it. And what I would say is it was really about beginning to build the operational capabilities in the store with the sales associates to execute this. It's very easy to sit in this building and talk about doing something. Anybody who's ever worked in a store knows that anything that you can imagine happening will, and many things that you can't imagine happening will happen. And so it was about building robust operational capabilities. We did put some incremental payroll in to support ship-from-store. And what we're doing right now is, having brought the model up and running the model, it's clear that the payroll pays for itself. It's got a tremendous return on it. The second thing we're doing with the field leaders is starting to then tighten the model up operationally and put the minimum amount of payroll in that we need to in order to drive this. The good thing about ship-from-store is the same operational capabilities, get the order, assign the order, pick the order, pack the order, absolutely applying exactly the same way to reserve-in-store, with the exception that there's a front-end customer experience you have to build on top of that, of the picking and packing process.
In the context of these actions, are there any role models outside of the industry or inside of the industry of people who are pioneers in terms of this? And also, could you just give us context for how we should think about omni-channel on domestic versus global?
Sure. I would say, if you think about role models, there are different companies who have -- seem to have mastered different components of this. It is hard for me to see somebody out there today who's really nailed this holistically. The one experience I referenced, clearly, from a transactional efficiency standpoint, the back-end of this whole thing, they've got it nailed. But the in-store experience, as a retailer, seems to me to be really lacking, because no retailer wants to get qualified traffic in their store and get it out as fast as you possibly can. It's the antithesis of what you're trying to do as a retailer. The other thing is, it's hard to tell, for people who appear to be doing it well, just exactly how it's happening underneath the surface. And what I mean by that is, some of these models that have been brought to life, I know for a fact, are happening more through brute force than they are through good systems and capability. And so I don't think there's anybody out there today that I would really say, "Okay, if we could just be like them, we'll really have this thing nailed right now." On the North American versus global, obviously, you've heard -- everything you've heard today is global is a priority, North America is still the economic center of gravity of the business. And so we're going to be rolling this capability out in North America first, getting it built into our operations and processes, understand the learnings from it, and then we'll come up with a timeline for how to roll this internationally as well. But you apply this, first and foremost, to where you get the most leverage out of it, which is here in North America.
As a follow up, is one-day shipping very important to [indiscernible]?
It's not, so far, been that important. My perspective on the whole what's going on in terms of fulfillment expectations is, we are going to be fast and nimble in order to respond to where our customers' expectations lead us. And I think we're seeing out there today, everybody's trying one of everything. And I think there are a lot of things out there you look at and say, "Okay, I get that from a customer benefit standpoint." There are some things that people are trying, lockers at Staples, that I don't get as a customer benefit. There are just some things out there I think we're seeing where people are throwing stuff at the wall and then they're going to prune it off and focus on the things that really matter to customers. We are very much prepared to be nimble when it comes to fulfillment expectations. And we have the advantage that, as many forward-facing DCs as some of our competitors might have, we have 2,000 forward-facing DCs in North America that we're shipping from today in ship-from-store. So it gives us a very close to market presence with those stores in terms of think about them as forward-facing DCs.
All right, one more question. Dana?
[indiscernible] about the economics of this. Labor cost, obviously, reserve-in-stores, and then you mentioned fulfillment. Is there fulfillment centers that need to be built, or how are you thinking of stores versus fulfillment and the economics?
So the economics in stores, it's very early days. If you do, again, the simple math around what do I have to believe for the payroll to make sense, the numbers are extraordinarily easy to get your head around. And I've always thought about payroll as payroll is not an expense. You put a dollar of payroll in. I want to get well more than a dollar out, so it's not an expense. And so far, we've seen in ship-from-store, as the beginning of that, that the economics are very attractive. They're very attractive. So the marginal cost of doing this versus the marginal benefit that we're getting to the P&L, it's a no-brainer. What was the other one, then?
Fulfillment, yes. I have a strong bias right now that we should not -- we're going into a world of significant uncertainty from the standpoint of customer expectations around fulfillment and competitive offers around fulfillment. And uncertainty demands flexibility and optionality. And that's really how we're thinking about this right now. Part of ship-from-store was to build local fulfillment capability for non-store orders in key markets. We could very easily leverage that capability in major metropolitan markets for same-day or next-day delivery on the infrastructure that we've built already. So versus putting large set piece assets in place in the form of incremental fulfillment centers right now, I think we would rather stay flexible and see how it develops and see what portion of the market moves to these much tighter fulfillment expectations, and that's the strategy.
Great. So with that, Glenn and Sabrina will be back on stage and continue with Q&A.
Glenn K. Murphy
We're a little late. And I know everybody is hungry. At least, I am. Janet [ph], the answer to your question is corporate in China. He gave you the right answer, because we coached him, but that's the answer. Am I picking people?
Glenn, I think the most interesting I've heard today is about knowing where every unit of inventory is throughout the organization. I was wondering if you could put any metrics around that, either do you buy fewer units, does that enable you to buy fewer units and turn faster? And if so, by when? And then, secondarily, does it change the level -- you push more to the store level, you push more units into the store so that when you do the seamless ship-from-store, that there's much more product in front of her or him when he's -- when they're shopping?
Glenn K. Murphy
In terms of the benefit, when it comes to turns or buying less inventory, I think we always look at this from the customer at first. So at the end of the day, we know directionally, given the business performance right now in terms of revenue and how much throughput we have on units, we have enough inventory. So the question for us, over time, is going to be, can we make sure that inventory, for every million units we buy, starting with the vendor to the right country, once it's in the country, again, it's in the right DC, get it then to the right stores and channels, and that chart that Art showed at the end, where he basically had lines going from every single place. It's still foundationally, and from a disciplined perspective, what we don't want to do is be incurring a multimillion dollar FedEx bill. So there's still some disciplines in the business to make sure that the right country has to be based on facts and decisions, but now we work upstream, and we have really current data on how the businesses are performing around the world. That's the first decision that's most important to me. As I was telling somebody earlier, fit aside, when we opened up China, our inventory got trapped there because our stores got delayed. That alone is worth multiple million of dollars to us to have been able to redistribute that inventory somewhere else by having one more bite at the apple before the vendor sends it out. I won't tell you when we cut our POs and what a commitment it is. But let's just say it's too much of a lag period between the PO being committed to a certain distribution center, which could be as many as 40 to 45 for any given vendor, given our franchise business, getting down to one clear direction before it ends up being shipped. In-country, to me, is the biggest opportunity where, once it's in a country, where does it move to, and how many different either stores or regional distribution centers or master distribution centers serve that customer need to maximize AUR? Do I believe, once we get that figured out, we go for customer service and we go for AUR maximization? Let's just put them in that order. Do I think, at some point, the inventory productivity in the business should get better? I think it's a bit of an assumption that how could we not assume -- sorry, how could we not assume that once those first 2 get done, there'll be some inventory efficiencies inside the company, which would include turns?
Sabrina L. Simmons
Yes, and one of the things to add, just to clarify something that Art made a point of, one of the most powerful things of doing ship-from-store is it's actually allowed us to understand better what the underlying online demand was. It's cheaper to fulfill in the distribution center. So it's really been fantastic to unleash the true online demand. And the first thing we're going to do, and the most efficient and most cost-effective thing we're going to do, is buy to that demand and fulfill from the online DC. And then it helps, of course, margin accretion in the stores as well.
Katrina, did I do something to upset you? So it's kind of an Art, but really a big-picture Gap question. If I'm in the store and I'm in a mall, your worst-case scenario, in the center of the mall, great location for the store, and I'm purchasing clothing for my kids, and now I have these 2 big shopping bags that weigh way too much. I don't ever want to carry them for the rest of the day. And I don't understand why there's not an initiative, no offense, Adrian, to more inventory in-store; I think it should be the opposite. Why isn't there's a bit of a push to the, what I call, shop, swipe, sign, send, in that I go up, I pay for everything, but then everything is sent home, and I don't take anything out of your store. I guess the a follow-on to that is over time, shouldn't that enable you to, a, carry less inventory in-store, which -- and fewer deliveries to the store, which means lower payroll expense at store because you're not constantly restocking, perhaps smaller physical stores, or if you keep your store the same size, more of an ability to romance the store you have instead of stocking so much of all the basics? I mean, to me, that's where this mobile experience and this technology experience is even more exciting than being able to talk to my -- buy it on my iPhone.
Glenn K. Murphy
Look, what I'll say to you is everybody's different. And you have people who actually -- the experience of ordering online and fulfilling online is what they want to do. Some people want to order online and actually, as Art was talking about, reserve in-store and go to store because I don't think we'll ever a cocoon society in any one of the countries in which we operate. When they're in the mall, they may have other things to do because it may only be a single item and they may want to complement with something else. What Art was trying to get to is that we're trying to explain to people here in the room and people on the phone is -- we're laying out what we think is the continuum of what we're going to do today. So we started with ship-from-store, went to find-in-store. It's going to go to reserve-in-store. Somebody might have asked -- I think Art's example of Apple was that, that's a pickup-in-store. You may want people who just want to do that. That's not in our best interest. But that may be the option they want. You may want to have the complete your sort of square that circle, get it all the way to in the store, try it on and then just send it to my house, send it to my hotel, send it to somewhere else, send it to somebody, send it to one of my kids at the university. I think there's nothing that we're going to stand in the way to what the customer wants to get done. The device you referenced has made, as I said and Jack said, the customer is running ahead of us. Your expectations today, or what it would have been 5 years ago, even, are ahead of where this industry has moved. And by the industry, I mean the total retail industry. And through setting up the vision under Art's leadership and making it so we never lose sight of product and we never lose sight of marketing, because if we threw this to Steve, this could take half of Steve's time trying to figure out the answer to the question. By having it focused on a team that really understands -- and we've hired people who are capable, who live this world, who really understand the customer wants, really provides that ultimate service provider role to the brands. Inventory, look, you and Adrian, are you scratching at the right issue? Probably. What I am saying today is we're not coming and presenting and saying that our turns are going to go from x to x plus 10%. That could be an outcome. I think there's a number of financial unlocks available to the company from a leverage perspective on our operating profit before we get to that. That could be one, though, no question. Then you had something, Ann [ph] , I was going to just fill in -- yes. The one thing I agree with, whether it's romance or not -- we're pretty good at romance. But whether it's romance or not, the issue for us is the role of the store. And ultimately, you get to today, for the most part, give or take, with the exception of our flagship stores, our fleet is homogeneous. They open at the same time, they close at the same time. The delta between certain assortments is not as different as it should be. I think this allows us, by knowing the customer better, finding out to their preferences are, certain markets, certain locations, a street store behavior versus a mall behavior, allows us to look at the assortment much differently in the store -- in each one of the markets. You got to take a market like Atlanta and say Gap has 10 stores. Today, they pretty much all operate the same. And how will they operate going forward? I think the work we're doing here is going to unlock information. We have reames of data, as Art said. Do we have big data today? We have a version of it. We're drowning in data. What we're missing, as I think he said completely appropriately, is great information. And as we get the information, we can make better decisions. I think it's going to lead to recognizing that 2,400 stores split up by each one of the brands shall not be so identical to one another going forward. I'm open.
Just on the universal fit and the inventory question again. Are you going to be changing fits in your large existing international footprint to conform to universal standards? And if so, how do you plan to implement that? And then secondly, when you talk about AUR maximization, is that really just mitigating the amount of markdowns? Or do you expect to have different opening price points across different markets?
Glenn K. Murphy
Sorry, can you say the fit question again?
You already have a large international footprint. Are you going to be changing fits there to conform with the [indiscernible] ?
Glenn K. Murphy
These look like the headlines for tomorrow, "Gap announces change in fit." And I just threw that in last night. Here's what -- here's our thinking. Basically, today, our lessons are that Old Navy and our outlet business -- sorry, Old Navy started off with one global universal fit. And people we compete against globally, who we admire, have one universal global fit. 10 years ago, 15 years ago when we got going into the international business, we had a European fit, we had a Japanese fit. Trust me, 2, 3 years ago, we were this close to a Chinese fit. I happen to be lucky to be in the meeting when that came up, because I wanted to go in the other direction to say, "Should we not be revisiting this as opposed to taking up more complication inside the business?" Today, the way to look out at it is we have a global fit and a Japanese fit. That's it. The question being put on the table, and this is not happening right away, and it's certainly not across every -- it's not a given across every single line in the assortment. Whether bottoms and tops need to be treated differently, I think somebody's got to do the research and do the homework. The assumption we had made until a year ago when Old Navy opened was this was the way to go. What Old Navy has told us and further research has told us is that we can get to the same issue by managing the size curve that Steve talked about as opposed to the incremental cost and the trapping of inventory through a unique Japanese fit. I think the team here will make up their decisions when and if I declare myself, that's why I was on the slide, that I think it's definitely the way to go. AUR maximization to us is when you look at it, and it really just talks about the unit. Where can we get the most money for that unit? So Art was talking about earlier that the yield inside of the online business is very strong because, for the most part, we operate one store. So imagine if you're operating Banana Republic. Jack has 460 points of distribution, and the inventory is in 460 points. His ability to maximize yield is much more difficult than it is for Art. So then, what we're looking at is a couple of things. The movement of inventory, because this is -- anybody knows our business, one of the most important things we do is the allocation of inventory. The buy is important but not critical. The allocation is critical. Because once it goes to San Francisco versus L.A., it's in San Francisco versus L.A. Whether it's weather patterns, competition, better real estate, better salespeople, the selling pattern could differ. This is the nature of our business. The ability for that inventory to move more seamlessly, which we're working on. We're not going to all figure it out today. At least, as we were saying, at least we can know where it is in a much better way than before, opens a lot of opportunities for the company. Because one of the roles in the Apparel business is to guard against that last sale. That last sale of that last unit, as Stefan said, if I was allowed to give you the number, it's not attractive. And there's a huge opportunity because there's a perishability in our business. It's not as perishable as I think it should be. I think there's a little more -- too much perishability in our business. But that seasonal product that was made only for spring , intended to last only 8 weeks, the last 2 weeks, because it's got to go because here comes something else, that ability to manage that tail end of the assortment is huge in the specialty apparel business.
We'll take one more question.
Glenn K. Murphy
John? I mean...
Sabrina L. Simmons
John D. Morris - BMO Capital Markets U.S.
John Morris with BMO Capital Markets. Maybe it's a question for Sabrina, although I'll throw it out to both of you. Labor sourcing costs, we're through a lot of the cotton and issues and things like that. What are you seeing in terms of trends of labor sourcing cost? I'm wondering whether or not some of the wage pressures are coming back into the -- into consideration at this point as we go forward?
Sabrina L. Simmons
Yes, there's definitely -- I mean, I'm sure all of you are aware there's definitely, in Asia, been pressure on labor, and that's come up. I think the good thing about our model is what we talked about is that's more what we deem in the realm of normal operating pressures that we're going to deal with and use different levers to offset. So with all of our various sourcing strategies that we've put in place, we feel certainly, with the pressure that we're seeing, we have the mobility to move our vendor base. We have our volumes. We have our negotiations with our strategic vendors that we're trying to ever reduce the number of vendors from whom which we're sourcing. So I would say, absolutely the answer is yes to the labor inflation, but nothing that we see the we can't handle and offset and mitigate with the tools that are strong and alive and well within our sourcing organization.
Glenn K. Murphy
Another purposeful point when I was speaking about the business was the word -- well, the statement about fabric platforming. If our brands embrace fabric platforming, it's a much bigger opportunity that any labor pressure that we're going to feel in Cambodia or Bangladesh or Vietnam or China. And when they start doing more and more due diligence with the new roles they have and recognize how many fabrics we currently use in something as basic as a women's knit and give our sourcing team the opportunity to recognize, one, we should have longer-term arrangements with mills, we should have less fabrics that we go to, as fabrics can be treated different ways, that would provide -- that's in a -- that's a sourcing person's dream is that somebody comes to them and says, "We used to use a 100. We'd like to use 20, and could you negotiate that, and by the way, I'm going to give you a commitment I'll use that for 12 months." That's like the best day in the sourcing person's life. So as our presidents look at this and embrace and it and recognize that simplifies the business, makes it more efficient, has less fabrics to platform -- who wants to platform 100 fabrics? That's not a platform. It would present a huge opportunity. And labor is a much smaller component of our total AUC. But it's real. We're not ignoring it, and we -- one of the advantages we have, we tried to talk quite a bit today, but what are the competitive advantages, why Gap Inc.? Obviously, with sourcing offices in Hong Kong, a big office in Delhi, a big office in Seoul, we're very close to what's going on, and sub-office all over the world, so not depending on a third party who doesn't know -- we'll never know the real cost is. You might think you do, but you'll never know.
Glenn K. Murphy
One more question?
You're the boss.
Glenn K. Murphy
You got that right. Whatever you want, Katrina. I don't care.
Yes. I believe earlier, Sabrina, you talked about healthy merchandise margins are expected for this year. If I look back on the last 2 years, I believe you lost about 400 basis points in 2011. You got back about 200 basis points in 2012. Why should we not expect to get back an additional 200 basis points this year?
Sabrina L. Simmons
Yes. I mean it's all a balance. So we are focused in using all of those -- all of the tools that we've been discussing all day to get that margin expansion. I think as a reminder, though, when we hit our record merchandise margins, which was in '09 and they sort of stayed flat into '10, that still was a very different sourcing environment than the one we're in today. So cotton back then was still much lower than cotton is today and for the foreseeable future. So I think it's good to keep in mind that input costs are just different than they were when we hit that peak. That said, with all of this work we're doing around yield, AUR, regionalizing our inventory, getting a better grip on that, that's provides us opportunity. But we will be balancing that, obviously, with the desire and the goal to grow our overall gross margin dollars. So it's not just all about rate. In fact, when we hit our peak merchandise rate, our comp was negative. So we want to make sure we're balancing, driving healthy unit sales growth and healthy rate with growth in gross margin dollars.
Just one quick follow up. I mean, does healthy mean flat versus last year, or does healthy mean...
Sabrina L. Simmons
Healthy is healthy. You can interpret that. Healthy is healthy. I mean, we've guided to operating margins. So the bottom line that I'm trying to convey is that we are all about focusing on expanding our operating margin, and we will use in different seasons, different periods of time, different years the big levers, which are merchant margin, rent and occupancy and operating expense, hopefully, mostly in a balanced manner, but they may change a little season to season.
Great. Well thank you, all, for coming. We hope you found it valuable, and we thank the management team for your presentation. Please join us, we have launch being served, and the product setups are out there. If didn't you get a chance to see them, please come see them. The Global Brand Presidents will be in each of their product setups, and Art in his other capacity, will be in Athleta, so you can ask him questions there. They'll be there for about 30 minutes. Thank you very much.
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