Gap Inc. - Shareholder/Analyst Call

| About: The Gap, (GPS)

The Gap, Inc. (NYSE:GPS)

October 13, 2011 8:45 am ET


Sabrina L. Simmons - Chief Financial Officer, Executive Vice President of Finance and Principal Accounting Officer

John Thomson Wyatt - President of Old Navy Division

Stephen Sunnucks - President of International Division

Katrina O'Connell -

Arthur Peck - President of Gap North America Operations

Jack Calhoun - President of Banana Republic

Glenn K. Murphy - Chairman and Chief Executive Officer

Mark Breitbard - Chief Merchandising & Creative Officer

Julie Rosen - Senior Vice President of Merchandising - Banana Republic

Unknown Executive -

Edward C. Lenk - President of Gap Inc Direct

Nancy Green -


Dana Lauren Telsey - Telsey Advisory Group LLC

Teresa Donahue - Neuberger Berman

Omar Saad - ISI Group Inc., Research Division

Marni Shapiro - The Retail Tracker

Kimberly C. Greenberger - Morgan Stanley, Research Division

Unknown Analyst -

Unknown Executive

Ladies and gentlemen, please welcome, Katrina O'Connell, Corporate Finance and Investor Relations.

Katrina O'Connell

Good morning, and welcome to Gap Inc.'s 2011 Analyst and Investor Meeting. We're so glad that you could join us today. The objective of today's meeting is to give you a comprehensive update on our business and product strategy and by giving you a chance to hear from some of our key members of our management team.

A few housekeeping things that, of course, I have to do before we start. Just want to remind you, everybody, today, that the 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, can you read that? As well as any reconciliations of measures we're required to reconcile to GAAP financial measures, please refer to today's press release, which is available on as well as our most recent annual report on Form 10-K and subsequently, quarterly reports on Form 10-Q. Sorry I have to do that.

This morning, you will hear first from Glenn Murphy, our Chairman and CEO; and then Sabrina Simmons, our Chief Financial Officer. In addition to hearing from Glenn and Sabrina today, you'll also hear from the presidents of the following divisions: our International division, Gap Inc. Direct, Gap North America, Old Navy and Banana Republic. And this year, the presidents of Gap, Banana and Old Navy are also going to be joined onstage by their head merchants. You'll have an opportunity to ask questions after each of the divisional presentations, and then, Glenn and Sabrina will answer questions at the end of the day.

After the formal presentations conclude, there will be lunch available in the lobby area where you registered, and we do encourage you to visit the showrooms if you didn't have a chance this morning to check out the holiday product that's setup.

Following lunch, also then to let you guys know, there will be an optional session. It's a presentation that will bring to life elements of how our new Gap Global Creative Center is coming together. And after the conclusion of Glenn and Sabrina's Q&A today, I'll give you a few more details for those of you who are planning on staying for that on the logistics of that event.

Lastly, a couple of things, please turn off your cellphones today. Also on the back of your name badge -- I'm not wearing mine, but at the back of your name badge is the agenda for the day, so in case you want to see what's going on. You should also have received, on your chair, handouts from Sabrina's speech. Those are also available to download on, after the meeting.

Today's presentations are being webcast and an archive of the webcast will be available on in the Financial News and Events section.

And then lastly, we'll have a 10-minute break at around 10:20 a.m. The restrooms, for those of you want them, are near the elevators. And then since time is obviously limited today, if you could limit your questions to one per person asking questions, so that we can get as many questions answered as possible, we'd appreciate it. Okay, so now I'm really pleased to hand it over to Glenn Murphy, Gap Inc.'s Chairman and CEO.

Glenn K. Murphy

Thank you, Katrina. Good morning, everybody. Welcome to Gap Inc.'s Investor Day, and welcome to our new office, which is the Gap Global Creative Center, known internally as GC^2. So it's not our only creative center, this is where all the Gap team from around the world works on our product, on our marketing, does the production for our product. But we actually have other creative centers. We have one also in New York for Banana Republic for Jack's team. We have a creative center in Mission Bay in San Francisco for Old Navy. We have a creative center in Petaluma for our -- and we have a creative center, a very small and mighty and tight creative team for Piperlime also in San Francisco. So while this is where we're having the meeting today because it's new, and obviously, there's a lot of questions about Gap, which is the reason why there's a few changes to our traditional format.

First, there is a voluntary breakout session after lunch on the 11th floor with Pam Wallack and Seth Farbman. We're going to take you through the Global Creative Center for I think it's important, given the fact we made this fairly sizable change in our business about 7 months ago, to get people together, assuming you have the time to hear. I'm going to speak first and then hear from them what really was the intent, the strategy and what is the outcome we're trying to get to by bringing all of the best talent from around world into New York for Gap.

The other change to our format, sort of in keeping a little bit about trying to get some emphasis on product and the creativity inside of our business as well, I like coming up here and talking about strategy and so do our brand presidents from around the world, and what we will do today is have each one of our senior merchants that works for our domestic businesses for Gap, for Old Navy and Banana Republic come up and present to you with their brand presidents and take questions. Those are 2 changes to the format.

The last little change is because we've added that to the agenda, Sabrina and I who normally take up lots of time in these meetings but we get chance out of one-on-ones on conference calls, in other sessions to be with a lot of people in the room that I recognize, we're going to be a little briefer than usual to allow the people in the front row to get some extended time to answer questions and let them tell you exactly how -- what I'm going to speak to about in a minute, how the strategy of the corporation goes from what slides I'm going to take you through, most importantly to execution. And that's what the focus of today's meeting is going to be about.

So without any further ado, I think it's important to start off by saying, what is Gap all about? Who is the business? What are we all about? And it's really about, as we've been talking about for the last year, Gap Inc. is about sharing American style around the world, and the key word in that for us is style, the interpretation of style across all of our brands. So we're American brands, but the interpretation in Jack's business for Banana Republic and Tom's for Old Navy and Art's business for Gap, what is the interpretation? How do we come to market and make sure that the style component, the epicenter of what these brands stand for, come alive every single day inside of our business?

The other thing I think that's important that differentiates us in the marketplace, we run brands -- sorry, we own brands, we don't run stores. Now and again, for you as investors, you have to make a choice in this environment in which we're in, would you rather be making investments? Do you believe, long-term, that a store-run-based business will beat a brand-based business, but we own brands. For redeveloped brands today and the ones I mentioned, 2 up-and-coming brands in Piperlime and Athleta.

So the business is about the American style component. Now that plays very well when we take our business outside of the U.S. When we go to China, and go into Italy and go to our franchise markets. Obviously, the notion of American-style American culture plays very well. The lesson that I've gotten by the expansion of going from 6 countries to 34 countries in the last 5 years is we need many more competitive advantages than just our American style. And what the brand presidents are going to speak to you about today, not in-depth, but will definitely reference -- what are the advantages we have?

Because we go into Italy, we're stealing market share. We have to go in there and win and beat people who are established in that country, so we take back by spending the money and exercising our strategy around the world. What we take back into the U.S. is the notion that competitive advantages. Why Gap? Why Banana Republic? Why Old Navy becomes that much more important, because we're learning that as we're going into new countries today. Next, slide, Liz.

So beyond the "what," a big question that I think some people have every now and then, and we've spoken a lot about these meetings. How? How are we going to win? What is the strategy the business is working on? And we've been talking about multiple brands, multiple channels into multiple geographies. That's what the business has been referring to for the last 4 years since I've been your CEO. So multiple brands is critical to us. This is a very fragmented industry and sector.

I was telling this to Michelle Tan last night, the businesses that I came in before were not so fragmented. Social demographic, people's personal styles, age, average household income, it's a very fragmented sector. The $1.4 billion apparel business is what it is. We, therefore, believe in a multiple-brand approach. We're committed to that. If we weren't committed to it, we wouldn't be putting the time in the investment into developing Athleta as the fourth brand, and Piperlime as our fifth brand. It's -- obviously, that is the look the business has. Would we have a sixth brand down the road? If something makes sense, was complementary, we could be successful, it's something we'd consider. I'm only saying that because we're committed to a multiple-brand approach, making sure they're distinct and that's why we hear from Nancy today Mark Breitbard, Julie Rosen speaking about their brands, why are they distinct?

The other part of the strategy about how we're going to come market, how we're going to win is through multiple channels. The specialties channel is what everybody knows about. Those are the stores, obviously, on high street, the stores we initially opened up, but the business, long term, is about multiple channels, not just specialty, our outlet business, our online business and franchising our stores around the world.

So we love the strategy for a number of different -- but key for us is what is the role of each one of these channels? And the customer today, and we -- you don't do a lot of research. We do our research all the time. Like any other company, we spend money on research to make sure we're on top of what customers are thinking about. But today, one of the key comments that's come out of us is access. Customers want to be able to access your brand any way they want. A they -- a lot of people may come through our specialty channel, but may start first in our outlet business, and experience the brand. They may start online. But we believe, as we look at the competitive landscape around the world, taking the multiple brands, running them through multiple channels, and lastly, running that through multiple geographies.

There is 90 countries around the world we see ourselves in long term. There's 90 countries around the world today we ship our goods to, through third-party arrangements we have made through Toby's business. In the text of business we compete against globally who we respect operate in 82 countries today. We're at 34, and we're only near or at capacity in very few.

Let's take the United States. We're still nowhere near capacity on Athleta. We're still nowhere near capacity on Piperlime. We still have opportunities on the value expression of our brands whether that be outlet stores or whether it be power center locations, where we can put our factory stores in which is really the outlet store just called by another name. There is still opportunities in the U.S. This is the one market where we are the closest to capacity. But you run all the way through from the left-hand slide -- side of the slide to the right, basically, an expression large in retail long time ago is, we have the flexibility in our strategy to put the right horse on the right course. So all these multiple brands through multiple channels through multiple geographies.

Now one of the other benefits of the strategy that I just talked to you about, how we plan to come to market, is from day one, since the early days when I started this new management team on the front row started working together, we've been talking about how do we reduce our dependency on our specialty bricks-and-mortar business in North America. Call it about 80% of our business was in that bucket in 2006. How do we reduce our dependency? And we did it by looking at not only what's right strategically and how do we win on a competitive landscape, but if you look at it on 3 dimensions, all 4 extensions of the specialty business win for us on customers, on growth and economically. So from a customer perspective, you can't deny the online business has always been a strong performer. It outperforms the bricks-and-mortar business around the world by a long shot, depending on the development of the online business at each one of our countries. And with the advent of tablets, you could see the online business and free shipping and other developments that Toby will talk about later on, we're seeing that delta between bricks-and-mortar and online growing even faster, good for customers.

International business. Good for us because we're taking and exporting American style, American brands around the world. In a lot of countries we go into, there is no American-based business the way we bring. You saw that in China. We're seeing that in Italy. We're seeing that in some of the other markets we're going into, good for customers.

New brands. Obviously, if you look at the customer -- for those who got a chance last night to go to Athleta or know much about Athleta, that's a business that customers want. They're demanding those categories. It's a lifestyle play, married with performance. So that's good for customers.

And lastly, the value business. A segment that's always growing. If you look at around the world, the other day, were looking at numbers for Japan. And looking at the value segment in Japan from 2006 to 2009 to 2011, customers are making it very clear, they want choice, they want access. And all 4 of these are right for customers.

Let's talk about growth. We know the growth in online, we know worldwide, we know it here what's been established for more than 3 decades. Now go back, Liz. Sorry, it's my fault. We know the growth that's available to us in International. So far this year, Hong Kong apparel sales year-to-date up 26%; the month of September, 29%. If you look some of the countries we're going into, and this is not a condemnation of our home country, but we are making, obviously, clear predictions here. It's going to be a slow-growth market. When the look at the markets we're going into today, big investments in China and a lot of the investments Steven is making in the franchise business in Indonesia, in Singapore, in Vietnam, in Cambodia, there's big growth opportunities for us internationally. We're just holding share, and a lot of these countries could be double-digit growth, good for growth. New brands, good for growth. The Athleta business performance-based product for women's: CAGR over the last 5 years, 7% growth in a $30 billion business. Good for growth.

And lastly value. As I said before, customers are voting for that sector. You can look at the winner so far this year and because not enough of our businesses is in that segment, a lot of people at the top of retail in this country are value-based. Customers are voting we have to move, we have to shift our square footage to the value bucket. And lastly, this is great strategically for us and it's great for the economics of the country -- sorry the economics of the company. I wish it was great for the economics of the country, but I can't, I've got my own problems, I can't solve that.

Online, number one in our business, great return on capital, great return on sales. Go back, Liz. Sorry. International business, franchise business, phenomenal return on sales, phenomenal return on capital. Our Japan business from day one has been a great return and great economic business for Gap Inc. Our city strategy, yes we got a little overambitious 10 years ago. People keep bringing that up to us in the U.K., in France another countries, but our city stores in Europe have always been very profitable with a great return on capital. The challenge for us right now is how does China look like Japan in terms of its return economically. And you can appreciate, we are, under Sabrina's leadership, putting a lot of time in to make sure that the P&L profile of our China business looks like Japan when it starts to mature. Great for the economics of the business.

New brands, really feel good about Athleta, what we're seeing right now, very early days. Somebody asked me last night how do you move the needle with Athleta. And I said, the presentation today is not about how Athleta is going to move Gap Inc.'s needle. The presentation today is we have a number of different initiatives in place that collectively will move the needle. Athleta, though, we feel very good about the percentage of its business online, the split of how it is economically, good for Gap Inc.'s economics.

And lastly our value business. Our outlet business is world-class when it comes to return on capital and return on sales. So on 3 dimensions, our strategy for customers, for growth and for the economics of the company's P&L and the use of its capital is very solid, at the same time, while reducing our dependency on our bricks-and-mortar specialty business in the United States.

Now, Liz. Growing International and Online, you've seen this slide before, I'm not going to spend much time. Do we have a clock going? We're not going to spend much time on this. You have seen before the outcome of what I just talked to you about. When it's all said and done, the outcome for us is to move. And that's why we split our meeting today between our domestic team that's going to speak to you after the break and the first part of the meeting is about International from Stephen Sunnucks and online, what's going on, from Toby Lenk.

We're looking at our business today, we're measuring it this way, how do we go from 16% of our business in the year this new management team was formed and started working together to 30% in 2013, 2 years from now? We're committed to that number. So talking about strategically is one part, and on the dimensions I talked to you about, customers, growth and economics on the P&L and return on capital, this is key to the company getting to that 30% number by 2013.

Now 2 things I want to talk about here. As I said, you're going to -- you're kind of going to hear 2 messages today and hopefully, they'll come out clearer to you when the teams come up or you could get -- tease that out with your questions. You're going to hear about growth, and you're going to hear what's in motion in the company.

Back to my comments earlier, that somebody said last night, "How does Athleta move the needle?" It's not the only needle we have. It starts with China. And Steve will talk to you about today what our plans for China. We feel very good about China. Too early to declare anything. China's not easy. China takes patience. You need to understand it. We're going to make mistakes. We've made mistakes like anybody else but I think the mistakes we've learnt as we move forward continue to strengthen the company's resolve that we are making absolutely the right call in investments in China.

Franchise business. You're going to hear about that from Steve today. Big success, more new countries, more stores, more brands, global online and outlet, back to the strategy. We introduced it in Canada year ago, it's been a huge success. We've got it in Europe, it ships to 22 countries. We opened up in China day one with our online site. We opened up at Italy, day one with an online site. Third -- sorry fourth, Italy. Steve will give you an update on that, another European country going in, stealing share.

Banana Republic in Europe opened up in Paris in November. We got our plans for the U.K. We've got further plans for France and we got our franchisees who love Banana Republic. It's doing very well so far this year. Banana Republic is kind of that brand that, at times, I know Jack and I joke about this, gets mentioned third, Jack's third in the presentation. Jack, at the end of the day, Banana Republic and its position on affordable luxury is critical and playing very well in our franchise markets. We feel positive what's going to happen in France. We love the launch of London, initially. Steve will touch on that. Athleta and Piperlime, you'll hear a lot from Toby on that. And lastly, Old Navy Japan, which is on the list right now because it's in motion. We're trying to put the team together. We've got the strategy in place. We're doing the work through Tom Wyatt's team. It's going to be a push model, highly leveraged, Tom and Steve working on it together, but now we're taking the big player we have, the big brand in terms of volume, hitting the value piece and a lot of the other strategic needs the company has that's coming off the North American venture. We're going to take it out to Japan in the next 18 months. That's critical to us because Old Navy Japan, should be very successful in the market. We're going to go onto first, and then how does it build and become Old Navy international?

One of the things that we get asked every now and then, and I certainly talk to the team in the front row often, is how are we feeling about the pacing and the sequencing inside the business? How do we actually get to this? And there's a lot of gates here that we have to go through. One is, do we have the bandwidth? Do we have the proven execution? Do we, obviously, have the cash? Are we going to get the return for the investments we're making? This might look, dependent on what side of the aggressiveness you fall on -- fall under, this may look like a very full list that we have in motion today or you may be wondering if it's not enough. Knowing that the meeting today is not about a debating society, at the end of the day, this is what we feel comfortable about. Yes, it's pushing them more than we've done before. But we put the teams in place, we make sure we have independent people running it, this is the growth outside of domestic that we feel good about.

The last thing I want to say to you, in domestic, when the teams come up today, when you hear from Jack and you hear from Mark and you hear from Tom, their job today and their job every single day is where's the growth in North America? It's the biggest market in the world. It's the most dynamic market in the world. It's our home market. So we don't like the fact that we're not positive comping in 2011. What are we going to do about that in our home market? Toby will touch on today that as we got his team working on global online for the last 2 years, as we've redirected his attention to the business right now, domestically, what are the things that his team can do to help us drive growth in North America? So there's a domestic component you're going to hear about today. What you're not going to hear about today, because it doesn't pass any filter of sequencing and pacing as everything on the right-hand side, and I'm only flashing this to tell you the company has a very long runway of potential growth. This is just a sampling of where we could go down the road, whether that is in the 2012 investor meeting, '13, '14, '15, I don't know today. Let us manage what's in motion, let us do that -- let us execute that very well. Let's get that established, and then we'll turn our attention to what may be in motion down the road, but not for today.

Lastly, delivering on products. So again, 2 big themes today: growth and product. That's why we have our merchants here meeting with you today. So I don't want to spend too much of their thunder, if they give me the chance, I'll take all of it. But when you hear from Nancy Green, when you hear from Julie Rosen, when you hear from Mark Breitbard, we need to deliver on product -- I was talking to somebody earlier today, if you believe in the strategy, if you believe the company, I'll get to the economic model in a second, I put the economic model in place to deliver the kind of returns this business has seen 4 years in a row up until 2011, then when we run the product through that strategy and through that economic model, the product that is absolutely right for the customer, the position we take that's right every single day. It's not just delivering product, it's delivering product consistently. Anybody can be a winner in a quarter. Anybody can have a good season, consistently is what we have to do. And the people who are here today speaking to you understand that is paramount. It's a non-negotiable. There's 3 key areas we've been spending with our merchants, with our designers in the last 6 months, customers, talent and product model.

Our customer's tough. I mean whatever -- I always tell the team, whatever was great in 2006 is good in 2011. Great doesn't cut it. Whatever your view our great product was in 2006, a lot of the people here today, designers who work in our business, in Gap and Banana Republic, Old Navy, in Athleta, in Piperlime anybody who's been in this business for more than 7 years forget what you thought was great in 2006. It doesn't cut it anymore. You've got to be beyond that, and this is the challenge for the team, and starts with better -- you better you know your customer. Now that's motherhood statement. Of course, we know our customers.

Do we spend as much time as we used to? Do we spend more time than we used to? Yes. We put more time, more energy, more money in the last 6 months to making sure we're in front of our customers and talking to them so we can get to the new definition of great.

Do we have the talent? We're just putting 3 people in front of you today. We have hundreds of people. In our design teams, in our merchandising teams and our marketing teams, do we have the talent? We have made some tweaks in our talent recently. That's going to happen. Everybody's going to do that. The best companies are always in the search for the best talent. Do we have the right talent today? We're putting not only our brand presidents but our merchants in front of you to speak about what are they doing? Do they have the talent on their teams? And we've made some changes lately, but we're always looking to make sure we have the right talent.

And lastly, our product model is being challenged. We told you at some meetings in the past that this is a company that believed for the longest period of time that more time meant great product. It took us a while to break that paradigm in the company. More time doesn't mean better product. Closer to the market, closer to the customer, faster means better product. So what we've done on speed as you'll hear a little bit today, because we only have so much time is we've created that incremental pipeline. We shrunk the pipeline we had on product development down by quite a bit. We've added another pipeline. The goal now of the merchants working with the design teams and other people and the field leaders is to feed that new faster pipeline. Closer to the customer, better decisions, better decisions on trend, better decisions what's right for us. By the way, that's not the only change to the model.

Incremental categories. We can't live by the categories we have. You look at the greatest retailers brands out there today who are really winning, winning around the world. Their ability to introduce categories their customers want that fit who they are, fit their aesthetic, they are people who are winning today. We have a missed opportunity, you're going to hear some of that today, but how we're putting new categories in our business.

And lastly, we're no longer going to hold onto the notion that we have to be 100% vertically integrated. There are other brands. You saw a little bit in Athleta yesterday. Toby's business started that way. There are brands who would love to partner with us. They're complementary categories. There's categories we're saying to ourselves -- it's not our core competency. It's not who we are. And every minute somebody spends on a category like that, that's not being put into what we're great at and what we're going to dominate at, takes away from that category. And we are spending quite a bit of time as a business speaking to a lot of third-party brands. Who wouldn't want to be in 1,000 Old Navy stores? Who wouldn't? Pretty much nobody, so far, we talked to. So we just got to find the right brands, do they fit? Put them into our stores.

Now as a segue to bring Sabrina up, let me flash the P&L. Not all Sabrina does, but it is one of her top duties. All I want to do for today is I want to say 2 things about this. Are we happy with the performance we put out so far in the first half of 2011? And the answer is no. We're not happy with our performance in the first half of 2011. I do want everybody in the room, and maybe this is a little self-serving, for 4 years, from 2007 to 2010, this business increased its earnings on earnings per share on a CAGR of 19%. This business had a 13.4% operating margin in 2010. It grew and improved its performance every single year during 3 -- you have to admit, 3 of the more difficult operating environments you can have, and in 2010, we had significant -- we don't give the number out, we had significant amount of investment income in the 2010 performance to create 2011. To create the growth in motion I showed you, we had to invest money in 2010. So that's in that P&L that you're staring at in front of you.

2011, here's is the one thing I could be critical about, it's self-criticism. I allowed the cotton crisis to become a distraction inside the business. That's my fault. We lived through crisis in 2008. We lived through crisis in 2009 and we overcame it. The performance speaks for itself. It's a matter of record, a fact. But in 2011, when another challenge came our way, which we didn't see coming, and, obviously, you know the whole history about the company, its investment in cotton, how investment cotton-based we are, our value business. And then when it hit the company, I allowed that to become too big a distraction for the people you're going to hear from today, from the designers who are not in the room today, it became a distraction.

My job is to keep people focused. So going forward, what I can tell you is as we've regrouped as a team and talked over the last 3 to 6 months, I want to tell you the team you're going to see today is focused. The team you're going to see today appreciates the results the business needs to deliver, appreciates the kind of company this is and the kind of potential and profile that we have that a lot of other businesses would kill to have. So a strategy in place? Yes. Execution stepped up in terms of the focus the people in the business have? Absolutely. The focus has never been sharper and a big part of this is the focus of not allowing things that are going to come our way to ever be a distraction. Cotton wasn't this little thing. It was a significant thing, but we allowed it to become a distraction. I hope what you see today when you listen to the people about to come up is we are focused. We know our brands. We know our advantages, we know how we're going to win. And that's the big message I want to pass on to you before bringing up Gap Inc.'s CFO, Sabrina Simmons. Sabrina?

Sabrina L. Simmons

Good morning, everyone. Thank you for joining us today. As Glenn just said, after delivering earnings growth over the last 4 years with a compound annual growth rate and EPS of about 19%, and cumulative free cash flow generation in excess of $5 billion, our management team is disappointed in our 2011 financial performance.

Though there are several bright spots in our portfolio. The impact of cotton inflation in our business has been significant and our comparable store sales performance has not been consistent enough. Despite this, we are reaffirming our full year EPS guidance of $1.40 to $1.50 for the year. As we focus on rebuilding our financial performance, we remain committed to our long-term strategies. But as we invest, we continue to demonstrate expense discipline and our cash flow generation remains healthy. Our commitment to returning excess cash remains as strong as ever, as evidenced by our distribution of $1.5 billion in the first half of this year alone.

Today, I want to cover how we intend to deliver shareholder value as we pursue our strategies in 2012 and beyond. Our primary objective is to drive value by resuming operating income growth and supplementing that growth with our financial strategies, namely share repurchases and dividends. Our economic model is simple: grow the top line, re-expand gross margin, maintain expense discipline, expand our operating margin, distribute excess cash and grow earnings per share.

Let me now quickly take you through some of the key components of the model. So let's start with sales. Given the size of our revenue base at nearly $15 billion, moving beyond 2011, we believe a low single-digit total revenue growth is a reasonable goal. All of the brand Presidents will cover their specific strategies for delivering on their piece of this growth. But before I turn it over to them, let me take you through the important areas of focus in delivering the growth for North America and International, broadly speaking.

Starting with North America. At over -- at about $11.4 billion in 2010 sales, Gap, Banana and Old Navy are largely mature in North America in terms of store footprint. As we move past 2011, even on its large base, we do intend to modestly grow total North America sales through a smaller, healthier specialty store fleet supplemented by sales growth in our online and outlet channels.

Given its importance, I'd like to spend a few minutes on real estate. Our primary objective for our North American divisions is to improve productivity of our square footage, not only through consolidations and closures at Gap's specialty stores but also through downsizes at our Old Navy. These square footage reductions should increase productivity and allow us to shed rent and occupancy costs with the goal of ultimately making each box more profitable. In 2008, we set a goal to reduce North America square footage by about 10% by the end of 2012. We've made significant progress to date. Let me give you a few specifics.

At the end of 2007, Gap specialty had 1,056 stores on 10.3 million square feet. As of the end of the first half of 2011, Gap specialty is now at 889 stores and 9 million square feet, reductions of 16% and 12% respectively. By year-end 2013, our goal is to bring the Gap specialty fleet down to about 700 stores, which represents a full 34% reduction in the Gap North America specialty fleet since 2007. And we plan to supplement our healthier specialty store fleet with growth in our high productivity and high contribution outlet channel as we plan to add about 50 new outlet stores over the same period. By year-end 2013, we expect this rebalancing will bring our total Gap North America fleet to about 950 stores.

In contrast to Gap specialty, for Old Navy, the focus is on downsizes concurrent with remodels. And as we downsize our stores, our goal is to maintain the sales in a smaller box. At the end of 2007, Old Navy had approximately 20 million square feet. As of the end of the first half of 2011, with nearly the same number of stores, square footage has decreased by 8% to 18.5 million square feet. We believe there's an opportunity to take out about another 1 million square feet by year-end 2013. Driven by these actions, through the end of the first half of '11, we've reduced North America square footage by about 7%, on pace to achieve our goal.

Let me now turn to International. As you know,, we've been operating outside of North America for over 20 years. Historically, we only deployed our full price retail channel internationally. But as I told you last year, going forward, we're complementing our specialty stores with our higher returning outlet and online channels. It's this combination of channels that should deliver healthy returns.

Additionally, we have a high return and fast -- growing franchise model that we launched 5 years ago. And at the end of Q2, we had about 200 stores in 26 countries. Typically, we prefer to own and operate our stores in larger countries like China where the sales potential is substantial, and where we can, therefore, leverage a fixed infrastructure. We tend to deploy the franchise model in smaller, more complex markets. As a reminder, our franchisees are required to purchase all products from us at wholesale, and in addition, they pay us a royalty.

So to summarize, our objective is to grow sales modestly in North America on a smaller, healthier store base, supplemented by growth in the outlet and online channels. Internationally, we plan to complement our specialty store growth with our higher return in outlet and online channels while we continue to grow our high-return franchise business.

Turning now to margins. Our merchandise margins are down significantly in 2011, driven by the sharp escalation of average unit costs. As a reminder, a large part of our portfolio is in the value segment, namely Old Navy and the outlets. This heavily cotton-based segment got hit the hardest in terms of percentage increase of cost given their low absolute cost base. It's also the segment for which we chose not to raise prices commensurate with cost given the impact of the tough economy on our customers. However, we anticipate future re-expansion of merchandise margins enabled by normalized cotton prices. The biggest opportunity for this begins in the back half of 2012 as we lap purchases that embedded peak 2011 cotton prices. With regards to operating margin, we intend to return to the operating margin levels we achieved in 2010 over time. This will be driven by the re-expansion of our merchandise margins, which I just discussed.

So having gone through the P&L, let me now turn to cash and our financial strategies since EPS growth will come not only from a combination of revenue growth and operating margin expansion, but also from our financial strategies.

Over the last 4 years, average free cash flow has been nearly $1.3 billion per year. Our stated priorities for uses of cash are: first, reinvestments in our business to the degree we have projects that will deliver appropriate returns; second, increases to our dividends; and third, share repurchases. Our capital spend, which is our first priority for cash is focused on North America remodels that accompany square footage reduction. International store openings, especially outlets and the IT investments that go with it, Athleta store openings, continued growth of our global online business and targeted investor [ph].

Turning to cash distribution, our strong cash flow and balance sheet have enabled us to grow our dividends. Since 2004, we've increased our dividend 5x to $0.45 per share, representing a current yield of about 2.5%. Since '04, we've paid our shareholders over $1.5 billion in dividends alone. Even after capital spending in dividends, we still generate excess cash and we continue to consistently deploy excess cash toward our third priority, share repurchases. Since 2004, we spent about $10 billion repurchasing about 530 million shares.

In closing, while 2011 is a difficult year, we are more committed than ever to drive our economic model going forward. Specifically, we will remain focused on growing the top line through modest positive comps and growth vehicles that deliver solid returns, returning our operating margins to its earlier highs over time, generating strong earnings growth and distributing our excess cash.

Thank you, and now I'd like to turn it over to Stephen Sunnucks, President of our International business.

Stephen Sunnucks

Thanks, Sabrina, and good morning, ladies and gentlemen. It's a real pleasure to be with you here again. I'm Stephen Sunnucks, and my job is to grow our brands all around the world for the long term. I came here more than 5 years ago to lead our European operation. In 2008, I took on responsibility for our franchise division. And early this year, I assumed responsibility for our combined international businesses, that is Europe, franchise, Japan and China based out of London. So I'm responsible for the whole of our stores business outside of the United States and Canada, and I share responsibility with Toby for International Online.

I've been in apparel retail for more than 30 years. and I joined Gap because I saw the fantastic potential for our brands internationally. We have a simple task in International. It is to sell more products in more countries to more people through more channels using all of the Gap brands. We've put together a strong international leadership team, and we are confident that we can deliver sustainable long-term growth for this business.

So today, I'd like to tell you how we've been getting on since we last met, to share with you our current view of trading and to explain how we're going to realize the potential for this long-term growth. I will concentrate mainly on our geographical expansion and how we see that developing. Brands in Online will be covered in more detail by my colleague later in the day.

First, to put International in context, let's just remind ourselves about the opportunity. The global apparel market is worth some $1.4 trillion, and about 26% of that market is in the U.S. and Canada and 74% International. At Gap Inc., we are the other way around. In 2010, excluding online, we had about 86% of our store sales in the U.S. and Canada and only about 14% in International. That gives us a lot to go for.

So let's look at our progress so far. Last year, excluding online, we saw sales rise 11% to almost $2 billion. Our comps were positive. We opened a further 67 stores, including franchise, taking our total to 531. We entered 6 new countries taking our total to 29, and we now ship to over 90 countries online. And we achieved that growth while making strong capital returns, seeing an internal rate of return well above the company's cost of capital.

Now this year has been more mixed. On the one hand, we've seen some excellent sales growth, up 11% including online in the first quarter and 21% in the second quarter. That puts our first half sales up 16% overall. The reason for this is that we have had some excellent performance from our new stores and particularly those in developing markets. For example, there has been a resurgence in the Middle East, opportunities in Russia and the strength in Asia, in China, Korea, Singapore and Australia. However, on the other hand, despite those strong total sales, our comps have been more challenging. They are down 5% in the first half and we've seen a tough start to autumn, particularly in Europe.

Now for the last 4 years, International comps have exceeded those of Gap North America. So what has changed? Two things have changed. First, the product is not as we wanted, particularly in women's wear. Some of the offerings have been too basic. There hasn't been enough on trend. International customers are looking for something more fashionable and more aspirational. Pam and her team are working on that and you will see that later today.

Secondly, we have to factor in some severe short-term headwinds in our 2 biggest comp markets, which are the U.K. and Japan. Together, they represent around 85% of our international company-operated comp store base. The U.K. has had a rough time through the recession, with rising inflation, there has been a severe squeeze on income. The result is a downturn in consumer confidence and therefore, on spending. This has affected the whole of retail, and we believe it will take a little while to turn around.

As for Japan, since the earthquake, consumer spending has been very fragile, and therefore, short-term adverse effects such as the exceptional warm weather and typhoons in September have had a significant effect on our business. So a combined challenge of poor product and these short-term headwinds in our 2 biggest markets have made business volatile and taken us into negative comp territory. To offset these headwinds, we have maintained tight control on expenses. We work out of lean regional offices. We've closed underperforming stores and we're even more focused on inventory management. And so in the light of this, you can see why it is so important to mitigate our historical reliance on these 2 markets.

And indeed, once we look outside the U.K. and Japan, we see a very different pattern. In developed markets, we are following a strategy of carefully targeted growth. Italy is a good example for us and has worked well. And we're seeing more momentum and a positive performance from our development in emerging markets. There's been a lot going on in the Middle East and that has been good for us. Last time we met, for instance, Dubai was going through a financial crisis, now it's back. We see terrific opportunities in Russia. It's strong, too, in Asia, in China, Korea, Singapore and Australia.

Our ongoing international strategy is very clear. We will continue to grow through existing and new geographies, expanding our channels and introducing our brands, while optimizing our financial returns. We begin by opening brand-building flagship in major high-traffic city destinations. And at the same time or shortly after, we establish an e-commerce channel. Then we follow with smaller core stores in surrounding cities and with outlets. Putting these together, our goal is to optimize our reach and our financial return in any given market. Store-by-store, we shift the way our sales are balanced between the U.S. and Canada and International.

Here are some of the new flagships that are building our brands. This is in Ginza in Tokyo. It attracted foot flow of over 30,000 customers in its opening weekend in March. That's nearly double our previous #1 flagship in Harajuku. When we moved into Kiev, the capital of the Ukraine, with our franchise partner, we literally had hundreds of people queuing in 90 degrees heat, our staff were even having to hand out bottles of water just to keep them cool. And here is the first fantastic Gap in Rome. Sales for this store have been consistently in our top 20 in the fleet globally. This is the interior, and you can see how we take the architecture of the building like this original mural and treat it locally as part of our denim story.

And coming in just a few weeks, Hong Kong. A wonderful site in Hong Kong Central District, which is still growing in prominence as a cultural shopping and entertainment destination for the city. So here you can see how we use the broad -- so here you can see how we use the brands consistently in the exterior of all these various architectures, and that's what we call global. But in the interiors, we have to pay respect to local, and so you see we style the interior differently here in Japan to that in Italy.

This map shows how we prioritize investment as we continue to diversify our business by geography, by brand and by channel. These are the IMF latest economic growth forecasts for 2012 issued just a few weeks ago. You see here in purple the developed markets. They still have the greatest scale, 64% of worldwide GDP, but they are forecast to grow more slowly in aggregate at around 1.9%. Going into these developed markets, we take a very targeted approach. Our brands are well regarded and we place them where they will have optimal impact. So as we have seen, when we went into Italy, for example, we went into large affluent cosmopolitan cities like Milan and Rome with brand-building flagships supported by outlet and online.

But it is here in the emerging market, here in blue, where we think we will see the biggest growth. They represent about 36% of GDP and, are forecasting to grow on average of more than 6% per year. This year, in our franchise business, we will open 65 stores in 9 new countries, almost all of which will come from these emerging markets and putting us right on track to grow to 400 stores by 2014.

Of these emerging markets, the largest is China. There is a huge amount of contrary news about China daily, but for us, China remains a really significant opportunity. It is the second largest apparel market in the world. It has more than 110 cities with a population greater than 1 million people. And although forecasts vary at the moment, it is still set to grow at a faster rate than other economies.

We launched in 2010 with 4 flagship stores in the major cosmopolitan cities, 2 in Beijing, 2 in Shanghai, and we will launch in the third major city, Hong Kong, in just a few weeks' time. We have also invested in the infrastructure needed to grow with our regional office based in Shanghai. We are excited about that. And we're excited, too, about the response to our e-commerce business. We now have 2 sites in China, a dedicated Gap e-commerce site run by a third-party, and Taobao, one of the most heavily trafficked Internet destinations in China. We're seeing orders from as far away Harbin in the North and Chengdu in the West, with very positive customer reviews. That is an indication of the potential for our store growth in other regions.

During the second quarter of 2011, online orders came from all over China, covering provinces, municipalities and the autonomous regions. Many orders came from Hong Kong and its highly international population. The good thing about that is that is when we open our first Gap store in Hong Kong, we shall do so with a benefit of strong brand awareness.

Now brand awareness is crucial to a new retailer. In China, we built it fast. We were helped by a strong exclusive marketing campaign, which we called Let's GAP Together. This was an East-meets-West creative visual idea where we put together artists, models and musicians. They connected our heritage brands with the modernizing and optimistic energy that characterizes China's new generation. The effect was powerful and resonated highly with our Chinese customer. Post-campaign feedback was very positive. More and more people are now wearing the gap logo on the streets of China's big cities. They are proud to do so and that says everything about the brand.

So 2010 was all about building brands and infrastructure. And following that, this year is about opening more stores. We have made a good start, and we're pleased with our performance so far. Today, we have 8 company-operated stores in Shanghai and Beijing, and we are forecasting to have 15 by the end of this year. In addition, we're expanding into other cities, specifically, Hong Kong, Tianjin and Hangzhou will open later this year, with populations of 7 million, 13 million and 9 million respectively, these cities demonstrate the opportunity for our brands right across China.

As I said, there are more than 110 cities with a population of over 1 million people. This year alone, we are forecasting to be in 5 of those cities with a total of at least 15 stores. And we're targeting another 30 Gap stores next year, bringing the total to 45 stores. And that's just the beginning of our long-term expansion. We will also explore the opportunities through our other brands and other channels.

So I hope I have conveyed the excitement of the scale and potential as we grow our business geographically, and here, in this diagram, you can see the results so far. You can see that we have made real progress and increased our mix of non-U.K. and Japan stores, company-operated and franchise, from 14% in 2006 to 42% last year.

Following on from geographical expansion, I want to now touch just briefly on our brands and channel opportunities. Brand and channel are vital because our big opportunities lie not only in building the Gap brands geographically but also in introducing and then growing all our brands and channels. This chart shows International revenue as a percentage of total brand or total channel sales and how the Gap brand is already a truly global player. So for instance, while International represented just 14% of Gap Inc. total store sales in 2010, it represented around 32% of Gap brand sales. But look how small the business is for our other brands, with Banana Republic at around just 7% and Old Navy not yet launched. Our outlet and online channels also have similar opportunity.

Let's just quickly look at Old Navy because Old Navy currently only exists inside North America. But with the growth of demands for value players globally, and the rise in this consumer behavior of shopping between premium and value brands, Old Navy has an amazing opportunity ahead. So we are planning to launch internationally starting with Japan. This means Japan will be the first country outside of North America that offers consumers all 3 of our major brands. This truly diversifies our business. Banana Republic, too, continues to grow with our brand building flagship launch in France later this year on the Champs-Élysées in Paris. Outlets is growing with more stores in Italy, and online is building on its early success as Toby will show you in a moment.

So to sum up. I want to emphasize the strategic approach that we are taking. It is to grow through geographies, through brands and through channels that we will deliver a high rate of financial return. Along the way, we will develop a whole new set of operational efficiencies in IT, in logistics and in purchasing. In geographies, we are looking at our targeted approach to our developed markets like Italy, and we have highlighted the enormous potential in the emerging market, particularly in China.

The story of brands is one that begins with the success of Gap, and this success in turn shows us the potential for Banana Republic and for Old Navy. As spoken only briefly about channels, outlets and online, but it is important to remember how strong their capital returns are and how they are crucial to extending our reach to new customers. So whilst the U.K. and Japan are tough right now, we are protecting our brands and continuing to invest in these important long-term markets. We have a clear old strategy but plenty of opportunity. Our brands translate well into worldwide market and so we are confident that our approach will deliver strong long-term financial return.

And finally, I want to show you a short video because I want you to have a real sense of the buzz, the excitement that accompanies the opening of one of our new stores, and it's this buzz that I believe Gap is creating throughout the whole of our international expansion. Thank you.


Katrina O'Connell

We have time for just a couple of questions for Stephen. And just a reminder, if you could limit your question to one per person so we can get as many questions as possible, that will be great. Oh, Tom, yes.

Unknown Analyst -

[indiscernible] Relative to the comps though -- pricing relative to the competition and relative to here in the U.S.?

Stephen Sunnucks

Yes. Clearly, I mean, our pricing strategy is a competitive advantage, because I talked to you broadly about the opportunity that we see. We price alongside the brands that we see we need to compete in the market, so we are consumer-led pricing strategy, and how it compares to U.S., obviously, is not the first thing on my mind. We look at the -- so in Italy, with the key competitors like Benetton, like Zara and H&M, we're priced competitively against them. If we go to Japan or China, we'd look at a similar competitor. So -- I'm not sure what more I can say to you other than we price according to the consumer and according to where we think we need to be competitively to win.

Katrina O'Connell

Great. Adrienne?

Stephen Sunnucks


Katrina O'Connell

Oh, sorry.

Adrienne Tennant

Can you talk about some of the infrastructure requirements as you move from your current base of stores and kind of move forward? What types of distribution centers do you need for Europe? How many do you need in Asia? And how many countries -- store -- or store-owned, I suppose, because of the franchise differential could a distribution facility service?

Stephen Sunnucks

Yes, I mean, I think, if we look back to the beginning of this year, we just created the International division. And to give you a little bit of background to the team that we've built, I have 8 direct reports, and the way we're organized is I have 4 run by geographical head, so I have managing directors in Japan, in China and Europe and 1 for Franchise, so that's those 4. And the other four are focused, I think, on your question which is about infrastructure. So I have a CFO for International, and a head of HR, then I have a head of Ops and a head of Products. And what you're looking at now with bringing the divisions together is the first time in some while is what are the synergies we can now look at globally. So to your point, particularly we're looking at distribution and can we have, what we're talking about in terms of regional inventories and we start to think about building hubs in Asia and maybe in EMEA, for Europe, Middle East and Africa to service our businesses as we're joining now. So early stages, but yes, your question is the right one, as we start to build the infrastructure.

Adrienne Tennant

And right now everything everyone is coming out of the San Francisco DC or...

Stephen Sunnucks

No, it doesn't. No. Today it ships straight from vendor to local DCs in the country. For the U.K. service out of Rugby, which is in the middle of the U.K. We have a Distribution Center in Japan, obviously, Hong Kong for China, and so on.

Katrina O'Connell

Any other questions?

Unknown Analyst -

Just to follow on, you talked about a third-party provider in China for the Internet business. Is that the strategy until there's a critical mass where you can adjust by building on the...

Stephen Sunnucks

It is. Yes, it is.

Unknown Analyst -

That's both for the Internet and for the bricks-and-mortar stores, that's, say, using a third-party...

Stephen Sunnucks

Bricks-and-mortar stores, we own and operate ourselves. The online business is a third-party, which we will, as you say, transition over, over time to our platform.

Unknown Analyst -

And that's not only China but have you looked further a field over the next several years?

Stephen Sunnucks

Yes, I mean, we've actually phased our online. So actually, the European business is owned and operated franchise -- sorry, owned and operated online. And Japan is coming. China is today, third-party. So we're gradually sort of moving out from the U.S. with our online business.

Unknown Analyst -

And will the online support all the franchise operations if you continue to go further a field?

Stephen Sunnucks

Yes, it will. I mean, I'm sure, Toby will -- I don't want to steal his thunder, but he'll talk to you in a moment. Yes, I mean, we have a push model at the moment, of the U.S., most of our franchise market. But certainly, I think the next step will be to partner with some of those to build in-depth online businesses in the countries which are relevant here.

Katrina O'Connell

We have time for one more question. Yes? Do you want to wait for the mic?

Unknown Analyst -

Yes, just on the International side, you spoke to a tough start in Europe. Is that sequentially year-over-year? Can you qualify that or quantify that a little bit more with what you're seeing thus far in fall?

Stephen Sunnucks

Yes, I mean, our September comps were difficult, that's what I was referring to in -- but I mean...

Unknown Analyst -

That's just for your September? That's what you were discussing?

Stephen Sunnucks


Unknown Analyst -

Okay. And is -- for retail perspective, is it still U.K. or can you quantify a little bit more on Italy or...

Stephen Sunnucks

Yes, we've don't break out our -- country by country, but I think it's fair to say that the U.K. is probably the toughest of the Western European economy at this time.

Katrina O'Connell

That was quick. We might have one more? Oh, sorry, I think there's one over there.

Unknown Analyst -

I was just wondering if you could give us an idea of how long it'll take the business to scale with all the investment you're making and the store openings in many different markets to scale to a level of contributing or advancing towards company average operating profitability?

Stephen Sunnucks

Yes, we don't give out company operating profitability by division. But I think what I can say, I said earlier that we're more than paying for ourselves in terms of our internal rate of return, our return on capital. But the business today is profitable, I said that last time, it still continues to be profitable. We're building for the long run. I mean I think if you look at the key messages here, there's huge opportunity. I think 14% of our business is international against that 76% for the market. We've got some fantastic brands that you'll hear about in the moment where the American style is really resonating. You've seen Milan, you know, the fashion capital of the world arguably, and the response we had when we came in with Gap. And then we've got, of course, Old Navy and potentially the other brands in due course. But, yes, the business is profitable and we're delivering good rates of return on our capital.

Katrina O'Connell

Great. Thank you, Stephen, for your time.

Stephen Sunnucks

Thank you.

Katrina O'Connell

Now I'm going to invite onstage President of our Gap Inc. Direct Division, Toby Lenk.

Edward C. Lenk

Somebody left this behind. I'm going to move it over here so it doesn't distract me. So I want to start off by kind of going back to last year, and for those of you who were here last year, you recall I started off by talking about our financial results and laying out the long-term financial goals. So last year, we had just finished our prior year '09, which is $1.1 billion in revenue and $252 million in operating income. And we laid our long-range goal to reach $2 billion in revenue and $500 million operating income by no later than 2014. So what I want to talk about today is how are we doing since then. Since I slated that out last year where have we been. So we finished, as you can see in the chart 2010 with $1.3 billion, up from $1.1 billion in 2010 and $302 million in operating income, so it's a great step forward. It was about 16% top line growth in '10 over '09, and 20% bottom line growth. In our first half, to date, we've grown our top line about 19%, so again, another strong step forward, and I can say that given how the first half has gone and given what we're seeing in Q3, we expect we'll reach about $1.5 billion. I keep dropping my bottle of water, that's funny. Nobody's laughing though but me. We'll reach about $1.5 billion this year.

So $1.1 billion, $1.3 billion, $1.5 billion, continuing to climb the staircase toward our goal of $2 billion. And the big headline today is I want to strongly reaffirm that we are solidly on track to reach $2 billion in revenue and $500 million in operating income in Gap Direct by no later than 2014.

So I want to now talk about some of the highlights of our progress toward that goal in 2011. So first, I want to talk about International. Last year, 2010, was what we call the year of going international. So this is sort of the first year after the year of going international, and I'm going to give you some specifics on that. But first, just to remind everybody, we launched last year locally in Canada, with local fulfillment for Gap, Banana Republic and Old Navy. And we launched in Europe local fulfillment and e-commerce for Gap and Banana Republic. And in addition, we began shipping to about 90 countries from all over U.S. websites. So all 3 very big initiatives for us last year, the year of going international. This year, we continue to invest in capacity and capabilities on all those 3 lines of business, and we expect this year, we will cross about $100 million in revenue from those 3 initiatives in their first full year of operations. So we launched those about halfway through last year. This year, in our $1.5 billion, about $100 million of that will cross that this year in those 3 initiatives. So we're really happy that's a very strong start to go from basically nothing to $100 million in our first full year of operation. So great, great progress on the international front.

I want to talk next about everyday free shipping. We launched this last year in Q4. And our research showed us that the customer was going to respond very positively with that to drive incremental sales both right now, and then longitudinally over time. And I can say that the results, as we track them internally, have been very positive. We're very pleased with this. Now it's an investment. It impacts our top line revenue. So the 19% revenue growth in the first half is weighted down by lower shipping revenue year-over-year. But at the same time, it also powers merchandising net sales and growth within that, so there's 2 things going on in there within that 19%. But it is an investment but we're very happy with the payoff that we're seeing from that investment. And the other thing I might add is everyday free shipping is really becoming a standard in the marketplace. It's inevitable that multichannel retailers are going to all go to that, if they haven't already. We've gone, we went last year and we're very happy with the results.

Next, I want to talk about Athleta this year. And obviously, the big story there is Athleta stores. That's the big thing I want to spend some time talking about. So first, I just want to tell everybody exactly why we're opening Athleta stores. It's very simple. The customer has demanded it. She's been very clear with us. Both our existing customers and prospective customers, they want to try these products on in a store environment. The performance characteristics, the fit, the function, the fabric, she really wants to try it on. We've got lots of prospective customers who get our catalog, but they just don't want to buy this category direct. They've asked us to open stores, our existing customers have asked us to open stores, so we have opened stores.

We first opened our test store in Marin. We followed it up with our first flagship in San Francisco. Very strong sales per square foot, very happy with those results. We've begun lapping our test store in Marin, strong year-over-year revenue gains. And we know from the first 2 stores, something very powerful that we take $1 of direct sales in the area we open up a store in and we turn that into $5 of sales when we have direct plus retail. So that is a very powerful statistics and with very minimal channel shifting from direct into the store environment. So very accretive and it shows us we have lot of growth potential from converting Athleta into a multichannel retailer and satisfying that customer need that's she's been very vocal about.

We're targeting locations very carefully. This, of course, is the Upper East Side, which some of you were probably out last night at the reception. We use our customer data to give us a heat map of where the best locations are to open. We've also opened up, as you know, the West Side, so those are stores 3 and 4. The fifth store we've open is in Orange County in Southern California. So we've got 5 open right now. 4 more are going to open by the end of November, 1 in Georgetown in D.C., Philadelphia, Minneapolis and another in the heart of Los Angeles. And then one additional one will open up toward the end of the quarter, a little north of here, up in Westchester. That will bring us to 10 stores opened by the end of this fiscal year. So I'm going to talk more when I talk about '12, about the go-forward rollout plan. I'm going talk more about the operating model and the economics of our store growth plan for Athleta. But suffice it to say, we're very, very excited about the potential there.

Next, I want to talk about Piperlime. The big story there is our expansion, continued expansion into apparel. Piperlime started as just a shoe store for us and now it's much, much more. We've expanded the apparel assortment for women's a lot this year. We've worked to create broader price points from lower price points, entry price points, to aspirational price points. And we've worked very hard to expand and compliment the assortment of our horizontal brands with some private labels. So we are now starting to convert Piperlime a bit into a hybrid model. It's always going to be anchored in fantastic horizontal third-party brands. The majority of the sales, we are now starting to mix in selectively private label brands to target particular price points and aesthetics to really round out the line and provide a compelling differentiated assortment.

We also continue to have success with vendor-exclusive styles we can secure and also partnerships like the successful Alamosa Piperlime. And also, by targeting small undiscovered specialty brands in the marketplace that we bring to life in the site, all of which gives us a very special, and unique and highly targeted assortment. So you could see some of the image we have in our marketing campaign running this fall. Some statistics, we expanded the Piperlime women's apparel assortment by about 50% in terms of styles this year so far. And the apparel sales have grown significantly more than that percentage. So that expansion and that strategy is working very, very well. With that expansion, with continued marketing investments, Piperlime remains our fastest-growing U.S. online brand.

I want to talk next about ship-from-store pilot. Some of you may recall, we talked last year about the fact the we'd be launching a pilot of ship-from-store technology in Q1. We launched that on time. And just to refresh, that was to hook up 25 Banana Republic stores to our U.S. website. So what that means is we take the inventory from 25 Banana Republic stores, we took it, integrated it to the site. It was available which you sell to consumers, allowed us to stay in stock longer, drive incremental and capturing incremental demand by having more inventory. We then take that demand and we send it out to the stores where the associates pick it, pack it and ship it to customers' homes.

So when launched it, interesting thing happened, we got way more demand than we expected, more demand than we wanted to comfortably send to our 25 Banana Republic stores. So we tapped it down a little and then we took a step back and said, "You know what, we probably need to architect this technology to scale to possibly hundreds of stores." And so we took a step back and for the last 6 months, we were working to architect it to do that. And over the next few weeks, we're going to now roll to about 150 Banana Republic stores with this technology into Q4. We're going to open up 110 Gap stores to integrate it to with this technology. We're also going to open up the 10 Athleta stores we'll have by the end of Q4 onto the technology. So we'll have 270 stores hooked up to ship-from-store technology in Q4. And likely in '12, we will explore and test integrating some Old Navy stores into the technology as well. So I'll talk more about that in a little bit, but we're excited about the potential and we've made really good progress there this year.

I want to talk about mobile now. Everybody knows smartphones are really changing the game in mobile. And heading into this year, we launched our next-generation mobile e-commerce shopping platform. It was a major step forward in improving the customer experience. The form factor of a mobile is quite different than a tablet or a PC. You must adjust platform to make it easy and shoppable for the customer, and we've done that. And I want to share a couple of statistics with you.

Mobile traffic, this year, seasonably adjusted has probably been growing about 10% per month for us. So we're seeing pretty rapid growth. It's risen to about 10% of our total site traffic. And to give you an idea of the impact of both smartphone penetration and our new platform, our conversion of mobile shoppers in August to a buyer was over triple what it was prior in August of 2010. So there's 2 big things driving that, more smartphones which are easier to use to browse and shop the Web, but also our new mobile shopping platform made it much easier for people to shop and convert. So we're very excited about our progress. We think we have probably one of the better mobile shopping platforms out there. And I'll talk more about that, but we're going to continue to invest to stay ahead of the pack there. Fulfillment -- sorry, yes. I forgot to share the screenshots, but there's some of the screenshots of our site. Go to it. It's very easy, very shoppable, and we're very happy with the progress there.

Last on '11, I want to talk about fulfillment. We opened our Phoenix distribution center in the spring. And this was very important for us on our path to $2 billion, we needed more capacity. We also wanted to get closer to our West Coast customers to ship them faster and cheaper. We've opened up the building. We have Old Navy product in there right now. Old Navy is our #1 unit driver. It was important to get Old Navy into that building for this holiday peak to give us enough peak capacity. The building has gone very, very well. It's really our warehouse-for-the-future design. We're very excited about it. Next year, we'll be putting Gap in there, our second largest volume unit driver in the U.S. and we'll continue to scale the building from there. So that has gone very, very well. For those of you who know, when you open new warehouses, it's sometimes a big challenge. This has been without a bump, so we're very pleased about that.

So now a very busy year. This is just a highlight of some of the stuff we've been working on this year. I want to talk a little bit about 2012 and some of the things we're going to be working on next year. First, and I think Stephen mentioned this briefly, we're going to be -- we plan on launching Gap and Banana Republic online in Japan sometime in Q3 next year. We will own and operate that. That won't be a third-party site as we do have in China, which Stephen mentioned. We were going to do it this year. We deferred it partly due to the tsunami, earthquake disaster that hit the country. But we are going to come back and launch that in Q3 next year.

Interestingly, we're going to launch it 100% on our ship-from-store technology. So this is an example where we're using our technology to do different things around the world. And the reason we're going to do that is it's going to be very probable [ph]. We'll be able to see how high is high because we'll be able to tap into all of Stephen's store inventory in Japan. We will take all the orders and send them down the stores for fulfillment. Once we can read the business, the composition, the size and the growth, we will then make the proper decisions on what sort of back-end fulfillment investments we need to make over time rather than the traditional way, where you guess, you go in, you put a big investment in and then you see what happens. This way is much, much more efficient and much more leveraged.

We are going to explore Old Navy Japan for later on. We're not going to launch Old Navy Japan online, coterminous with the stores that Stephen mentioned. But we will come back and look at that possibly for '13 or beyond. Athleta stores, come back to about that again. So 10 by the end of this year, we publicly said 50 by the end of 2013, so just do a straight line between the 2. It doesn't take a math genius to know that 30 is about the right number that we're going to have by the end of next year. It could be plus or minus, but that's the pace we feel comfortable with right now. We're having good luck securing real estate locations of good quality and that appears to be about the right pace for us to scale up the business. Obviously long term, there could be more potential than 50. But in the 2- or 3-year time horizon, that 30 and then 50 is what we feel comfortable guiding with you right now.

And the other thing I want to talk about is the business model for Athleta. I had a couple of questions last night at the reception, "Well, how many stores do you have to have before Direct won't be managing stores anymore?" Because it is kind of weird, we're Gap Direct and we're opening stores, right? But we have a very powerful operating model we've crafted for Athleta. One, we're going to manage the inventory from one common pool, physically and digitally, one common planning and replenishment platform, one warehouse all together, and that's going to allow us to dynamically and continuously balance inventory between the channels as we fit to maximize economics.

Two, we're going to be applying our Direct fulfillment skills that have very rapid continuous high-quality replenishment to keep the service model really great and in stock really great in the stores. Three, we're going to be utilizing our ship-from-store technology. So if we happen to over-allocate to a store, rather than it being stranded and perhaps having to go to a kill price, we'll be able to clear that item at a fuller margin with a Web order. All 3 of these things combine to let us maximize the sales potential of this brand and the margin efficiency. And we think this capability is a real competitive advantage. We're not aware of anybody that's runs a multichannel business like this out in the marketplace. And it's a greenfield opportunity for us to build that capability up, and it's really going to help us.

Now the economic model for Athleta stores is also quite attractive. It's a premium brand, differentiated. We've got high AURs, we've got strong gross margins, we're demonstrating strong sales per square foot. So the store economics are attractive and this multichannel operating inventory model I've talked about will further boost the store economics. And there's one other important thing about the economics of this multichannel expansion for Athleta that's important to talk about. Catalog prospecting for new customers is expensive and many customers want a store before they going to be a new customer. So over time, stores are going to allow us to remix out of some relatively expensive catalog prospecting and they're going to become the prospecting vehicle for us. That's also going to be an economic boost to the system. Bottom line is we're very bullish on the Athleta growth potential and we're very bullish on the economic model and the length [ph] of that growth at the margin over time.

Piperlime. I'm going to just tease you a little bit here. The big thing we're going to be looking at in '12 is we're going to explore multichannel for Piperlime. We believe multichannel still remains the most compelling way for people to shop in our industry, and we think multichannel has great advantages. So we're going to explore it. We think Piperlime's assortment and brand has gotten to a point where it's worth a hard look. Nothing definitive to say to you today, but that's the big thing we're going to taking a hard look at, to scale and grow the Piperlime brand.

That's a little bit on international, Athleta and Piperlime. Briefly on mobile. Mobile is all about continuous enhancements. We're going to constantly be improving mobile. So you're going to see us rolling out faster site performance, navigation improvements. We're going to continue to port features from the website to the mobile device, like order status and tracking. We're going to do better job integrating our dynamic marketing content of the site and through email through the mobile device because it's not perfectly synced right now. All these things are going to be continuous improvement, we're going to work to stay ahead to have the best mobile platform out there. And the other good news is we're going to launch our mobile platform, shopping platform, online for Canada and Europe next year. So we're going to bring those skills to our businesses there.

Last, I want to talk about multichannel. And you heard Glenn talk about multichannel a little bit. This is the big focus. So 2010 was the year of going international. 2012 and beyond is going to be about multichannel. It's going to be about us now turning some of our guns and focusing attention toward driving the multichannel business system for the company. So let me talk a little bit about division here. If you look at our online store traffic combined and add them together, online is about 40% of traffic. So we're an amazingly big portal to the overall brand and to all of our channels. And multichannel is all about providing better service to those customers and better leveraging them for the benefit of both stores and online. Another fact, though online has about 40% of brand traffic, and this is in the U.S. only, we carry about 10% of brand of the total brand inventory in our warehouses, so as a result, we book about 10% of the sales. And what kind of potential can we unleash if we can let people through the website through their mobile devices have access at their fingertips real-time to 100% of the inventory of the brand? What kind of potential can we unleash?

So the first thing I want to talk about is this thing we call internally easy buy anywhere. And that's where we want to let the customer, through any device at their fingertips, have access to all the inventory in our company at any time. Clearly, ship-from-store technology is part of this. But if you're at the website and we don't have it in the online warehouse, we want to be able to go find it in a store and ship it to you. If you're in a store, we don't have your size, we want to, at your fingertip to be able to find that size in another store or online. So that's the kind of vision we have. And it will encompass over time order or reserve online and go to the store and try it on and buy it and other sorts of modalities.

It also, someday, we're starting to conceive of using it to have same-day delivery. So we could start thinking about using our stores as a forward-deployed warehouse, where we can use our ship-from-store technology for same-day delivery to really put the easy in easy buy anywhere. The potential is really exciting. This isn't going to happen overnight. These are some of the things we're working on and we're going to try. And what's great about it is using our stores as a competitive weapon for something we're very focused on.

The next thing I want to talk about is open data everywhere. It's a closely related concept, but essentially we will take all our store inventory data and we're going to publish it out to the website. And essentially, we want to let customers customize the website to their local store. Essentially, we want to be able to publish out thousands of individual localized websites corresponding to each store. We want somebody to be able to go to and set my store and have all the content at the site tailored to the inventory that's in her local store, and then make it very easy for her to see what else can be shipped to her from other locations through easy buy anywhere. So maybe her favorite Gap store, there's 10 spring dresses that she can see that are in stock right now for her to pick up in her size. But maybe there are 20 other dresses we can ship from a Gap flag store or from the online inventory and make it very easy for her to see all that at her fingertips in 1 swipe. That's what we're setting out to do. We're not setting out to do just a little item lookup, which some retailers do today. That's okay. That's not the home run. We're looking for the home run here and how to craft this experience. And again, this isn't going to happen overnight, but it's what we are working on actively right now.

Mobile. I keep talking about mobile. Mobile is all about -- everything I'm talking about is going to happen to the mobile device, all this stuff: at your fingertips, easy buy anywhere, open data everywhere. This is going to be available on the smartphone. It's not going to be just through a tablet or through a PC.

Trackable online media, next. This is a very interesting thing. It really is in the camp of us trying to develop techniques to power advantage for all of our channels. The idea here is having a way to measure online advertising impact on stores quantitatively, scientifically. It's been a big channel for multichannel advertisers to do that. We have developed some ways where we can actually scientifically measure the impact of online ad spending to our stores. Why is this important? Because it's going to allow us to channel our dollars in places where we know we can get an ROI. We've already deployed incremental investments for Gap, Banana and Old Navy and been able to measure the lift, not just online but in-store. And it's a very exciting development and a very exciting breakthrough.

So these are some of the multichannel highlights. I think you get the idea. We've got a very rich multichannel agenda. We in GID are very good at what we do. And what I'm saying to you today is we're going to be now turning our attention to driving multichannel probably at the top of our list, and that's going to create some big opportunity over time. We're going to be very good at it.

So summary, going back up. With all the stuff we have in flight and in the pipeline, we are excited about our growth potential. We solidly are on track for our $2 billion, $0.5 billion goal by no later than 2014. We're going to drive growth in the U.S. from, and, from Piperlime, from Athleta, powered by stores and going multichannel. We're going to drive growth in our international lines of business, Canada, Europe and, as Stephen and I have said, soon in Japan. And we continue to have our third-party relationship in China. All that is going to allow us to reach that goal. And as Glenn talked about, it's not 1 thing, it's not 2 things. I've got a basket of initiatives, a whole of bunch of lines of business, that are going to help me do that. One might come in hot, one might come in low. I've got a basket of initiatives that's going to help me get to that goal. And in addition, the multichannel stuff I'm talking about is not even in that goal. It represents upside. It represents upside to that $2 billion goal. So if ship-from-store becomes a big deal for us, that would be upside to those economics for the company.

So to wrap up, we've got a powerful global e-commerce platform, we've got best-in-class e-commerce skills, we've got the ability to innovate and drive growth. Most importantly, we've got 5 great brands to take our online skills and exploit to drive growth and profits for the company. So we're excited about that, and we look forward to delivering on it.

And that's it. I guess, we'll turn it over to questions and Katrina.

Question-and-Answer Session

Katrina O'Connell

Yes, so we have time for a few questions for Toby, and then we're actually going to take a break for about 15 minutes. So questions for Toby? Yes, Marni?

Marni Shapiro - The Retail Tracker

Toby, 2 quick ones. Are you seeing good crossover from customers that come into your site via Piperlime or Athleta into your core brands? I'm guessing they're slightly different customers. And then if you could just touch on mobile, clearly a big forward-looking initiative for you guys. The number of times I see people in your stores taking pictures of product and texting it to their friends, which leaves Gap Inc. out of the equation. Shouldn't that sort of be your first step into mobile is somehow capturing that conversation or being involved in that conversation that's already -- she's already using that and understands that technology?

Edward C. Lenk

Yes. So I'll take the second part first. If she's in our stores, snapping pictures and sending it to her friends, we love that, that's great. And I don't have time to give you all of the great things that are going to happen in mobile. And by the way, I'd be lying to you if I said I have a perfect vision as to all the great things that are going to happen in mobile. But that's one of the things that happens today. There are going to be lot of things that are going to be happen in mobile that are going to be very powerful. And we can't necessarily control the dialogue. The wonderful thing about the technology is the customers are going to talk about the products amongst themselves. Us inserting ourselves into the middle of that is hard. Now we do a lot of stuff at Facebook, we do a lot of stuff on our sites, we do a lot of stuff in email. But ultimately, we are a company that sells fashion. And if we do a great job at designing great products, she's going to talk great things about us through the word of Web, used to be word-of-mouth, now it's word of Web. So if we stick to our knitting and do a great job at that, the technology is going to help amplify our brands. So we're not stressed about getting in the middle of that dialogue, what we need to be stressed about is having great products, and then we think the technology is going to just take it from there. On the first part of your question, cross shopping, we do. We do measure cross shopping, in fact, there are people who might be lapsed from Gap purchases who come into Piperlime, and then get reactivated at Gap, as well as Gap going to Piperlime. There's a two-way balance of trade, so to speak. There's a two-way benefit. Each of the brands being there together, cross marketing in the universality framework, helps us drive engagement, drives incremental revenue and drives customer value. So we do measure all that and it happens every which way, every which way, and it's attractive [ph] .

Katrina O'Connell

Okay. Next question. Yes, in the back, and wait for the microphone.

Unknown Analyst -

Question was on the ship-from-the-store thought process. Just maybe, whose P&L would the inventory be on? And how would the store employees feel if they're shipping things and spending their hours maybe not getting comp or store performance? And then on the free shipping, how does that impact the profitability for you to get to that $500 million EBIT margin goal?

Edward C. Lenk

Yes. So I'll take the first -- the second part first. Inside our guidance is embedded the notion of free shipping to get to the $500 million, so it's in there. Our operating margin was just 22.5% and then it went to 23.2% in '10. We're going to have to keep -- continue leveraging up to 25%. Now in that, there's a lot of activity, there's a lot of new businesses ramping up that are not mature. There's mature businesses that are growing a little less slowly. There's investments in things like capacity and free shipping, it's all in there. We get advantages from scale. As we grow up, we leverage some of our SG&A. We're going to get advantages in our back-end operations. By going to the West Coast, we're going to get cheaper shipping to the West Coast. That will be a reinvestment we'll use to fund part of the free shipping, so there's lots of stuff we can do. But if you see we're very, very profitable. We easily have the financial power to make that incremental investment. And what's really going to be the attractive part of it is it's going to help power incremental growth. And incremental growth at the margin more than pays for the free shipping investment. But it is an investment. It is impacting our margin slightly. But over time, we're going to keep leveraging up to that 25% operating margin goal. The first part of your question was store associates and incentives. Every store associate has absolutely got to get credit for every single sale they participate in for a piece of inventory in their store. And they do, and they will. And that's got to happen. You got to let them -- they've got to be incented to do the right thing in a local store environment, and we do that today for the stuff we send to Banana Republic stores right now.

Katrina O'Connell

We have time for one more question. Yes?

Unknown Analyst -

Just following up on that. Could you talk a little bit about the timeline for the ship-from-store technology? What's the test period and when you actually get to where you want to be?

Edward C. Lenk

Yes. So we've been testing all year with small amount of Banana Republic stores. That's gone very well, and we're going to roll the next phase of it, as I said, in the next, literally, few weeks, 2 to 3 weeks. Just under 150 Banana Republic stores, just under 110 Gap stores and the 10 Athleta stores. So I think next year, when I talk to you, possibly Glenn or Sabrina sooner, we'll have lots more to say. I think that next phase up is really going to be really important because we needed more stores in the system to really be able to see and measure the full impact. But we're pretty sure there's some very nice incremental demand capture potential from the technology. But our next phase up, which is happening as we speak in Q4, is going to be really important for us to give more specifics about it. But we're very, very excited about it.

Katrina O'Connell

Okay, thank you, Toby. All right, so we're going to take a quick 15-minute break. Please feel free to see the showrooms on the break, and we'll have you back for the next part of the agenda.


Glenn K. Murphy

Okay, everyone. Ladies and gentlemen, we're going to get started here. I'd like to introduce Art Peck, President, Gap North America.

Arthur Peck

Good morning. I'm going to talk about a couple of things this morning and I will ask Mark Breitbard, who is my head of merchandising, to join me in a few minutes, and then we'll save some time for questions as well. Really, a few full things. I want to talk about short-term work that we're doing to impact business performance now and on a short-term going forward, and then a brief moment on some of the things we're doing in parallel to continue to improve the stability of the consistency and the overall performance of Gap North America.

Let me spend a moment on who I am, since I know some of you but not all of you. I joined Gap about 6 years ago. I came in from the Boston Consulting Group where I had a long career. Left there, and I was managing the global practice P&L for the business, and I spent my time in client service, significantly in entertainment, film entertainment and music, as well as retail. Came into to the company in a pretty traditional strategy and business development role and have worked closely with Glenn and the team on the strategy that we're articulating today. Assumed fairly shortly after joining the company, responsibility for really building the franchise business from an idea to opening over 100 stores across a number of different countries. Took on our North America logistics operations, in addition to that. In 2008, I moved into the outlet business and with the team there, we quickly moved the business from what I would describe as having been somewhat in genteel decline to an improvement in top line performance to top line -- to comp store sales and new real estate and global expansion, as well a significant uptick in bottom line performance as well. And then joined -- in this seat, joined Gap North America earlier this year in February.

So it's been a busy 6 years. It's been a busier 8 months. And I'd like to talk about some of what we've been doing, and how we see the business and where we're going. So first, I want to spend a little bit of time talking about the assets of the business because I come to this seat with incredible assets in this brand, and I think it's important to call those out, as well as focus and acknowledge obviously the struggles that we've had in top line sales and in business performance.

I think notably, the soft spot, and Mark will talk more about this, has been significantly in the women's business. Men's has continued to perform, and frankly has gotten stronger season by season. The Kids and Baby business has been a solid and consistent performer along the way, and the Body business has some very bright spots in the business. But women's has been a tough. And significantly as goes women's, obviously so goes the business on an overall basis. So you will hear us talk a little bit about today what we're doing to improve the business in the short-term. And we will talk about where we think product is getting better. We will also talk importantly about some of the underlying changes we're making in how we work and what we do to deliver better product and deliver better product with consistency, which has obviously been a challenge for this business.

Other assets. We have great real estate. Real estate is a liability, but it's also a huge asset. It's a financial liability, but it's a huge asset. If you look at the doors that we have, and our competitors in many cases would kill to get the real estate that we have. Our job is to do better with it. We have an amazing brand. There are those that ask whether Gap is relevant. We have hundreds of millions of footsteps every year crossing the lease line. We have near-ubiquitous brand recognition, over those are huge assets as a starting point. And frankly, we have, and the quantitative research shows this, as does, you just talk to customers, there's a huge amount of goodwill out there towards this brand and an expectation that we haven't been adequately fulfilling.

So on that basis, this is a team that is really energized about the opportunity. Importantly, I would point out also a sense of urgency that this team has. We get current performance. We are not pleased with it. We are committed to improving it, and we're committed to improving over the long run with consistency of performance at a higher level.

Some of the things that we're doing, let me just talk very quickly about that. I would focus first on the team. Obviously, whenever you get into a new seat, the first thing you focus on is talent. And the team that you have leading the North American business today is significantly a completely new team, either in significantly new roles, like Mark, where he successfully running the Kids and Baby business and merchandising to all of merchandising in the brand, to new players in the others seats to a person many of whom have had significant experience and successful experience outside of Gap. So it's a new team with a new perspective, not encumbered by many of the things that we've traditionally done in the business. And I want to underline that because it is a team also that does not believe that it's going to come in and do the same things that we've done before and achieve different outcomes. If I were you, I would be asking, "What are we going to do differently to improve performance and consistency in this business?" And I hope to address that question somewhat through the conversation over the next few minutes.

In product development, which is critical, and I'll only spend a moment on it, Mark will talk about it much deeper. From my past experience, I've worked in creative businesses, my experience in creative businesses is that discipline and process empower creativity and empower great results, that they're not competitive with each other. And one of the things you will see in this building, when Mark talks, when you talk to Pam this afternoon, is we have been a building a product development process, a 3-season in parallel process that is cross-functionally integrated that we believe has the potential and in fact, we have high expectations of it, to consistently deliver against the expectations of our customers product that is brand and aesthetically right. It is a disciplined process that's frankly been running in Kids and Baby, less so in the Adult business. And we're now on that process and we are very excited about what we think it can do for us. Mark will spend a minute more talking about that.

Marketing. We're coming at marketing from a very different place than we have historically as a brand. Again, you have an opportunity to talk with Seth Farbman, who's the Global CMO, this afternoon. I would emphasize the fall campaign, which was very much about talking about what Gap as a brand is, and then also a strong product message in terms of the product aspiration of our denim business. And it's really moving from, I would say, telling one synthetic story to telling real stories about the brand and multiple stories that customers can choose to engage in. And on the great majority of metrics that we have signed against that campaign, we saw very good results associated with it, most particularly in attracting a new customer the interest and relevance of a new costumer and a younger customer that we need in this business.

The last thing I would talk about in terms of doing things differently that's important -- and there's a broad range of them, and I'll dive into a few more after this. But the important thing I want to underline is the field as well. We have a huge asset in our stores and in our field people, it's where the bulk of our headcount are. I'll be the first to say that our stores have not been executing with the consistency that they need to execute at in order to deliver the kind of brand experience that we are committed to delivering. We have absolutely great stores out there that knock the ball out of the park and outperform everyday. We don't have enough of them and we don't have enough of them consistently to deliver the performance results in this business that we're committed to delivering.

Steve Stickel, who is not here today, who is my head of field, worked in the outlet business, then worked at Banana Republic, had a long career at Macy's before he came here. And Steve is a tough guy, and we have raised the bar in the field very significantly. First and foremost, again, a number of changes in people because it starts with people. We've made changes at the senior level of the field organization, we are making changes at other levels of the organization as well. And we will not accept inconsistent performance on an ongoing basis. We need consistency and we need the bar to be set higher.

And what I'm talking about here is many things, and I'll dive a little bit deeper into it. But simple things like our replenishment practices, store standards, the customer experience, fitting room and cash wrap. These are retail fundamentals that, as a company, we can be world-class at. We have not been consistently world-class at. In many cases, we invented the model. We need to get back to those world-class practices as quickly as possible. We're starting to see results there. We're seeing it move in our customer experience surveys that measure the actual experience of a customer in a store, but we need to continue to move that needle as quickly as possible. How that shows up? It shows up in terms of one of the most important metrics of conversion. We still have the bulk of our footsteps that walk out of our doors without a bag in their hand, and it's a big short-term opportunity to drive the business with customers who are already part of the brand.

Okay, a couple of things I want to talk about then, deeper on product for a moment because it's important, I think, and Mark will go into this again as well, just to call out a few of our product successes in the women's business, which to me are not proof of change but validation hopefully of the direction that we're going. In February, we immediately went heads down on the product that was in the pipeline. And that product is the product that is now starting to show up in the stores today, it's a product that you saw in the showroom this morning. And it was the product that we will be able to affect program-by-program that far out in the pipeline. We canceled some programs, we added some programs, we changed some programs.

The good news is that the things that we changed, the things that we put into work that are now in the stores are absolutely registering with our customers. The significant sweater program that you saw laid out in the showroom, that was a change that we made. We put people on planes to Asia, we put those sweaters into work, we felt that they were absolutely on trend and appropriate for the brand. We put quality into those sweaters. They're in the stores now, very successful product acceptance with our customers. The cord leggings that you see in women's as well, same story, on trend, great color palette, perfect fabric, a right price sale. And that's what you need in this brand. A number of other programs as well that are working right now. And again, good consistency in Kids and Baby, good consistency in the men's business and some very bright spots in the Body business as well.

My philosophy on product. And this may sound a little bit different than maybe what you have heard in other places in this industry. To me, product is necessary but not sufficient to sustain great results. We have to put great product in our stores, brand-right, trend-right, quality-right, price-right everyday. On top of that, I want to talk about a few other things that we're doing to lift the bar even higher. None of them individually a big deal. Cumulatively, we believe that they will have a significant impact, in a way, blending the art of merchandising and design with some of the science and process in the business that we feel is critical. What's our big problem in the business right now? Bad product, we're overly discounted, we're overly marked down. How do you get at that besides putting better product into the stores?

Number one, our unit buys. We put a lot of pressure on the business in the first half of the year with units in women's tops in this business. Where do we have the toughest product acceptance? In women, in women's tops in this business. We had to discount heavily to move that product through. We have rebalanced the unit pressure in our business significantly already in the back half, and we're looking very carefully at where we're putting pressure on the business as we go into 2012 to get the right balance of units in the right places of the assortment and then be able to pull the pricing pressure back off the business. That's number one.

Number two, how we allocate product. In much of our product from a fashion standpoint, we've had a methodology of fully allocating the entire flow on the initial allocation. What that does is it ends up with product in stores where the product is selling better and product in stores where the product is selling worse. You get orphaned and stranded product. You have to mark down or promote to move through the system. We've rebalanced our allocation methodology to hold more product back, read the results across the fleet, and then reallocate into those stores where the product is performing better and pull back on the allocations in those stores where the products are performing less well. That again will release pricing pressure on the business.

In outlet, a couple of years ago, because the outlet business is inherently a promotional business, ticket promotes the way that business runs, we developed an in-house tool, which is proprietary for localizing our promotions across the fleet. It allows us to take local promotions on a pricing basis into individual stores and importantly has a logic engine at the back end of it to be able to allocate product on the basis of store-level elasticity. So for those stores that can sell a Gap Arch because it's a tourist store and tourists love the logo products, never at a discount ever, they will never get a Gap Arch promotion and they'll get a disproportionate allocation of the product. We have basically poured at that capability directly into this business. We're testing it right now in a couple divisions of the business, and we want to have it up and running fully by the end of this year to impact 2012 performance. We believe we will remain promotional, this is an industry that's promotional, but we can't continue at the depth of our promotional cadence and depth of the business. And that's another tool for helping us do that. I won't promise any specific level of performance associated with that, but I can tell you in the outlet business, it was real and it was material. And it's significantly impacted the rate of the business and the overall profitability.

Toby mentioned ship-from-store, really excited about that. In my word, ship-from-store, as we implement that, virtualizes our inventory. And we get the benefit of a higher margin in the online business and that margin spread and rate versus stranded inventory in our bricks-and-mortar business. And our ability to play arbitrage between in that rate spread across the business we think could be potentially a significant impact on our overall discount levels as well.

And then structure, we are promo-ing differently today than we have historically. A good example of that is Columbus Day. We had a 4-day Columbus Day promotion this year that was an up to 50% off because Columbus Day weekend is a promotional weekend for the mall. If you don't play, you go home. Last year, we had 40% off the entire basket on Columbus Day. We drove a huge comp, and it was really tough on margin. This year, we had a 50% off for 4 days, which allows us underneath to manage rate across what's in what bucket from a promotional standpoint. We drove very good comp with that, and we managed to a very good margin. And again, it's not rocket science but a principle that we're putting in place here which is how do we back off of this depth of promotion as we put better product in the stores, we restructure our promotions and we bring these tools to bear against the business in order to increase our margins and increase our rate in the business.

A couple other things I want to touch on. And obviously, stuffing 8 months into 10 minutes is tough, so we'll have some time for questions after this. Real estate. It's on everybody's mind, a number of you asked me about this, this morning. Sabrina mentioned the 700-store target that we've put out there publicly for the Gap North America fleet. We're committed to that. It's part of our market planning. We have a path to get there. It's part of naturally managing our exit from centers, where they're no longer appropriate for the brand and we will work our way through that, while at the same time, as she mentioned, backfilling in a select number of markets with a Gap -- and again, we've had a strategy now that we've been testing for over a year as I've been in the outlet business, to put Gap factory stores out of traditional outlet centers. So far, the early returns on that are very good. In essence, it's about acknowledging the fact that not all value customer shop in outlet centers and there are plenty of value customers who don't, who have a desire to participate in the brand and it's a way to take that value expression of the brand to a customer who wants to be in the brand but is either unwilling or unable to participate in it at a premium specialty price.

Last thing I want to talk about then is on top of improving short-term performance, we have an obligation and an opportunity to really drive sustained health back into this business. As I mentioned, we have great assets. We have, however, become stale and predictable. We did an exercise a while back with some customers and literally said, "Close your eyes and talk to us about a Gap store." And we would hear, "I see maple flooring, I see a bank of denim, I see all the things that have almost become cliché about what a Gap store looks like as much as it's made a part of the cultural landscape of retail." And it's our obligation frankly to refresh the experience, that sense of discovery, that sense of newness which is what retail is all about. And if you don't do it, you fall behind is something that we're working on really pretty aggressively right now. And to do that, we've taken some stores in essence out of the fleet. In L.A. right now and then a couple of stores around the San Francisco Bay Area, and we've been testing some things. And let me underline the fact that there are components of it that are a new store design absolutely. But a new store design without a new customer experience is not the way that you win over the long run. It's service model, it's a hand-picked assortment that is beginning to bring in complementary third-party brands. It is a new store design. It's a new way of displaying product. And that to me is one of the most critical things which is we are not getting paid today for the quality of product that we have in our stores.

In this business, good product and a turnaround, business performance always lags good product. Our product is better than our performance. In these stores in L.A. where we have started focusing on a different form of product presentation, less mass display of product, more selective display, a different replenishment model [indiscernible], very positive results.

So very early days, not going to declare victory by a long shot. But very positive results so far. The Grove, which is obviously a very, very great center in Los Angeles, will reopen with the full brand expression of the next version of this at the end of the month. For those of you that are out in L.A., I would suggest that you stop by. It is not the endpoint, it's really the starting point of us beginning to refresh what brand -- what Gap stands for as a brand while building on those incredible assets that I mentioned at the beginning.

So with that, products should be on your mind. Let me invite Mark up on the stage to talk about what we're doing on the product side of the equation.

Mark Breitbard

Thank you, Art. I am Mark Breitbard, I oversee merchandising, as you know now, for Gap North America business. I've been with the company for 10 years, with a short break to work for a couple of other brands such as Levi's in the middle [ph]. Before taking on this role, I was overseeing the Gap Kids and Baby Gap division. And today, I'm going to share with you some of the insights about product, our approach, some of our philosophies around merchandising and share some of our aesthetic work that we've done, as well as some specific examples by division.

As Art mentioned at the highest level, I do want to remind you there are 3 business units that we are running. There's a Gap Adult business, which has men's and women's, There's the Kids and Baby business. And there is the GapBody business. So at the highest level, the Kids and Baby business, we're pleased with the performance and has been very consistent. The Body business has some great foundational businesses that we're really pleased with but we need to do more with. So bras, underwear and the Gap Fit business, the sport part of that business, we're happy with the progress. We need to do -- there's much more we're going to want to do there. We're both very passionate about that business.

The men's business continues to perform. It's exceeded expectations. It's been consistent. We've been pretty conservative with this business. And we're going to try to build more energy and some growth into men's as well. And the women's business. We have very publicly and vocally and globally talked about how the challenges we've had in the women's business, in no small part due to the off-brand product we've had over the last year. We brought this on ourselves with challenging product that has lacked color, it's lacked a style point of view, and it's been very poorly received as you guys all know. So I want to talk a little bit what we're doing to turn around the product, particularly, in the women's business, but it will also be a sort of overarching some philosophies around it.

I first wanted to say that Art talked about the importance of process and discipline. I want to talk about how in bringing product to market in merchandising, there are sort of the glamorous aspects of it that people always like to talk about, the color and trend and the aesthetic and fashion. And then there are the less sexy parts of the merchandising, which are absolutely critical to deliver business consistency. And that is the process and the discipline behind it.

So I want to start by talking about some of the less sexy parts but they're really critical that we've been working on together, we've been working with Pam very closely on, which from my perspective, it begins with alignment. So Art mentioned alignment across the functions, bringing big ideas to market. We have not been doing this over the past year well, and we have new process in place and tools to bring better alignment across all functions. And what this means on a very tactical level, what a big message will be in the window will be bought appropriately, will be trained appropriately in-store, will be from inventory management to visual across all functions and marketing. And actually now globally as well for some of the biggest messages.

We also are aligning on secondary messages. So each division with the full cross-functional teams' alignment with the secondary messages of this season [ph]. These are very fundamental concepts in retail, I know, but we have not been doing them consistently. A few other ways, as I talk about process and discipline. Discipline in the key categories. I think we've proven that we can launch categories well. We have not proven we can sustain them, particularly in our equity businesses, our core businesses, denim, khakis, knits. And we're building better plans for launching and sustaining those businesses. Promotional discipline. Discipline around our promotions, around pricing as Art mentioned.

Feedback, we have launched in the last 2.5 months, essentially an internal social network where we can have immediate feedback from store managers and their top associates, where they post comments from customers and comments that they have themselves and that they're hearing directly to and have merchants respond instantaneously. So we are constantly doing it. Merchants are asking questions, "This just delivered, what are they wearing it with? It seems like this color is doing well or there's a problem here." And we're getting an instant feedback in the way we haven't before, and it's been really interesting.

Arthur Peck

Can I just add, Mark? We're also going to be trialing a crowd-sourcing platform for our field employees to be able to look at our products, comment on them before we make our inventory investments on a going-forward basis. So to be determined what that will yield, field is really excited about it. It will be interesting to see what that yields as well.

Mark Breitbard

True. And that will be happening over the next few months, so we'll be piloting that. Also, we've talked a lot about the speed pipeline. That is another process we brought in place to help us bring higher-margin products more trend-right into the business. And as we talked about, some of the styles that you're seeing now entering into the line were developed on that pipeline. Where you see more color, where you see pattern, where you see print were developed on that pipeline. So process and discipline in the business, not particularly glamorous, but very critical to our success.

Now on the more glamorous side, our aesthetic. As with our overarching performance, we have been inconsistent in how we've delivered against our aesthetic. So again, Kids and Baby is delivering covetable American style, easy to outfit. We've been delivering it consistently and our results have reflected it. In the Body business, great casual American style, but that it is either in the sexy bra and underwear part of the business or as in Gap sport, we add style plus performance. And again, we're in a good spot there. In Adult, we are -- it's a work in progress. And we clearly have had work to do. Where we have delivered casual American style that is optimistic, that is more youthful, we are seeing the results.

So I want to talk -- well, I guess, I should first say that I don't think words had been our problem. And that when you look over the last few years, that we've danced around different words to describe our aesthetic and that tends not to have been the problem, it's been about execution. But having said, I still do want to share with you the words that we are using to talk about our product. And then after lunch, when you can go down to the 11th floor, you'll see Pam and Seth can talk in even more detail about it.

We need to be youthful with a contemporary flair, not missy. We need easy-to-wear versatile styles that are not fussy. We need color. Color is a huge, huge part of what -- of our aesthetic for Gap brand. Color brings optimism, color brings energy, color brings confidence into the store. And we have largely, for the last 3 years, been lacking color in this business. So I want to just give you a quick snapshot of before and after for spring, that I'm going to show a slide of spring 2011. And this is a color photo, this is not a black-and-white photo. The entire store was sort of a sea of neutrals in 2011, as you will recall. And just a quick snapshot, fast and forward to 2012, and you'll see more of this downstairs. But particularly, when we're in a color trend, obviously it's critical for everyone. But just the color is such an inherent part of the brand that I think it's important to flash that in front of you.

We also know that denim is going to be an important part of the aesthetic. Wardrobing back to denim is sort of at the heart of the brand. So if we start to nail the aesthetic, and then you say, "How do we position that aesthetic?" We unlocked something very powerful with the 1969 launch. We unlocked this accessible premium platform, where you take style and quality cues from the premium market and you bring them into an accessible price point and you make it an accessible and easy shopping experience. We need to continue to build on that. So for instance, in denim, we want to build on that. We now have the 1969 L.A. office up and running, bringing newness. Art mentioned the success we've been having in colored leggings, in the cord leggings, the prints that you saw in our showroom this morning. And we are very excited about this trend and have plans to keep it in place and keep it fresh for the next few seasons, giving us -- while still having flexibility to manage trend. Also in black pants. We have been very pleased with the platform we built. We need to do more to sustain this. We had success with the men's wear pattern, but we need more pattern, more color and we're bringing that in. Gap fit active bottoms. Again, launched last October, and we have -- actually in this part, it hasn't been as loud marketing-wise, but we have done actually a decent job of bringing newness to color and silhouette into this business, and it represents a good example.

So if we start to feel better about the aesthetic and better about delivering the aesthetic consistently with better process and discipline for the business, and we are platforming it as accessible premium, we have to tell the customer. Something that Art is very passionate about that I'm passionate about that you will hear Seth be incredibly passionate about as well is storytelling. Doing a better job of storytelling with the brand. So in order to tell a better story, a better product story specifically, we clearly need big seasonal messages and bigger ideas. Over the past year, you could argue that the only story we've been telling is a promotional story in Gap brand in North America. That will start to change in -- it actually started to change even in the past few weeks, where you'll notice a sweater window. Art mentioned sweaters, we had cable. And we started telling a story about cable and merino, about new yarns, and new quality. We did training in stores where we actually showed them. InStyle, Lucky, Vogue had said, "This is a major trend." We had the inventory, we have in front of store and we layered on a sweater promotional on top of it. And we are, as Art mentioned, really pleased with the results we've seen.

So I think in an environment that we all acknowledge as a very competitive retail environment that will be promotional for the foreseeable future, I think it'd be foolish to say we're going to shift into entire storytelling. But making it so that the promo isn't the entire story and that we are doing a better job of telling big product stories with promos that layer on is going to be our key strategy. In the Kids and Baby business, we've been doing this actually pretty well. The stories had been around collection. This is an image from the holiday where we talk about the I Want Candy. This was set up in our showroom. It's a great holiday emotional product story that is centered around kids in a candy shop or even bringing candy into the store to help tell that story, and then we'll have promotions that layer on. That's an example of the storytelling I'm talking about.

So those are sort of the overarching philosophies for how I think we're going forward with the products for this brand. We're going to have some time for questions. But before we do, I want to highlight a couple more things in the women's business because we've been so vocal about the challenges we faced there. First, as I think Art spoke to, where we have delivered a casual American style with a more youthful expression, with optimism, we have seen response. The sweater example. Some key fashion items in knits where you see more color we have seen out the speed pipeline. They deliver against the aesthetic, we serve it up and we are seeing success there. We mentioned traction in some of the bottoms areas already, colored leggings, cord leggings. And we'll continue to push in those areas.

The results we're seeing in areas where we feel like we're delivering this are energizing for us, and they are encouraging us to continue down the path that we're on. So I just want to reiterate before we take questions that we are completely dissatisfied with the current results that we have seen in the business, and we are entirely focused on improving the product and we will not accept mediocrity to this brand and product.

So with that, we are going to have a few minutes, I think, for questions.

Katrina O'Connell

Yes. Thank you, guys, very much. So we're going to the questions for both Art and Mark. I see lots of hands in the audience. And maybe what I'll try and do, too, is go to this side. So my apologies, I can't see behind who's behind here. So Dana, do you have a question for us?

Dana Lauren Telsey - Telsey Advisory Group LLC

As you think about the products, and you think about your customer, how are you thinking about pricing? What should the right price be and what types of promotions? As we've been seeing 40%, 50% or 60% off, how do you move from that going forward so that you balance what should be a full price with an off-price?

Mark Breitbard

I think Art mentioned being -- getting more sophisticated in pricing. So from how we allocate inventory to more local promotions, obviously, that gives us the flexibility. We are moving from the straight 40% off, 50% off into more of the up-to promos where we can manage it under sort of behind the scenes. And I think that's how we plan to do this going forward. It's preseason, buying bigger and knowing where we want to go a little bit deeper, and then having shallower discounting on the styles where we feel like we need to have shallower discounting.

Arthur Peck

Let's also state the obvious here, but it's worth stating, which is the best way to get yourself off of the promotional cadence and depth that we've been on is to put product that she falls in love with. And maybe she thinks she's going to come back in and buy it on sale in 2 weeks and she's disappointed. There's going to be an aspect of that. So if you see that we have sold through some stuff, we'll probably get hammered for our service levels. But the idea that it's got to be something that's sells at right price that we are run out of, that is not a bad dynamic and part of this business.

Katrina O'Connell

Great. Maybe -- sorry, I can't read your tag. Kimberly, sorry.

Kimberly C. Greenberger - Morgan Stanley, Research Division

I'm wondering how you plan to filter the information that will be fed to the merchants in terms of feedback on the product. And it strikes me that over the past several years, the International stores have consistently looked far better than the North American stores and that would seem to be a really easy feedback loop to help improve the U.S. merchandise. And we just didn't see that at all. So internally, what are the barriers to sharing information from International stores to help improve the U.S. assortment? And secondarily, if you couldn't even filter the International information to the merchants to help them improve the product execution, how will these new information channels assist in that process?

Mark Breitbard

I'll tell you, one of the -- okay, you are in the Gap Global Creative Center right now and this building is the center of that information that we have not had previously. We are partnering with our -- I have weekly meetings with our global counterparts and our teams are operating more globally. So at the end of our product weeks, we're going through exactly what the big ideas are. We have merchants in my business that are junior merchants in North America that know what's trending in Tokyo now because of our counterparts. So we are openly sharing more information, by the way. We are working here. And I know Pam can speak more to that when we meet downstairs.

Arthur Peck

Yes. I would just add to that what you -- having the information and doing something with it are 2 different things as well. And as an example, in the stores that I mentioned that we're working and trying something different in L.A., part of the assortment differences we have a bunch of the European product in there. And lo and behold, contrary to what may have been the conventional wisdom, you actually can sell a cashmere sweater in Glendale, California in a Gap store.

Mark Breitbard

And I think in terms of tempering information we're getting, I've always believed that in the great merchandising is this combination of intuition and getting facts, your gut and your facts. And I think that's where we're going to get a tempering of information we get. A lot of the information we get from our online -- on the tool I was talking about is a merchant recognizing something, asking stores about it. And by the time you've heard 20 different responses and the group building on itself, you start to build the picture.

Katrina O'Connell

Okay. Yes, question there.

Teresa Donahue - Neuberger Berman

Teresa Donahue, Neuberger Berman. I'm curious on your comments about store presentation, et cetera, and also on the marketing side. How do you balance the need for changes there with what I believe is a corporate goal of managing expenses very tightly at this division?

Arthur Peck

To me, the -- I guess, a way to frame it is, if we're going to put payroll back into the stores with a different replenishment model, put less product on the stores so that it appears more aspirational, and it is, it's a simple fact, we got to get paid for it at the end of the day. So far, as we've been doing that both in the fleet and some things that Steve has been doing in some key stores and some of our bigger flags as well as in these test stores, we've seen the payback. So it's one of those things. The same is true on marketing, which is marketing that delivers no return as an expense, marketing that delivers the return is an investment that helps the business and we're looking for returns on both of those. And I know that's a trite but true thing to say, but that's absolutely the way we're thinking about it. To me, there's no right payroll level. The right payroll level is the level at which you get paid for driving the business in that stores. And in a lot of cases, we've pulled payroll back to the point where we can't focus on some of the basics, whether it's fitting room, cash wrap lines, store standards and those kinds of things. And we need to put that money back in, and I'm absolutely confident we'll get the returns for it.

Katrina O'Connell

Yes, in the front row.

Unknown Analyst -

I guess, I have a 3-part question. So one is, just fundamentally, what's so hard getting tops right? Why is that so difficult? And kind of when do you believe they will be right? And then second of all, what is Gap division's lead time? And what should it be? And how much are you sort of speed sourcing now? And why can't it be shorter? Why aren't you using that more effectively?

Mark Breitbard

I'll start with the tops question, which is I think that we think -- we're consistent with our strategy, which is we have great loyalty in our bottoms fits and we continue to drive excitement to the tops. And I don't think there's been -- I don't think that there's some massive unlock on tops other than if we are in a huge color trend and we have had no color in our tops. I mentioned about needing to be more youthful and more with a contemporary flare and less missy. I think we've been missy in our tops. I've mentioned that we've been a bit fussy in some of our tops and are harder to wear, harder to outfit back to denim. So I think starting with the areas of strength and building from there is how we're approaching this going forward. Sweaters, we're really pleased with the progress there and the knit business has been actually one of the stronger-performing businesses we've had. It's been the women's woven business that's been the toughest and we have traction in some of the wovens we have coming that are in store right now. They're a little bit more conservative, and we're building on those going forward. And by the time we get into the second quarter, we are trying to really reclaim our dominance in the entire knit, top, where we're going to fashion knits top classification. So I don't think that there's a magic unlock there. I think part of what is going to help us unlock was your second question of 3, which was the speed pipeline. We are building a higher percentage. If you look in the knit classification, it's a larger percentage. If you look at total women's, it's higher than it is in men's. But across the board -- and we have named a person who is actually overseeing the full speed and fast process for us. And so we are aggressively building that. And timelines there are anywhere from 12 to 16 weeks before we can impact our business. And that is becoming a greater percent of our business with every season.

Katrina O'Connell


Unknown Analyst -


Arthur Peck

What I would say is, I mean, it's a blended number and I haven't done the math, but we have pipelines. There are things that you can buy. If it's truly a perennial basics program, you can buy them at a long lead time for best possible pricing and there's no fashion risk associated with it. We have our core pipeline, which we shortened a year plus ago, which we're continuing to operate on and then a speed pipeline as well. And the issue that we're committed to is frankly as we've done some of the other things that Mark talked about in terms of building back some of that underlying process, discipline and design and merchandising is now starting to grow that speed pipeline on top. So the answer would be a point in time, but I actually haven't done the weighted answer. What we are committed to is now holding open to buy against that speed pipeline, so we can continue to grow that as a percentage of the overall business.

Katrina O'Connell

Great. We have time for one more question. I see lots of hands, so these guys will be in their showrooms during lunch, too, so you can ask them questions then as well. But I'll take one more. Yes, they'll bring you a microphone there.

Unknown Analyst -

You talked about discipline. Are you changing your fits back and silhouettes with your tops? And also, what percent do you feel should be woven versus knits? And the tops have seemed boxy.

Arthur Peck

Other than that, we're good.

Mark Breitbard

Our feedback is only internal right now, so I can't get that [indiscernible] for me. But yes, our tops have been boxy and we have changed our specs. I think that if you think about the last 3 or 4 years, we have struggled in women's tops, but this past year was a true departure.

And we were -- our specs got worse and were even more boxy. But we had a global fit meeting in the -- it was actually I think a week before last year where we had nailed down new fit blocks for tops that I think will drive much more consistency in our tops. And we know that it was -- that they were too boxy. So from a knits and wovens percent, we don't break our business out like that. But clearly, knits I've said is going to a killer, big category for us. So that is going to clearly be a bit more dominant. But I think wovens are also an important part of the business. And I think there are going to be, there are different aspects of wovens we are going after, slightly more conservative wovens that have done well and building some fashion wovens. I always want to have great white woven tops for women in the store at all times.

Arthur Peck

And wovens as a percent of the assortment will vary by season. Summer is not a big wovens time. You get more into a holiday or fall time period, then it's different. I also just -- last comment on this. I just want to emphasize common sense because that's a component of what I think Mark and his team and the design team here really brought together. A woman's wovens top with an asymmetrical shoulder and a ruffle on it in a light fabric in February that you can put a third piece on is not a common sense thing to put into the stores. And we've gotten a lot of that, hopefully all of that out of our system as we look at our collection going forward. So thanks everybody.

Katrina O'Connell

Thank you very much. So I'm really pleased to welcome up on stage right now our Old Navy team. We have President of Old Navy, Tom Wyatt, and we have Nancy Green, who is our head of merchandising.

John Thomson Wyatt

All right. Good morning, I think, still. It is a pleasure to be with you. This is my third year representing the brand, representing Old Navy. And just as a backdrop, Glenn said it, but I'd like to say it as well. We -- yes we're retailers. Our conduit is not just retail boxes. Toby's business is online, soon to be more in mobile. We are a franchise. We are a brand. And that's what we really look at everyday when we look at Old Navy, the consumer, the store experience, the entire, if you will, experience of the brand. So that's the approach that we take.

When I joined the company in February of 2008, the brand was actually a bit schizophrenic. We were going through a bit of a dark time in a fast fashion kind of mode. We weren't really focused on our target customers. We should have been. And what I worked on initially and what we have sustained over the 3.5 years I've been there is actually this, if you will, strategic imperative. This is what I can proudly say has really driven our business. And the improvement of our business, if you go back 2003 to 2008, we lost $1,300,000,000 worth of business. We had 5 years of comp decreases in the brand. And we've had a very nice run. 2009, 2010 were 2 positive comps for us and we're very pleased with those.

The target customer, we had to land. We landed Jennie. We landed Mike and the kids. We actually, by doing that, clarified where the product ought to go and how it could be more consistent. And quite frankly because of that focus, the product has been much, much better.

The other thing that we did is, as we really said, we're going to be a value player. We're going to compete against Target. We're going to compete against Wal-Mart. We're going to compete against Children's Place. And we priced our products accordingly. And at that time, that was a little schizophrenic.

The store experience, if you notice, you know this brand well, 17-year-old brand, over $5 billion worth of business in North America. And we hadn't put a lick of paint. It's an Alabama term. Hadn't done a lot to the stores during those first 16, 17 years. It was imperative that we change the shopping experience, change the store design and we've done so and are continuing to do so. And then all of that, if you will, enveloped into that fun, quirky spirit, which is our brand, which is Old Navy.

So now I want to take you through some of the things that we've actually been proud of this year and some of the things, quite frankly, we've been challenged by. The biggest thing we've been challenged by is traffic. As most of you know, in spring of 2008, we introduced the SuperModelquins as a brand-new creative platform. They were immediately a success for us. They really landed on those 4 tenets that we really believe in, in varying degrees, fashion, family, value and fun. They were dead-on in value. They were dead-on in family. They were dead-on in fun, very, very fun, quirky spirit in the personality and DNA of the brand. They were a little light in fashion, but quite frankly, the others overwrote it so much that we really enjoyed a number of very positive comps in both traffic and business.

In the second half of 2010, I will tell you that the traffic waned and we felt like it was time to give the SuperModelquins a little time off, a little hiatus. And we started embarking on a new creative platform. And we introduced that in the spring of this year. Glenn has mentioned this on a couple of calls. We have talked about it obviously internally. And quite frankly, that creative platform has not resonated with customer. It did not have a strong call to action from a value point of view. We changed product and we changed, if you will, outfits a number of times, on a 30-second spot, so the customer wasn't really sure what we stood for. And as you know, we're a key item brand and when we go after tight shorts or we go after outer wear in a big way, it makes a big difference.

So we really confused the customer, but it wasn't brand damaging quite frankly, but it just didn't have the resonance that it should have. And we tweaked it in the second quarter. We played with a little bit in the third and we got some success out of it. I mentioned tight shorts. But it's really time to say we need to move on from a music-grounded creative platform, and I'll talk to you about that in just a minute.

The second thing which I'm extremely proud of is Project ONE, ONE, Old Navy Evolution. And we are now 1/3 finished with our fleet. We've taken -- and Sabrina stole this but I'm going to say it again. We've taken 1,500,000 square feet out of our stores and those stores are comping at a delta better than our fleet, as are the other Project ONEs. We're very, very proud of it. And quite frankly, the CES scores, which is customer experience survey that we take in our stores every day are at the highest levels they've been since we started measuring many years ago. That is not just Project ONE. It obviously is the way our stores are performing. How our associates, 45,000 associates, are working everyday to make that entire experience fun and engaging. So we're very, very proud of that and we continue to build on that. We'll obviously be remodeling next year and we still have over 1 million square feet to get out of our fleet, and we're on track to do that.

And the third one is product. And I'm not going to talk a lot about this because this is really Nancy's expertise. But if you remember, again, I go back to 2006, 2007, particularly 2007, we really got into more of a fast fashion and sort of a confusing state relative to our assortment for Jennie. And I spent a lot of time before Nancy joined the company really getting back those core tenets that we really stand for, and that's the basic assortment. It's also the seasonal basic assortment. Those are the vast majority of our business, and they're very, very important to us. And quite frankly, that's why we enjoyed positive trends in both 2009 and 2010.

But it's not enough, and that's the reason Nancy joined us about 18 months ago. And it was important for us to not only take that core and continue to make that relevant, but also, to be fashion relevant. And that is to show aesthetic and aspirational looks in our assortment. It has to be at Jenny's price. It has to be within the value context, but we needed to elevate our game just a bit whether it's color, whether it's treatment, whether it's fabrication, it was important for us to do that.

So with that, I'm going to hand it over to Nancy.

Nancy Green

Thank you, Tom. So for those of you who I haven't met yet, I'm an alumni of Gap Inc. I was here in the '80s and through the '90s working in both GapKids and Old Navy. And I am so happy to be back here. It's been 18 months now working directly with Tom in a brand that I know extremely well and a brand that I was part of help building. I love this brand, very excited about the opportunity.

One of the things that really impressed me coming back into the business under Tom's leadership was how close the merchant and the product teams are to the customer. You heard Glenn talk about that this morning. Old Navy has a great dialogue. We brand our customer, Jennie, Mike and the kids. We do a lot of work directly with focus groups. We talk to Jennie. We have a lot of consumer insights, and we're really -- we're getting more and more close to her in understanding what she needs and what she's looking for from us.

So when I joined the brand, I wanted to make sure that I really spent the time going through a lot of that information and talking through what that meant. So what she's telling us was while she loved the brand and she loved the product, we weren't offering her enough versatility for her family to meet her lifestyle needs. So she -- so we identified an opportunity to do a couple of things. And that was first to create a good, better, best assortment strategy where we could stretch the assortment, not add assortments but stretch the assortment and make sure that we had less redundancy in our offer. That also became our pricing strategy and architecture, so we created disciplined structure around that.

And then the second thing we did was we built a strategy around delivering new product ideas, so whether it was new category growth that we wanted to -- new categories we wanted to add, categories that Jennie and Mike were looking for that she was buying from other competitors of ours and not able to buy from us, and again, that met her lifestyle needs. So we built a framework around both of those, and those are the key to what we've been focused on.

So good, better, best. What is good, better, best for Old Navy? So this is a clear delineation across 3 levels and tiers, all categories, where Jennie clearly sees a different level of product whether it's through detail, fabric, elevation, more basic at the opening price point in the good bucket, and a little bit more elevation in fabric and detail as we move up. But all tiers are meant to be a great value for Jennie. We're a value brand and nothing is meant to be expensive. It's all got to be great value for her spend.

So we have an example of that. So in sweaters, big business for us coming up. And if you haven't seen the showroom, please come by and we'll take you through it. So this is an example in our sweater category. So strong opening price point, basic business that Tom mentioned. That is the foundation of our business. We drive a huge amount of volume in Old Navy in all businesses, in basics and seasonal basics. As we move up into the next tier, this is where we need to have a little bit more emotion, where we charge a little bit more, we use slightly more elevated fabric or the same type of fabric material but we give her product detail and she's been asking for more. She's responding to emotional details that we've built into the product, so that example is in the middle. And again, the price moves up slightly as we go up.

And then the top is our best tier, which is the newer for us this year. That's a small percentage of the business, meaningful percentage of the business. Again, the vast majority still remains in good and better. But as we get into the best tier, that's when you see a lot more emotion for her and it's in more overt product and styling details.

So how is it working? She's responding well to all 3 tiers. That tells us that the strategy is right. But we're learning. It's not perfect yet. And especially, in a challenging economic environment, we have to make sure that we watch pricing very closely. So in some cases, some of the price ceilings that we've taken to, we definitely hit a ceiling. Again, small number of styles, small percentage of our assortment and very manageable. So when we get to see that from Jennie, we're "maybe that's a little high," we can react to that and we can adjust. And the good news is all of the work that we have done on our fast pipeline and building much more agility into our sourcing process. We're able to react and make adjustments much more quickly than we've ever been able to do. And we've made those adjustments that we needed to for the fourth quarter and then into the first quarter. So that's good, better, best.

New categories and core categories. We need to balance how we approach new categories for Jennie and how we also balance bringing relevance into the core categories. So I want to take you through how we think about new categories. Again, getting back to what is important for Jennie and her family as her lifestyle needs evolve. We recognized it was a huge opportunity in our Active business to build a performance tier that did not exist. Jennie and Mike are more active. They are buying performance active from key competitors of ours. And what we were offering were just more basic-type products, so really more lounge-type products versus true active. So we went out there and decided that we were going to go after this business and we decided that we were going to do it in the right way.

So we built a level of true technical fabrics with details and fit that are designed to perform with you. We tested this, the compression is a new fabric, for example, that we brought into women's. That fits our incredible, the compression fabric is designed to actually make you slimmer. The way the design details are done, it -- there's a slimming effect and it enhances your workout. I've actually -- I've personally tried a lot of these and they're great. We're getting really, really strong feedback. We tested this in January. We had a strong response, and so we knew that we had something that would have a lot of potential for us.

So this fall, we decided that we would rebrand this category. It was called GoGa and Rech Tech in the stores. We rebranded it to be Active by Old Navy because we felt that it was very important to have credibility and expertise and sort of as a -- in our branding. And GoGa and Rech Tech didn't take it seriously enough. So you'll see this. It's in the store now, it's been in for a month or so. We're actually marketing it on TV this week, so we're considering this a big launch and look for it on TV tonight where it launches. We're very proud of the early results here, so that's Active.

Other new categories for us. We have, as you know, what exists today as primarily a vertically integrated model. We also use third party brands now more than ever in Old Navy where we can -- or third party partnerships, where we can get into businesses that we might not otherwise be able to get into. Fast lanes is an example of this. So if you don't know, fast lanes are the reinvention of our register lanes business. And we sold everything from water bottles to bottled water. So there's a consumable piece of the business and an impulse accessory end of the business. And Jennie and Mike, as they're checking out of the cash register, it's right there for them. It's a great business and they love this category. So this is an example of a business where we work with third-party partners to help us deliver this operationally.

Another example, jewelry. I'll get back to this. But jewelry is a new business for us. We're doing that in a very innovative new third-party partnership model, and we're very encouraged by the early results. Jennie loves the jewelry that we're giving her.

Licensing, graphics is a huge business for Old Navy. It's one of our iconic categories that we built when we founded the brand. And you guys have heard us talk a lot about licensing growth. And this is a business we have consistently grown to be a sizable business now for us in the last 2.5 years. This year, what we identified was an opportunity to create a level of localized assortment in the sports licensing end of the business. So we created Superfan Nation, which is a local store by store assortment of Jennie and Mike's favorite NFL, NBA pro teams combined with local NCAA teams. We launched this over Labor Day and very encouraged by the results. It's a family concept and she can outfit her whole family and whatever the local team is that we have in the store. So those are the great examples of getting into new businesses with help.

So Old Navy needs these new categories to grow, but we can't rely solely on new categories. We have to have a strong foundation and we have to have a strong core. So the innovation and the work that we do on the core is as important as new. And this is where I am spending a lot more of my time with the team, making sure that we go through all of the iconic categories, the businesses we are famous for, and making sure that we are appropriately putting the right amount of time and energy into the relevance that we need to bring these core categories to the strength that they can become.

The perfect plus [ph] for the family is an example of this. For -- and by the way, bringing the relevance back is so important across the family. We have big categories of business that are not just important in women's or men's but they're big family businesses.

So this last point is an example of where we're taking a core category, which is our frost-free outerwear. This is an iconic category for us. Again, we made this famous in the '90s, but we got a little stale in the last few years. We haven't updated this category enough. So this year, we decided we're going to go after this. It's actually a fashion-trending category as well. It's iconic and we're bringing relevance now back for the whole family through changing the shape of the product, through color, through how we're constructing the channeling, bringing shine and fabric dimension. We are incredibly proud of this product and this will be a big idea that we'll market in December.

And that brings me to the last point, which is what makes Old Navy famous is big ideas across the family. We are a business driven on huge key drivers and very, very big ideas that we market aggressively and that we show up very clearly and concisely in store with. So that is one of our biggest areas of focus. If you haven't been to the showroom, please come by, you'll see it presented very overtly, and that is going to be something that you're going to start to see more and more as we make a very big shift towards that for November where you'll see every single week, we will be marketing big ideas for the family on TV and in-store. So we're excited about that. And again, as Tom said, we need these ideas to drive traffic. We can't drive traffic with too narrow a message. So the focus on big ideas for the family are so important to get her in the store, and then once she's in the store, for her to get excited and see the great product that we have to offer.

John Thomson Wyatt

All right. Thank you, Nancy. So I'll end with a couple of things. One is the strategies you saw in the beginning, the strategic imperative, the 5 strategic imperatives that I started with are not going to change. The target is not going to change. The store initiative is not going to change. Nothing is going to change. We do need to execute it better. We have had, as I spoke to in the creative platform, some of the thinner, if you will, advertising campaigns we had that only worked for Jennie instead of for the whole family, have not driven that kind of substantial traffic that we need. So I'll go into this after I speak to those strategic imperatives, and that is just what Nancy said. It has to be bigger, bolder ideas. And it has to be for a broad range of the family. Occasionally, we will do a female gender or a male gender depending on the time of the year. But we really, particularly at Christmas time, we'll be sure that all of the messages that we do are clearly for the entire family.

The other thing that we've found an AUC [ph] , Glenn used the term and I actually used it this morning with someone, it's been a distraction. It's been a huge distraction, the second half of this year. And it has made us try to look at different price points and different, if you will, testing the elasticity of certain categories. Some have worked, many have not. And so for us to really look at this fourth quarter in a way that we have to take and look at the core message that we do and be sure that we drive screaming value, which is when this brand truly, truly hunts and when the stores are populated with a lot of excited people. And that's the approach that we're going to take in the fourth quarter.

And the last thing I'll say to you is just a little bit about a new creative platform, and I'm going to share a picture with you which I'm scared to death to share with you because if you take it seriously, it would disappoint me, I guess, at this point. But I do want to share it with you because we're really, really excited about going back to those 4 tenets, fashion, family, value and fun, and really looking at a way to bring that fun, quirky spirit back to our creative and to our advertising, not only on TV, but in circular and direct mail and in-store. And our teams, our marketing teams, have been working with me and working very, very closely with Crispin to come up with what we believe is an incredible scalable concept which will be launched in November. It is where all great things at Old Navy have happened for the last 17 years, whether it was innovation, whether it was fun, whether it was screaming value, whether it was energy in the store, all of it is going to be housed in something like that. And we're very, very excited. It really does, for me and I've been involved in the concept since day one, it really does bring back that fun, quirky spirit that the brand needs to have to really, really hunt. And it gives us the flexibility to use it to build up fashion, innovative ideas, new fits in denim, all the way to great, great events on a given long weekend or a Memorial weekend, what have you. So please watch your televisions closely and watch your mailbox closely in the month of November. I know that this is the new route we're taking.

I will also say to you that the SuperModelquins were only on a hiatus. They did a lot of work for us. We're very proud of them. So don't expect them to have gone away. As a matter fact, Steve spoke about Japan and I can assure you that the SuperModelquins were great, the Japanese consumer in those stores, just as they do in all thousand plus stores we have in the United States. So we're still proud of them. They've had an incredibly long rest. And as most good marketing companies do, they create a portfolio of creative platforms and that's what we're attempting to do. We stumbled for a minute, but we're innovative. We are proud to at least take that chance.

So with that, I will open it up, Katrina, for questions.

Katrina O'Connell

Great. Thank you very much, and we'll take some questions now for the Old Navy team. Yes, sorry, I can't see your tag.

Unknown Analyst -

I know traffic is very important, and especially during holiday. Have you been able to test the new message at all and get some reaction to ensure that this is really the one that you need to go with for the holiday season?

John Thomson Wyatt

We've been able to test it with Jennie from a conceptual point of view. But it's not just the creative. It's the product. It's the price. It's the call to action. It's the sense of urgency. So I say to you that Jennie loves the quirky spirit of fun nations inc. But to say that I can actually prove to you that we're counting footsteps per $100 spent, which is the way we measure our advertising, we can't do that until we actually deliver a spot. So we have always, the way we handle our advertising is, we always go to Jennie first, be sure conceptually she understands. And then we hone it from that standpoint forward. And every single piece of advertising we do, because as you know, we are a TV-oriented brand and a heavy marketer, that it's very, very important for us to get hindsight on every single dollar we spend, so we do, do that.

Katrina O'Connell

All right, next question. Yes, Jeff [ph].

Unknown Analyst -

So I guess we reiterated the guidance for the year, Sabrina did. But how do we look at the margin implications of the pricing strategy you just mentioned if a lot of this has not been planned the way you described it if you're looking at AUC?

John Thomson Wyatt

It has been planned, it's baked in. What we said, and I'm not -- I'm not -- I can't remember the specific date, but when Glenn and Sabrina took the guidance down to $1.40, $1.50, what we are discussing with you today is baked in.

Katrina O'Connell

Yes, question there. Sorry, gentleman here.

Unknown Analyst -

Could you comment on the online business, both from a marketing opportunity and as a sales opportunity?

John Thomson Wyatt

Toby did a real good job earlier. But just to share with you, obviously for us, we're very excited about the support we're getting from Toby and his team. We do an incredible amount of our business online. We also have an outlet channel, as you know, and we have our regular specialty channel. And we're excited about trackable online media. We're a big part of that initiative in the second half of the year. We're looking forward to testing, call it bricks and clicks, but just direct from store. We are -- we need to go slowly with that because of the average unit retail that we do, because that is not an inexpensive way to service Jennie. But there are certainly opportunities to do more. So we -- Toby even mentioned to you that we are certainly his largest volume brand. And quite frankly, the trend that he's had this year has been encouraging and rewarding for us in that total scheme of that 19% comp. So we play an important role in that business. And they play an important role in the brand.

Katrina O'Connell

I have Marni.

Marni Shapiro - The Retail Tracker

Could you guys talk a little bit about the women's fashion and how you balance your big family ideas with the fashion that Jennie can't resist? Because that's probably very important to you guys as well. And I've noticed in the stores a little bit of what I would call almost wear-to-work product. And I haven't seen consistently on all the stores. Is it a test? Is it something you're trying to pull together more cohesively or the way you have with Active? Just curious about that.

Nancy Green

Yes, I'll take the first question. So, yes. I mean, we -- not everything in the women's assortment is a big family idea obviously. Certain things don't translate. So we always look at the balance. And where we have a huge basic knits piece of the business in women's, that is also balanced with fashion knits that is -- sits outside of what necessarily a family campaign is. So really it's about making sure that we have feminine flattering shapes. We've actually done a lot of work with getting feedback from Jennie on where we need to streamline shapes. And you can see it now as a product is coming in where there's more flattering silhouette. Mark talked about it in Gap as well, where some of the fits were a little bit too boxy. So making sure that we have those flattering fits for women, making sure we balance the need to drive a huge business in basics and seasonal basics and key drivers. That drives the women's business. With the right emotional layer on around it that she can be surprised and delighted when she comes in and sees it. That's how we think about the balance. And then the second question on wear-to-work. We don't have a wear-to-work strategy. What we have is a versatility strategy.

John Thomson Wyatt

Right answer.

Nancy Green

You know what, we are not a wear-to-work brand. I mean, we have a wear-to-work brand, and it's Banana Republic. But we need more versatility, so breezy blouses is a great example in women's where while it did not drive traffic, the product is selling very well. And it's a versatile product that she can wear with a skinny jeans and a ballet flat out with her friends or she can wear it to work if she chooses to. So we approach that idea as do we have the right amount of versatility for Jennie to meet her lifestyle needs while staying true to what Old Navy is, which is a casual brand. Everything has to be able to go back to a pair of jeans, everything.

Katrina O'Connell

Great. So thank you, Tom and Nancy. I think they will be back in their showroom as well for more questions. And we're going to go ahead and move on to Banana Republic. So thank you very much. I'd like to invite on stage Jack Calhoun, who's President of Banana Republic, as well as Julie Rosen, who's our head of merchandising.

Jack Calhoun

All right. Hello. After all these years I have not moved out of the last position. We are last in bringing it home. Okay, so what are we going to talk about at Banana Republic? I'm going to go over kind of who we are and what do we stand for as a brand, make sure that we're all clear on that. Talk a bit about how we've been performing, current performance and kind of our path forward with a specific lens on product and marketing.

All right, so let's start off with a little reminder of who is Banana Republic. So Banana Republic is all about providing great workwear for our customers. So when I say workwear, I'm very clear that it is versatile work, making sure that we have that versatile work for our customer, that they can dress up or dress down. We all work in a world today of new work and it's pretty versatile out there.

So first, it's about not being too serious. When we get too serious, it doesn't feel like our band. We need to be in work but not too serious. So our primary focus is in the versatile work area but we also wardrobe our customer in the area of going out and in the more polished casual occasions, and Julie will talk quite a bit about that when we get there. We sit in the category of affordable luxury. A lot of people talk about that, what do we mean? We mean that we are making sure that we offer beautiful design, great product quality, all at a really a good price. So those 3 things coming together is what I mean when I talk about affordable luxury.

So overall, Banana Republic has a very strong and solid economic model. Globally, as Stephen said, there is a lot of interest in our brand and there's some momentum there, which is great. We opened in London in 2008 with our first store and we just opened our eighth store recently in Manchester. So some good momentum in the U.K. Last November, you saw some of the pictures in the video, opened a beautiful store in Milan, which is really exciting, and we are thrilled that we'll be opening Paris later this year. So a lot of momentum going on.

Our franchise business is strong and it's growing. We just opened a new store in Moscow in Russia so we are now up to 32 total franchise stores in 11 countries. There's some momentum and nice to see the brand accepted and demand for it outside of North America. But in North America, we're actually quite solid. What we're good overall, I guess, that are pockets of opportunities and we're certainly going to talk about those. But overall, we have a really strong economic model at Banana Republic. And since we brought together the outlet and our specialty business at the beginning of the year, it's been really neat to look at how we leverage and look at those 2 businesses together holistically. And there's been some leverage and there's been some synergy that we see across the product and the brand and the channels. But let's be clear, they're different channels. They accomplish different things. They are different customers and there is overlap in the customer. It's really about how do we benefit the entire brand and the business model, operating in both of those channels. So it's about figuring out what can come together and what needs to stay separate.

All right, since we spoke last year at this time, we didn't hit all of our expectations. But there are a lot of bright spots in the business, a lot of good things happening at Banana Republic. Last year, I told you our goal was to deliver a consistent top line growth. So we achieved that through Q4 of 2010, and then did hit a few rough spots at the beginning of 2011. But we know our biggest opportunity here is driving consistency, and we need to drive that consistency in our women's business. We believe -- I've identified those opportunities, Julie's going to talk about them specifically, but our big opportunity is consistency in our women's business. So let me be clear. We're actually really proud of our performance at Banana Republic, especially in our men's business. We have now driven 6 consecutive quarters of comp growth in our men's business, which I think is great and says a lot of about the team and the brand.

Let me talk a little bit about what consistency looks like for us and how our path forward looks. And I'll talk about 2 areas, product and marketing. And I'll start off with marketing.

Overall, we are quite pleased with our marketing at Banana Republic. We found a tone and a voice that is very aligned with our versatile work point of view and it feels brand right. It just feels like Banana Republic. We've been consistent with this brand look and feel for about 2 years now. I shared with it you last year at this time, and we remain consistent. You saw in our holiday setup some of the images that we're just up here on the screen, the holiday advertising and the look and feel. It looks great. It feels like our brand, and I'm very proud of it.

Look, we'd love to be less promotional overall, but I think the best thing we've done in this promotional world to be competitive is how to do it in a brand-right sort of way. So we played at Labor Day, which is a big promotional time. What we did in a Banana Republic sort of way where we did, Win Your Salary, work-focused, inviting customers in and one lucky person wins their salary for a year.

We're doing After 5 events to introduce customers to our new collection. We flow new collection to the stores. We do After 5. So there are people that worked, come in After 5, we have an event, and those have proven very successful.

And then we had to figure out our way to do the category flash sale, we call them Power Lunch. So during the lunch hour, we have a couple of hours putting category on sporadically, maybe once a month. And again, those have been successful. So we need to be promotional. We know how to do it, we also know how to do it in a brand-right sort of way.

But I'm also quite proud of how we're inviting customers into our brand in a reg-priced way and enhancing our product messages. So what I've been asked a lot of questions about today is Mad Men. Mad Men is a great example of how do we focus reg-priced on our brand and invite the customer in. It's resonated with our customer because it's brand-right and it was executed extremely well. We took it one step further this year. We offered it on 36 hours before it hit stores, we put the collection on there, give them an allocation and proud to say it sold out to the piece and that is all reg sales. So that says a lot for the brand.

So Mad Men has been great for us, expect more. We are going to do it next spring. We'll have another collection in the spring when Mad Men actually debuts their season. So it's really good about that spring.

So partnerships have been good for us. We had Project Runway quite a few years ago. We have an ongoing partnership with Virgin America, Mad Men, expect to see more of this kind of things out of us. They work well for our brand. I think we've been able to leverage them quite well.

So all of this though adds up for us to meaningful improvements in traffic. We've been ahead of the industry for 2011 so far and that feels good. So in 2012, we're looking to build and market on this momentum with a couple of things: maintaining this brand consistent look and feel, continuing to push innovation and partnerships, showcasing our brand messaging through our traditional media but really building on that traditional media and filling in our marketing mix and our product stories with stories across varying social and digital channels, as Toby has talked about, and including getting much more product messaging onto our own website. In fact in 2012, you're going to see Banana Republic start to invest a little bit in our marketing to be competitive and support these great product stories.

All right, so that's it for marketing. I'm going to move on to products. Let me talk about products for a second before I hand it over to Julie. So we are confident that we know our customer and our positioning is correct at Banana Republic. We are not making any shifts here. Our biggest opportunity is going to be serving that customer in a more consistent way. I'm quite pleased to have Julie Rosen, our head of merchandising up here, who works with me everyday, and she'll going to talk more specifically about what we're doing here.

But at a high level, I though I'd just give you a couple of things that give me confidence in the area of products that makes me feel good that we have the ability to deliver. Number one, we have the right leadership in place at the product level. Simon Kneen, our head of design, and Julie are both incredible talents when it comes to product and merchandising, and they work really well together. They have been with us for multiple years, and they know and they love this brand. Overall, we have a very stable and highly tenured team.

We have made one change in our women's design team recently. So Deborah Moore [ph] joined Simon most recently, quite recently, from Michael Kors. And what I love about Deborah is her background and her aesthetic is exactly what the customer wants and expects from Banana Republic, so she's a great addition to the team, and a very stable team.

Second, we have the right product development cycle. I know I talked about our product development cycle. I shared with all of you last year, at Banana Republic, we shortened our development cycle by about 25%. We did that last year. It's working quite well. So we feel good about that. Let me be clear, most of our product at Banana Republic is built on that core collection pipeline. That is the majority.

But we have strengthened our speed muscle at Banana Republic with 2 additional pipelines that allow us to react to trend in our business or trend in the marketplace in as quick as 12 weeks. So with those 3 speeds in our pipeline, gives us a lot of flexibility to respond to our business but keep a collection-oriented point of view. So ultimately, in product and merchandising, what we do is about standing for owning and delivering that idea of versatile work for our customer. We're going to continue to deliver this in men's and keep that consistency going and build our own momentum. Women's, we have a path forward of making sure that we offer that versatile work point of view and we narrow down and polish up our casual point of view.

So with that, I'm going to hand it over to Julie to talk to you a little bit more about product.

Julie Rosen

Hi there. So what we stand for first and foremost is work in both men's and women's. And let me be clear, we all know work means different things to different people. But to us, work is not too serious. It's trend-right while still being elevated. So we capitalize on this position of being a wear-to-work destination with that sweet spot, as Jack talked about, in versatile work.

The idea of versatility is that our customer can dress it up or dress it down based on the occasion. We call it desk-to-dinner because that helps us make sure that we don't get too serious. Versatility is more important than ever to our customer for a couple of reasons. It really drives value based on the number of times and occasions she can wear something, as well as our customer continues to be cautious and thoughtful in her spending habits. So beyond versatile work, we also cover the going out and the casual occasions and we really think that this helps set our brand apart from the competition.

Across all occasions, we always remain true to our brand aesthetic of in-the-know, easy-going polish. In-the-know means that she wants to be trend right and current but she doesn't want to be standing out, and easy-going polish really speaks to that dressed up put together feminine look.

So let me just touch on what we learned in holiday 2010 last year, because you were all here and saw the showroom and we heard from many of you that you loved it. But unfortunately, from a product perspective, it wasn't 100% right. We win when we deliver the right balance of occasions, style and design and quality that our customer expects. So where we have stayed laser-focused on this, we win. And we've seen that primarily in our men's business. But where we've strayed from this path, we struggled. And we see those pockets of opportunity in women's, where we haven't been as balanced in our occasion strategy.

Let's begin our conversation in men's because we're going to take a lot of those learnings from men's and apply them to women's in a couple of minutes. So as Jack mentioned that we are incredibly pleased with the way that our men's business is tracking, 6 quarters to date of positive comp growth, and we don't see that ending. We believe that there are 2 key drivers to that success. First, we're delivering the right balance of occasions in our sweet spot of versatile work at the style, design and quality he expects to find at BR. We see the big drivers of this business in 3 key categories across men's where we dominate the specialty marketplace. And those categories are sweaters, pants and wovens.

So sweaters is the first category where we hold the #1 market share in specialty in men's sweaters. We do this by offering year-over-year trend right basics in our marino or silk cotton cashmere and our sweet spot of versatile work. And this year, he's really been responding as well to our third pieces, our chunky pieces, our cardigans and our half zips.

Pants is yet another category where we have Banana Republic own the #1 market share position, and we're really proud of that. We just launched an incredibly successful third fit in our chino franchise, Emerson. It's our slimmest fit, so it now sits beside Gavin and Dawson. And these are our most versatile work pants and the ones that we are absolutely famous for.

And finally wovens. Wovens is a category we know we dominate in. We know that the men's wovens market has been flat this year, but our business has been growing. So we're sure that we're stealing share from the competition. This is a category that's really successful for us and really helpful that we own all the occasions. So we own the work occasion with our non-iron shirts and our slim and our classic fits. We own the going out occasion with our stretch poplin, and we own the casual occasion with our soft-wash shirts. And we do this all at a great range of prices at amazing quality. So this is a category we're having all 3 occasions really benefits us, especially the work occasion.

Secondly for men, I think we do a great job making it easy for him to put it all together and to wardrobe. All the way down at the store level, we're able to make big statements and show key drivers that cut through, all the while showing him how to put it together for the multiple occasions in his life. So he really doesn't need to shop anywhere else. And we're also really proud of how this shows up in our men's accessories business. So from a key category perspective, we're proud of the big statements we make and where we stand in the marketplace.

So now, let's turn our attention to women's. So I am disappointed to report that last holiday, we over-assorted 2 casuals for her. We loved the product. It was absolutely trend-right, but it wasn't what she was looking for at Banana Republic. We know our customer. She hasn't changed and we know what she wants from us. She wants work, versatility and quality. She wants some desk-to-dinner that serves her lifestyle. And she wants some polished weekend, as well as some going out. So if it's BR, it's polished dress-up style whether it's during the week or the weekend. That said, our true work collections were very successful last year. So she really continues to respond to our value proposition and aesthetic in this high-quality option. And I hope you either came to the showroom or will come at lunch so you can see how we continue to deliver on that.

So let me tell you what you can expect from us at Banana Republic from Q4 and beyond. First, a laser-like focus in true work with our sweet spot at versatile work. We're going to continue to give her covetable options from desk-to-dinner where we offer trend-right items that don't get too serious, all at the price that she expects to pay at Banana Republic. And in Q4, we're going to also layer on that dressed-up option for her going-out occasion. We know that's the competitive advantage during this time of year. But as well, we will continue to stress versatility in those offerings.

Second, we're narrowing and dressing up our casual offerings. We'll give her that more polished trend-right look for the weekend at the quantity she expects and is willing to pay for. And third, similar to our category dominant strategy in men's, we have a laser-like focus on our category strategy for women's. So in 2011, we're just building on the successes that we saw in 2010. So let me take you through the categories that we're going to dominate in women's.

First and foremost is dresses. This is a category that we identified as a huge growth opportunity for us last year, and we want to own this in the marketplace. The teams have been absolutely going after it and delivering. They're going to continue the delivery in more work-appropriate dresses, as well as those key seasonal opportunities. And we're especially proud of our Mad Men collection.

Currently in dresses, we offer a range of silhouettes, sleeve lengths and price points, and she is absolutely loving it and responding to it. And I'm proud to announce that we're running double-digit comps year-to-date in women's dresses. Like men's wovens, dresses is a category where we cover all occasions for every season. So you saw them I'm sure this summer in our long patio dresses, you've seen them in the showroom today in our party dresses, all the while protecting our covetable work versatile dresses.

Next is sweaters. We are a market leader in our specialty competitive sets in sweaters year-over-year and we want to continue to dominate in this category. We want to own the sweater category in Q4. So we'll look to Q4 to bring our brand defining third pieces in new silhouettes and textures. You'll see an amazing range of key drivers and beautiful colors. Color is back at Banana as well, not only Gap. And you'll see novelty gifting and color for cashmere.

And finally knits. Knits is a place where we absolutely compete and want to continue to compete. We win with great style and design that she's willing to pay for. We have done a great job of offering a balance of the key layering pieces and the trend-right fashion pieces, and she seems to continue to respond.

So let me summarize. In women's, we're going to continue to own these key categories of dresses, sweaters and knits. We're going to cut back and dress up our casual offerings, and most importantly, we are going to dominate in versatile work. This does give us tremendous confidence in Q4 and beyond.

So as Glenn mentioned and Jack mentioned and Mark mentioned, we've all been ramping up our seed [ph] capability across both men's and women's. And for us, it's really just another weapon in our arsenal that allows us to get trend-right products to our customer quicker. While the base of our product is on our core pipeline and we're not a fast-fashion player, we do see higher margins and higher AURs in our seed product. So the seed pipeline really just helps us get the trends to the customer quicker, as well as it helps us react to our own business.

And finally, we're really excited about opportunities to expand our brand in the right way. Fragrance is a category for Banana Republic that's been incredibly successful. We launched Wildbloom last year and not only has it been well received here in North America, but abroad as well. So you will see us launch 2 new fragrances next year, one for men's and one for women's. And we're also really proud of some of the partnerships that we have, with Adidas and Clarks and we're going to continue to pursue brand-right products and partnerships as the opportunities arise.

So with that, I'd like to turn it back over to Jack.

Jack Calhoun

All right, just to finish off. So our goal in 2012 is really the same as it was last year, really drive that moderate, consistent top line growth. I think we've got the right team, obviously. We've got the right strategies in place to help us deliver on it. It's all about getting our women's business on track doing the things that Julie just talked about. So we can bring that consistency in women's up where it's been in men's and at the brand level. So I think with where we are in product and marketing and the things we have in place, we're confident that we can get there.

With that, I'd like to open it up to some questions.

Katrina O'Connell

Yes, thank you. So we have time for 1 or 2 questions for Jack and Julie, and then we will -- they'll be in the showroom too, so you can ask them questions. Yes, Kimberly.

Kimberly C. Greenberger - Morgan Stanley, Research Division

Over the last several years, there has been a couple of sort of mild course corrections. The brand and the product got a little too serious. And then I think recently, you've talked about getting maybe a little too casual. How do you provide guidance or guardrails, if you will, to try to deliver consistently on your product goals?

Jack Calhoun

Yes, I'll do -- I'll take over the brand and then you talk about your product filters. So I think number one is that the brand level being very clear that we are about work and work versatility. For us, the idea that we work today means a lot of things to people. We need to sit in that space of being about work doesn't mean we don't do those other pieces of the business, but it's got to fit in that work versatile thing. As we stay focused on that we can get there. Julie and Simon spent a lot of time on how do we get those product filters clear so that we don't make those swings. They have not been big at Banana but there's still swing. That's why we've missed, we got too serious and then too casual. When you get done on and I mentioned that all or...

Julie Rosen

Yes. I mean, I think that Jack's hit on it. It's really honing in on the filters. I think when I first came back to the brand, yes, the work had gotten way too serious and the work occasion too big and take full responsibility for a full swing into casual. But that casual bent was really the trend and what was happening. And I think that based on what's happening in the world today, versatility is more important than ever to her and to him because they want to be able to dress things up and dress things down. So Simon and I have worked really hard on just being clear on our product filters and ensuring that all products fit through them so we remain true to that.

Jack Calhoun

Well, I think part of that trend, there is trend out there, we're not having trend meetings where we say "There's a trend out there. The trend coming in neon." We look to that and said, "Yes, we see the trend. It's not Banana Republic, no." So we look at a trend and then say, "For us, it's [indiscernible] when." And there are a lot of trends that we shouldn't participate in.

Katrina O'Connell

All right. Yes, Adrienne.

Adrienne Tennant

As you do more and more abroad, particularly in Europe, where the trends come from, are there any designs specifically or any intention to design specifically for European product or is it all going to be the same?

Jack Calhoun

Yes, we have one line across the world and that's what we've always had at Banana. I think it's been successful. We make sure that with Japan or places in Europe, we may have 10%, 15% of the line that we do some specific things, which I think the design team make sure that were locally relevant. But at the core, 85% of what we do is the same product around the world, different fit in Japan and in Asia but other than that, it's the same product and same marketing.

Katrina O'Connell

Great. So thank you, Jack and Julie. And with that we're going to invite Glenn and Sabrina back up on stage to close the meeting.

Glenn K. Murphy

[Technical Difficulty]

So I'm going to give you a couple of closing comments, let's say, that mostly rooted my observations from the day and sort of maybe putting a little bit of an exclamation point and a couple of points you heard and get that to. So I'm going to do that. But one thing you've got to promise me, mic.

[Technical Difficulty]

Okay. So did you miss that? Here's the exclamation point so that a couple of points to make in the very end. You have to promise me because a lot of you never got past the Gap showroom and I know it's our 42-year-old brand, but it's one of 4 brands we have in our showrooms that were set up. A lot of people put hard work into it and the people on the front row are going to be there to answer your questions, but you got go see Banana Republic, it looks amazing. You got to go see Old Navy because I walked through yesterday with Nancy, and I can't believe some stuff she was talking about, say, the real dedicated category messages are very strong. And I think it answers a lot of the questions that some of you asked but also some of the points Nancy was making.

Third, you have to see Athleta because 50 of you came to the store last time which was just fine. Nobody was taking attendance. But 50 people except for me, 50 people showed up, which is fine. That's completely fine. It's a Thursday night and I get it. But the Athleta showroom is great and it shows the product and it shows how it's a 4 -- it's a 4-season business, you need to see that. And Piperlime also, as Toby talked about apparel, you should go in there and see it. So Jenn Gosselin, Tess [ph] -- all the merchants you saw today are going to be there.

So I'm going to quick closing, a couple of questions. And if you can get to the showrooms, around 1:00, for those of you who have the time, down on the 11th floor, there's a lunch available for you on the 11th floor, Pam Wallack, Seth Farman, again I'll open with a few comments about the Gap Global Creative Center and they have a presentation for you to talk about, I think, to give you a little more examples and to show you what Art and Mark talked about, but Pam is important for you to meet. Pam, she's running the center. She's doing product around the world. She wants to show you spring and takes some of your questions.

So observations. We talked about strategy. There wasn't a big change. You've heard us say it before, multiple brands, channels and geographies. The key thing I want to leave you with is we have the ability through -- I think, anybody who attend the Bank of Montréal -- sorry, Bank of Montréal, I'm dating my Canadian -- the Bank of America conference, at the very end of that conference -- good bank, Bank of Montréal, no insolvency there. At the end of that conference, I put up something called a soundboard which showed you the pace in which we can move our initiatives forward. So we have the ability through whether we want to accelerate things in China, whether Steve has some concerns going on in Europe, with Italy. We have the pace, the ability to pace and sequence, anything we talked about strategically. The brands we spoke to you today, and I mentioned some little bit and when I was talking about sharing American style around the world, when they were talking to -- and I was talking about some of the competitive advantages, the big thing that our brand presidents are working on in our domestic business, and Julie talked a little bit about where she wants to dominate, how she's going to win, I keep coming back to what are the competitive advantages in our business. Because winning is one thing, what are those advantages? And they have to start on product. What are the categories? What are the products? Who are you up against competitively? Who are you taking share from? What are the advantages? Why Gap? Why Old Navy? Why Banana Republic? Why has Athleta? Why Piperlime?

I can articulate some of those, it's a longer answer. But at the end of the day, our team is spending, we've always understood this, to be successful. How do you differentiate? How do you win? What are your advantages? We're spending more and more time going deep because the last thing we want to be is a 5 brands that are an inch-wide -- sorry, an inch-deep and a mile-long. We want to really look at the key things we can win and how do we take some of those and go very deep on it. I make sure the differentiation is heard and seen by customers every single day.

The economic model Sabrina took you through, I mean it's a very solid model. We've put a lot of time into leveraging it, thinking through exactly how the P&L works. That's why we flashed 2010 and to show you what the 1 comp and a 3% total sales, how we can really leverage our P&L with multiple tens of millions of dollars into the P&L in 2010. It's a very solid economic model. As a few people I was talking about earlier, Marni and a few other people are saying, if you get the product going now, which is obviously part of today's meeting, you get the product going consistently, you run through that economic model. This business, as Sabrina touched on, obviously we're confident that the 13.4% is a target we're going to get to. Again, we're not committing the time. It's a number we're going to get back to.

Stephen talked to you on International. Just quickly, big runway for us on International, big growth opportunity. What Stephen did mention is we have teams on the ground, so we have a managing director in Europe, managing director in Japan, managing director in Shanghai, managing director for Franchise. Stephen runs all the International. He has very solid experienced teams that are local, but also come from the U.S. business. We've taken some of our best people. Some of our best people in the company have gone to seed senior roles in our international offices. One thing also that I think Steve was trying to get across is the business I would say up until 2 or 3 years ago was local, global. And now our business has become global local. We're global businesses. There's local needs in Japan and China and the other markets, absolutely, in our Franchise business, that's why you have merchants and each one of those teams that buy off the line that is absolutely custom-made for what is right in their market. But we're much more of a local company through the collaboration that goes on around the world. What somebody asked earlier, which was a very good question, why am I seeing stuff -- this side of the room. Why am I seeing stuff in the international business in stores, in product that I don't see in the U.S.? Great question. It drove me as crazy as it drove you. But I think bringing everything together now, having one point of contact International, the working relationship between Steve and Jack and Tom and Art and Toby is very strong. And they understand we want -- there's no pride of authorship -- we want the best, particularly when it comes to product, the best product, the best talent, which is what the GC^2 is having the best talent around the world to put into our 1,300 Gap stores.

New brands. Toby talked on Athleta and Piperlime. We feel very good where we're at right now. It's early days, but they're going to make a big difference in the business. So I think that that was an important message. What Toby talked about, and this is his quote, he always has these little funny quotes, but he was saying we're turning our guns on the domestic business in a good way. We've asked Toby for the last 18 months to get us on a global platform for online. That took a lot of work for a lot of members of his team. That's is in place now. There's still more work to do as they get to the penetration we want of online for the total sales around world. But now him and his team who are highly talented, who have a track record of proven track record in Gap Inc. are turning their attention to what they can do to help our domestic business win. I'm talking about ship-from-store, mobile, trackable online media which he could have talked to you about for 10 minutes, what that is as a tool. Here's what I'll say about Toby's team. They don't -- they rarely finish second. Their team that perennially have gained market share for 6 years in a row even though there's been seasons when the product may not have been to our liking. So the talent in that team to leapfrog, this is the word I'm using, Toby didn't say it but I'll add it to your repertoire, the leap -- the ability for Toby's team to leapfrog what's going on in so many of these other areas, I feel very confident about.

Last 2 things, product consistency. This meeting could be a couple of days and really getting not just the 3 key merchants, design people, Simon Kneen [ph]. Our design leaders here, our merchants around the world, we understand that one thing that's been elusive to us, and I'm certainly been frustrated this year, and I talked about the distraction factor earlier is our inability to have consistently great product. We're focused on that. The team here knows it. It's a nonnegotiable. Because the company here doesn't want to win on strategy. We may have a good strategy. We know we have great brands. The company here is going to win on product. At the end of the day, that's what separates the real top companies in our sector from people who just do well and the people you met today, myself included and Sabrina, are not working at Gap Inc. to just do well. We're here to win, to be the top company when it comes to apparel. We're not throwing out wild projections that other companies may do. We measure our definition to be one of the best apparel companies by all the reasons we talked about earlier strategically, but to consistently deliver great product is going to be key to that.

And I hope what we showed you today is that the 2 of us have been partners in business now for 4 years, and we complement one another. We fight like crazy when you guys aren't around. We disagree, that's just the relationship between a CEO and CFO. What I tried to show you today is this is not the only partnership that you should be privy to. Obviously, we have a partnership, that's when you put people up here, Jack and Julie are partners. Nancy and Tom are partners. Art and Mark are partners. Toby has a partner, Debbie is not here today. Scott Key who runs Althleta has a partner named Kelly Cooper. Jenn Gosselin who's here today has a partner in her business. We have tried to create this inside the company.

So if you're looking for anybody to be just one dimensional, who runs our business to only be a merchant, to only be an operator, to only be a marketer, we've tried to get the best at the top of the business. Yes, somebody has to run it and somebody has to call the shot and somebody's ultimately accountable for the results. What we've tried to show you today is we've created partnerships. People we know that would run businesses, who are strategically sound, who are operationally disciplined get the fact that product is the most important thing we do and marry them up with somebody who you heard today speak to you about product. And they live it and breathe it. And that's what they care about. And that's the sort of collaboration we were trying to show you today.

I'm going to shut up now. And we will take a couple of questions, but please, anybody who leaves here, I'm going to be watching you walk to the showrooms. And if you have time, please join us down the 11th floor. But the showroom's a paramount, just a couple of questions before we close off. A few choices?

Katrina O'Connell

I'm trying to look for somebody who hasn't had a chance. Question there on the middle, sorry.

Omar Saad - ISI Group Inc., Research Division

It's Omar Saad from ISI group. Yes, one of the themes I -- we heard a lot today was women's, and a lot of focus needs to be placed in the business. And it's definitely admirable that you're shining the spotlight inward and evaluating your execution there. But have you thought about or analyzed what's happening in the marketplace in the women's apparel category, it's been tough for a lot of companies out there. And perhaps there's some other kind of structural issues or fashion issues going on in the marketplace that perhaps aren't specific to Gap Inc. And how that would inform your strategy and execution?

Glenn K. Murphy

Yes, that would certainly be me letting people off the hook. Because even though people would say this is a color cycle, this is a women's cycle versus a men's cycle, it was a skinny denim cycle for longest period of time, at the end of the day, I think there are people even in a cycle that may not be buoyant or doing well. And look, we track everybody. We're in stores. We got competitive information. We know who's doing well. We're not -- there are people, I agree with you, who maybe are into specialty apparel, who are women's-based the way we are, whose comps have not been that strong in the first 9 months. But some of department stores who are doing very well right now, I'm speaking about their numbers, you heard them reference cosmetics, handbags, shoes, men's, women's is kind of absent, we kind of get that. But the most important thing we get besides our own intuition and God-given talent that the merchants and designers have, knowing whether people are responding to a product, whether it is a good cycle or not, somebody in the business designed it. Somebody gave input into it. Somebody bought it. Somebody put it in the store and we bought it to a plan. If it doesn't sell to that plan with the understanding that maybe the cycle may not be as strong as we want, I still want to know who's accountable for that. So we still hold our merchants highly accountable to making decisions because if there's something at women's that we feel strategically, as I think Mark touched on this one, it comes the bind of inventory, we're not feeling as good about women right now and the cycle is available and their passion to refill their wardrobe, then we can buy another category. We have men's, we have accessories, we have kids, baby, we have lots of choices, and there's a lot of categories in women's. They are not driven as much by just pure trend.

So easy for me to let the 3 people you saw today off the hook, but I would say what I say is it when it gets difficult out there, and let's assume that you're right, that the marketplace for women's is a little more challenging right now, that should be the best environment if you're the best company. Because the distance you create between yourself and an average company should grow during difficult times, like our P&L did from 2007 to 2010 during tough economic times. So the cream always rises to the top. So that's the challenge and the pressure. And the people you met with today, we will get to that top with the focus we've been talking about internally for the last 6 months. We're going to get there.

Katrina O'Connell

Okay. One more question and then I know Glenn and Sabrina will be around during the lunch hour.

Glenn K. Murphy

Did I mention showrooms?

Katrina O'Connell

And showrooms. How about in the back, back there?

Unknown Analyst -

Want to ask a balance sheet question. You came through the recession. You came through the recession with a very strong balance sheet, very low debt, primarily lease obligations. Earlier this year, you decided to tap the debt capital markets, add a little leverage. Can you talk a little bit about your thinking in terms of coming to the market, adding some more debt on the balance sheet? How is the board involved? And what kind of metrics do you plan to manage to going forward?

Sabrina L. Simmons

Yes, I think overall, just to repeat our thinking for the year when we did that, it was really no change in our overall philosophy. And that's an important principle to just outline again. We consider ourselves very conservative balance sheet managers. We have targeted $1.2 billion as our targeted balance sheet amount because we don't want to be reliant on capital markets for our funding. So that's plenty for our working capital, as well as a reserve for any downturns. So nothing about our philosophy has changed. The financing in the spring was really an opportunity to come to market after many years, after we had demonstrated that through positive comps and negative comps, our cash flow generation remains steady and strong. And we felt very comfortable that given the market dynamics, it was a nice

opportunity to give us more flexibility. And we've of course kept our debt levels at, what I consider, prudent levels. We have, in total amount, funded debt of 1.65. We don't have any current plans to raise any more debt. And our investment grade ratings, which we've worked very hard to earn, are important to us. And we absolutely want to work to maintain them.

Katrina O'Connell

Great. Well, we want to thank everyone for joining us today. I really hope that you guys found this all valuable. We want to thank all the speakers who contributed today, too. The showrooms are set up, as Glenn mentioned. And we really hope you get there. Couple of logistics for those who want to stay for the GGCC presentation. There is lunch in the elevator bank where you guys came in, grab some lunch and we're going to meet downstairs on the 11th floor at 1:15. We are slightly behind just a couple of minutes. 1:15 downstairs, there will be people at the elevators and by the staircases to help you find the room. Great. Thank you.

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