Good afternoon, ladies and gentlemen, and welcome to Gap Inc.’s second quarter conference call. At this time, all participants are in a listen-only mode. (Operator Instructions) The conference call is being webcast and is being simultaneously recorded on behalf of Gap Inc., and consists of copyrighted material that may not be re-recorded, reproduced, retransmitted, rebroadcast or downloaded without Gap Inc.’s express written permission. Your participation represents your consent to these terms and conditions, which are governed under California law. Your participation on this call also constitutes your consent to having any comments or statements you make appear on any transcript or broadcast of this call. If you have any questions regarding this policy, please contact Gap Inc. Investor Relations at 415-427-2175. I would now like to introduce your host, Sabrina Simmons, Senior Vice President of Treasury and Investor Relations. Please go ahead.

Good afternoon, everyone. I would like to welcome you to Gap Inc.’s second quarter 2006 earnings conference call. For those of you participating in the webcast, please turn to slide two. I would like to remind you that the information made available on this webcast and conference call contains certain forward-looking statements, including but not limited to forecasts relating to earnings per share, free cash flow, operating margin, inventory per square foot, gross interest expense, depreciation and amortization, capital expenditures, effective tax rate, store openings and closings, real estate square footage, operating expenses, as well as other statements that express our expectations, anticipations, beliefs, estimates, intentions, plans and forecasts. Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause our actual results to differ materially from those in the forward-looking statements. Information regarding factors that could cause results to differ can be found in our annual report on Form 10-K for the fiscal year ended January 28, 2006. Investors should also consult our quarterly report on Form 10-Q for the quarter ended April 29, 2006, and today’s press release. Future economic and industry trends that could potentially impact net sales and profitability are difficult to predict. These forward-looking statements are based on information as of August 17, 2006, and we assume no obligation to publicly update or revise our forward-looking statements, even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. This presentation includes non-generally accepted accounting principal measures, free cash flow and normalized operating expenses which, under SEC Reg G, we are required to reconcile with GAAP. The reconciliations of these measures to GAAP financial measures are included in our earnings press release, which is available on gapinc.com. Joining us on the call…

That concludes our prepared remarks. We will now open the call up to questions. We request that callers limit their questions to one each.

(Operator Instructions) Your first question comes from Margaret Major with Goldman Sachs. Please go ahead with your question.

Good afternoon. I have a question. Cynthia, you talked about your customer and it will take time to win back your customer. Where do you think the customer has gone? Where is your customer now, and how do you get them back from wherever they came from? That seems to be a big problem. Then, I would like to ask specifically about the kid’s business. Did you say that kid’s has improved in the month of August, or so far, whereas it has been very weak through the second quarter? What do you think has helped that business turn that corner, if I heard that correctly? Thank you. Cynthia Harriss : Thank you. First of all, I would say that we are at really the beginning of what we know is a long-term strategy to win back our customers. We are only four weeks into the season and really just beginning with what we think is a longer-term strategy, of many aspects of it. But to directly address your question of where do we think our customers have gone, you know, any of the competitors that are positively comping in the categories where we do business certainly are gaining share while we are not. That goes in competition and specialty stores, and there are a lot of competitors out there. Frankly, it is our goal to win back in these key categories, and that is where we are putting our focus. Your question about the kid’s business, the kid’s baby maternity, what I said is we have a solid business and we are continuing to gain momentum with it.

Your next question comes from Richard Jaffe with Stifel Nicolaus. Please go ahead.

Just a question about inventories. Obviously you have taken the second quarter inventory liabilities down dramatically, but the thought was that there was going to be some build-up of inventory to support some of these third quarter initiatives, particularly the advertising. Has there been a change in inventory strategy mid-stream, or is this on plan? Byron H. Pollitt : No, the philosophy on how we are managing inventory has remained exactly the same. We are pacing our inventory commitments to what we believe the trend will be in terms of traffic, and so you should look at this as very much on plan and no change in philosophy.

Your next question comes from Lauren Levitan with Cowen and Company. Please go ahead with your question.

Thank you. Good afternoon. Particularly as it pertains to the Gap brand, I understand that you are at the early stages of trying to re-engage with lapsed customers, but I am wondering if both for Gap and Old Navy if you set any timeframe or any other tolerance levels for where you might rethink the amount you would be spending to recapture them. I guess specifically, how long will you allow traffic to be below your plans before you would consider other adjustments to the brand or to assortments or to the store base? Thanks very much. Paul S. Pressler : Let me give you a couple of perspectives. First, needless to say, we are very focused and committed on the strategies, so we do not anticipate changing nor are we thinking about changing our strategies. We are very, very focused. We will do in-season management, as you would expect us to do, on a variety of levels, whether it is chasing product, changing our direct marketing strategies, and so on and so forth. But overall, we are committed to the strategies. Having said that, we have built a second-half plan that I think is a pretty darn aggressive marketing plan for each of the brands. Needless to say, for Gap, which Cynthia and her team have built, is back on television, back in a big bold way in both print and outdoors, with a lot of interesting and compelling ways for us to culturally be relevant to our customers, which are exciting. The same is true for Old Navy. Old Navy has even very specific traffic-building opportunities. We just came off a best week ever, which we did see some enhancement in our traffic, and we have television advertising. We have a new men’s TV spot that we are doing, which we did not have last year, to focus and bring that customer back. As I mentioned, we were struggling a little bit in our men’s business there. We have a lot planned for the second-half that is just beginning to use our marketing to drive our competitiveness and to build back our traffic.

Your next question comes from Dana Cohen with Banc of America Securities. Please go ahead with your question.

With respect to the guidance for the year now, you said August is below plan, but you did not say it is consistent with the trend. Can you just give us some sense of how to read that? Is your guidance for the year predicated on business improving from current trends? Byron H. Pollitt : August month-to-date, fuller disclosure/discussion on the sales call, but the August month-to-date is trending below beginning of month forecasts or expectations. So we are combining that with a below expectation performance in the second quarter, relative to what we had originally anticipated at the beginning of the year. Therefore, our guidance reflects the actual performance in the second quarter and August month-to-date. The guidance does presume a modest, very modest improvement in the business in the second-half, given the strategies that we have yet to be deployed through the third quarter and fourth quarter.

Your next question comes from Stacy Pak with Prudential. Please go ahead with your question.

Just a follow-up -- do you want to tell us whether August month-to-date is worse than July, and give us some sense of where you are? Also, maybe address traffic, because it seems like you have dropped a couple hints that maybe traffic has improved. What are you seeing there? I guess, Cynthia, my sense from July was that was Gap comp might have been so bad because of how the sale was managed. If it is still below plan in August, why do you believe that is? When do you believe Gap division will comp positively? Paul S. Pressler : Okay, that is like four questions, so we will take a couple of them in the same genre. As I said, each of the brands are at a different point, first of all. So we are pleased with Banana Republic’s performance, and we believe that we are continuing to build on the momentum that we saw coming off of May, June, and July. As relates to traffic specifically at Old Navy, keep in mind that we did improve traffic in July, but that was very much driven by the mark-down activity. If I take a look at our early traffic at Old Navy beginning of August, we are seeing some improvement from the prior months of May and June, so we are confident that with the incremental advertising that we are doing and the marketing, that we can continue to focus on our traffic challenges and to gain some traction there. Cynthia Harriss : First of all, what you indicated in July, it was really critical for us to be able to show a significant and visible difference and really previewing our new fall product by exiting out of the markdown product. But just really what I said in…

Your next question comes from Kimberly Greenberger with Citigroup. Please go ahead with your question.

Thank you. Paul, I am wondering if you can talk about the talent at Old Navy, and in particular, I know you moved your design centre back to San Francisco. I believe there was a certain loss of talent in that move. Have you been able to fill those positions, or are you still running down in that area? Thank you. Paul S. Pressler : No, the easiest way to think about it is that all of our positions, particularly as it relates to design, have been filled. We did have a transition period, but at this point, this is the team that is really starting to anniversary that move, so we are great. Across the board, we have a great mix of talent. We have a lot of tenured folks who continue to be leading the business and some new folks. Old Navy right now is pretty stable.

Your next question comes from Lorraine Maikis with Merrill Lynch. Please go ahead with your question.

Thank you. Good afternoon. Just looking at Old Navy for a minute, is the women’s assortment where you want it? Can you also talk about how you plan to target the boy’s business with advertising in September? What is the specific focus of that? Paul S. Pressler : As I mentioned, we are seeing some traction in our women’s business, and we are pleased with that. The call-outs are particularly in our woven bottoms, some of our graphic t-shirts, and the knit-tops. From a product aesthetic standpoint, it is absolutely more reflective of where we want to be. This is really the first season that has the total product cycle behind it, so we do feel good about those things. We are disappointed with denim, and hope to be able to improve based on some better advertising associated with that. We will get back to you a little bit later with regard to kid’s, but we continue to support our kid’s and baby program through the traditional marketing mix, particularly with our circulars.

Your next question comes from Brian Tunick with JP Morgan. Please go ahead with your question.

Two questions. First, for Byron, does your updated guidance now for the year assume more deleveraging than you thought, or greater-than-expected markdowns, and can you comment if there is any impact on the 53rd week? Then, for Cynthia, maybe just talk a little about the denim this year, in terms of bottoms or inventory. How much denim is making up the third quarter inventory? Byron H. Pollitt : Let me start. With regard to 53rd week, the guidance does include 53rd week. Just remember, this is a week that occurs the last week in January, it is a clearance week, so for us, the impact is not significant. It is about $0.01, and that is included in our guidance. With regard to deleverage, what we guide to is the absolute operating margin, which we have now said is between 8.5% and 9% for the year, and that is obviously a combination of both ROD, which recognizing that we are opening a number of new stores, until we can resume positive comping, ROD will deleverage during that period. This is more about the merchandise margins that we will be managing to. As the year unfolds and as the momentum shifts, we would expect to see more regular-priced sewing, with some widening of the merch margin versus what we experienced in the first-half. Cynthia Harriss : Your question about denim, I would say a couple of things. We are really about four weeks into the season. In this also, I just want to acknowledge that our young adult shopper will continue to shop throughout August and September, so overall, there is still more shopping in denim to be had. That being said, we had planned denim down overall, and where we are seeing the sluggishness is really in the five-pocket category, where we planned it down. What our plans for the balance of the year is we had already previously planned to continue to have that be lesser, as a portion of our inventory, as we went forward with that. With the current sales, we are already making the in-season management where we are canceling some things and really adjusting the inventory appropriately. We are also seeing that we are going to expect to pick up the sales in many of the categories that are trending well, which are active bottoms, sweaters, knits, and those kinds of categories.

Your next question comes from Jennifer Black with Jennifer Black and Associates. Please go ahead with your question. Jennifer Black - Jennifer Black & Associates: I first of all would like to ask if you guys have any plans for direct mail at Gap or Old Navy. You mentioned Banana. Secondly, I wondered if we could expect comps to suffer at the expense of margins as you are turning the company around. Paul S. Pressler : I will answer on the broad piece with regard to direct marketing. One, it is a very important part of the marketing mix for all of our brands, and it is up at all three brands across the board. Some a little bit more significant than others, but this is a consistent way for us to talk to our customers. In fact, tonight for our best customers, our lux customers at Banana Republic, we have a special preview of fall, so there is a ton of work that we are doing to use that as an important lever to speak to our customers about promotion, about new product -- it is baked into all of our marketing mixes. Byron H. Pollitt : Let me try and respond to the question, you said do we expect comps to suffer at the expense of margins. If I were to answer that in the context of GAAP brand, we are refocusing that brand towards a greater reg price mix in the business. Therefore, we are willing to walk some of the excess markdown business that we currently have. During that transition period, you would expect to see some penalty on the comp line, but a corresponding upward impact on margins as we move to a higher mix of reg price margins. Another way I could answer that though is that for the company as a whole, recognizing that we are in turnaround, and recognizing that this is a turnaround that it is fundamentally, must be driven by successful top-line strategies, we are willing to invest in marketing, we are willing to invest and are investing in our customer experience in the stores, through store labor. Therefore, we are increasing SG&A, which will have initially a negative margin implication, but the intent here is to drive top-line and ultimate drive comps. Comps are obviously very important and we seek to find a good balance, but because we are in turnaround, we are investing in a way that margins will deleverage a bit as we fund those strategies we view as essential to our turnaround.

Your next question comes from Dorothy Lakner with CIBC World Markets. Please go ahead with your question.

Thank you, good afternoon, everyone. I wondered if Cynthia could talk about some of the things you have been seeing in those adult stores that you have really worked on. You have talked about some indications of improved sales there, so I wondered if there is anything you could share with us on that score. Thank you. Cynthia Harriss : First of all, I will just talk anecdotally maybe first, just because of the fact that we are only four weeks into the season. I mentioned that last week I had an opportunity, I went on a trip to many of those stores, and I would say anecdotally what we are seeing from customers by their response is they actually are recognizing the improvement in the overall store environment. We have gotten a good response about the shop concept, saying that it is easy to shop in the store. It makes sense, and just a general feeling with that. I mentioned in my remarks that we are getting some early reads on several of the categories that were enthused about, in knits, in both men’s and women’s, and active bottoms with that. We have gotten also good comments from customers saying they saw the advertising, I mean literally coming in the stores and saying “boy, that was great” and interested in the product that they saw in the advertising. We have had customers that are walking by the stores and saying “saw the windows, came in” -- I was actually in a store where a customer said they had not been in the store in a couple of years, saw the windows, came in, was enthused, and they left with a bag, so that was encouraging. So we are actually seeing a lot of things that are more anecdotal. I would just say the work we are doing in particular with the adult stores is just a big down payment on the longer-term strategy that we have and we are just beginning with it. The only other thing that I would add is in what we are calling our Power 200 stores that we have refreshed and in the stores that we have remodeled, we are seeing some better improvement against the rest of the fleet.

Your next question comes from Janet Kloppenburg with JJK Research. Please go ahead with your question.

Good afternoon. I was just wondering if you could maybe talk about the net flow of product coming into Gap and Old Navy, because it seems that maybe this flow is not resonating with the consumer, or maybe you disagree with me. Maybe you think it will over time, but if you agree with that, that it is not resonating to the degree that you thought it would, perhaps you have more optimism for the next flow, and I was wondering if you could talk about that for Gap as well as Old Navy. Secondly, I was wondering if you could talk about your flexibility in altering product coming in for holiday or for spring, given the kinds of lead times that your business is running on. Thank you. Cynthia Harriss : First of all, let me just try to clarify something -- I actually do not agree with that statement. We really actually think we have made huge improvement in our product. What we are really calling out is we have not made the big leap forward in traffic, as I noted, and that is where we are making big investment for the balance of the year and are going to continue with that to drive traffic into the stores. What you will see is on continued flows, flows into the shops, and as I said, we are getting some good reads on that. Paul S. Pressler : Just quickly on Old Navy, just for the dates, we do have our fall 2 that arrives in stores on August 28 for men’s and women’s. Having said that, Old Navy is doing much more continuous flow of new products, and not unlike Cynthia, I will echo it -- we are very confident and feel good about the reaction that we are getting from our customers, particularly in the women’s business, which is a leading indicator of some of the changes that we have made across the board. So it is still early and confident and excited about what we are going to do. As I said, this is really fall 1, and true fall does not really occur until the second flow.

Your next question comes from John Morris with Wachovia.

Thank you. Good afternoon. Really kind of a two-part question here. First of all, in terms of the remodels that you are doing, can you share with us the progress there quantitatively, as it compares to the core? Could you have a chance to, or would you consider accelerating those conversions? Then, because you touched on it briefly in your prepared remarks, a little bit more in-depth on the personal care launch. What kinds of products, how many, when will we see it, how will it appear, and a little bit about the talent behind that. Thank you. Cynthia Harriss : On the remodels, we are certainly encouraged by the performance and I just say overall, they are generally improved. We have about 100 stores that will be in the new design by the end of this year. We are committed to the remodel plan, and next year you will see more of those stores. We are still in the fray of working out all the details of that. Byron H. Pollitt : We, as you know, are focusing on the adult part of the Gap remodel project first. The real gate here is the speed at which we can renegotiate our leases. Many of these stores are successful stores that we have had under lease for some time, and when you undertake a remodel like this, you want to make sure you have enough lease term left on the lease before you make the investment. So we are working as hard as we can to extend lease terms so that we can accelerate the remodeling. I would tell you we would accelerate this remodel, the number of remodels, as quickly as we can get leases renegotiated. Paul S. Pressler : Just to give you some insights into the Banana Republic work that we are doing on personal care, one, it has been a fabulous creative collaboration between our design and merchandising team within Banana Republic and Inter Perfumes, who you know is just a great fragrance company, personal care company in the marketplace. We have relied upon their expertise and their nose in a lot of cases and our brand essence and creativity. We will be launching in the third week of September. We are really focused on fragrances first for men and women. We have a dedicated advertising campaign, print campaign associated with the product. I think when you see it launched, you will agree that it is not only elegant but it is really first-class. We have done it really right. We are going to do dedicated fixtures in our store, new fixtures so that we are going to display it in a way that is as compelling as we have done in our handbag business.

Your next question comes from Gabrielle Kivitz with Deutsche Bank. Please go ahead with your question.

Thank you. Good afternoon. A question for Cynthia, sort of two parts to the question. You have talked about reorganizing the teams and one of the benefits you discussed from this reorganization is that you should realize shorter product development timeframes, and a better ability to really chase business where you are seeing traction. Can you give us some examples of where you have done that so far this season? Just where you have been able to respond to early reads so far, and then just give us a little more clarity on the timeframe and when you think that product will come into the stores? Second, most of the product that we saw in the product rooms a few months back, we have now seen in the stores, and it sounds like the August and September marketing features stuff that we are already seeing in the stores as well, so I guess I am just wondering, how much newness are we going to be seeing between now and the holiday delivery? Could you just maybe be a little more specific about some of the newness that is going to be coming into the stores? Thank you. Cynthia Harriss : First of all, the strategy that I have talked about, about how we are organizing our team, really is a part of a longer-term strategy. I would say just the first thing with it is all the product that you saw in -- that you are seeing in the store right now, this fall, we worked diligently on it and much of that we did on a shorter time frame, just generally, but really to institutionalize this, we have a lot of work ahead of us on that. I would just say generally, it is certainly our big desire. We are working diligently on it. More to come on that. The big campaigns that are upcoming, and you are right -- the general theme which we did with Jeans Take Shape, t-shirts are starting right now. You have probably already seen them in outdoor as well as in the publications. The next one coming up really celebrates the skinny black pant. Those are already well-planned and are a part of our broader strategy. We are continuing to flow product into those shops, so it is less about maybe in another era where you saw a big flip in the store, we are very committed to these categories and it is really about flowing new fashion within each one of those shops. So you will continue to see newness along the way.

Your next question comes from Stephanie [Lisnick] with Piper Jaffray. Please go ahead with your question. Stephanie Lisnick - Piper Jaffray & Co.: I would like to piggy-back on a couple of earlier questions. The first on the sourcing and the lead times, if you could just talk a little bit more about those in terms of or in the context of your inventory and promotional plans for this current quarter, the fiscal Q3, and fiscal Q4 holiday. Secondly, back to the question on the Gap customer coming out of any of your focus groups or surveys, are you getting any feedback on how the Gap brand is currently perceived in the context of your pricing and assortment? Maybe asked a different way, how does the Gap brand fit into the purchase behavior of your target market? Does the assortment align with that perspective currently or do you feel like there is a little bit more room to grow in that aspect? Thank you. Paul S. Pressler : Let me give you a broad, across-the-company as it relates to sourcing and lead times. I think you know that we have been consistently working and our teams are working by classification on our ability to chase product in season, whether that is for a reorder or more specifically, when we see a particular item, be able to chase it, so our lead times now vary by different classifications and the teams are doing that. Old Navy is furthest along in its ability to chase. I would like to think that some of the women’s momentum is coming from that strategy, and clearly Gap is following suit. It is less relevant for Banana Republic but they too are certainly focused on the ability to make sure that we are chasing into big ideas, or amplifying ideas that we knew were big ideas, like the knit dressing business across the board. All of our marketing plans are kind of fixed and set, in terms of what the big ideas, and we have bought into those ideas and are committed to them. Cynthia Harriss : Really, I guess the best way for me to address your question is we are clear about our target customer. Our target is the young adult. That is where we are really focusing our inventory from look, attitude, pricing, everything about it. Whereas we know and we expect that we have pieces that are going to halo younger and older, we also know that we have always had a customer and we want to win back more of them and have them shop with us more frequently, that really puts it together in their own individual style with it. I would just say again that what you are seeing in the store is really just a part of our overall longer-term strategy and we will continue to read that and make adjustments as required.

Operator, we have time for just one more question.

Your next question comes from Dana Telsey with Telsey Advisory Group. Please go ahead with your question.

Good afternoon, everyone. Can you give us an update just in terms of denim, how much of the assortment and the denim commitment, what percent of the assortment is the denim commitment this year versus last year, how are you planning it for the spring, is there any change at all? Then, as you look at the men’s business and the women’s business in the different brands, do you see a fashion shift happening, or is anything you are adjusting to in terms of what you are seeing out there in the environment? Thank you. Paul S. Pressler : Just broadly on denim, I think you have heard that we have planned our inventories down for each of the brands. For Banana Republic, it is really a small part of their business, so it is not terribly material. But for Old Navy and for Gap, we continue to read. We continue to be excited about the dark washes and the fashion silhouettes that we have in both of the brands today. We have more flexibility in our ability to chase or cut into washes or silhouettes that we see that are trending, so we will appropriately manage, but overall recognizing the softness in our business, in our trend, we have planned down our inventories in Q3 and Q4. Cynthia Harriss : I will just add to that, and it is actually the second part of your question. While we are doing all the things that Paul outlined, we are also getting good reads on casual bottoms. I do think that is a place where you will see us continue to invest and that will pick up some of the business where customers were buying denim previously.

I would like to thank you all for joining the call. As always, the IR team will be available after the call to answer anymore questions. Thank you.

Thank you for participating in today’s conference. You may now disconnect.