Good afternoon, ladies and gentlemen. My name is Marcel, and I will be your conference operator today. At this time, I would like to welcome everyone to the Gap Inc. Fourth Quarter 2010 Conference Call. [Operator Instructions] I would now like to introduce your host, Mark Webb, Vice President of Investor Relations.

Good afternoon, everyone. Welcome to Gap Inc.'s Fourth Quarter 2010 Earnings Conference Call. For those of you participating in the webcast, please turn to Slides 2 and 3. I'd like to remind you that the information made available on this webcast and conference call contains forward-looking statements. For information on factors that could cause our actual results to differ materially from the forward-looking statements, as well as reconciliations of measures we are required to reconcile to GAAP financial measures, please refer to today's press release, as well as our most recent annual report on Form 10-K and our most recent quarterly report on Form 10-Q, all of which are available on gapinc.com. These forward-looking statements are based on information as of February 24, 2011, and we assume no obligation to publicly update or revise our forward-looking statements. Joining us on the call today are Chairman and CEO, Glenn Murphy, and Executive Vice President and CFO, Sabrina Simmons. Now, I'd like to turn the call over to Glenn.

Thank you, Mark, and good afternoon, everybody. Before I hand the call over to Sabrina, let me give you some highlights from my perspective on 2010, and then we're going to take a few minutes to talk about 2011 and how we're continuing to build on our total strategy for Gap Inc. At our investor meeting in October, we talked about a range of performance on a comp level the business is trying to achieve, being between a flat and plus a five comp. We've now done that for six quarters in a row. And our total sales, our absolute total sales, were up 3% for the full year. That's a 200 basis point delta versus our comp. And in Q4, we had a 300 basis point delta versus our comp. So our total sales are starting to kick in. You're getting that from our Internet business, which has been very strong; from our franchise business, which is growing at a very nice rate; and from new stores that we've opened, either Outlet locations we've opened or new country openings in China and in Italy. Our operating margin has gone from 12.8% to 13.4% in 2010, a 60 basis point improvement, and we're now starting to figure out the comfort zone for the company, which is growing EBIT dollars, which is important -- complement with our share buyback program gave us an EPS improvement of 19%. As you look at the last four years, Gap Inc. has had a CAGR improvement of 19% on EPS. So from a financial perspective, I thought there was a continuation of very good performance in the bottom line, some comp performance, which has been absent in this business for far too long with our 1% comp in 2010, and we're using that to make…

Thank you, Glenn. Good afternoon, everyone. I'll begin today with a review of our fourth quarter and full year results, and then provide an overview of our outlook for 2011. Please turn to Slide 4. I'm very pleased to report that we delivered on all of our stated objectives in 2010. Here are some highlights for the full year. Net sales grew 3% or nearly $0.5 billion, with comps up 1%. Including online sales, comps were up 2%. We successfully launched wholly-owned stores in China and Italy, and continue to grow our global online business. Even while we made those investments, rent and occupancy expenses leveraged by 60 basis points, operating expenses leveraged by 80 basis points and operating margins grew to 13.4%, our fourth consecutive year of operating margin expansion. Likewise, we delivered our fourth consecutive year of double-digit earnings per share growth at 19%, or $1.88. And finally, we distributed $2.2 billion of cash to shareholders. Turning to Slide 5. Q4 earnings were up 4% to $365 million, and Q4 earnings per share was up 18% to $0.60 per share. Full-year earnings were up 9% to $1.2 billion. On Slide 6, fourth quarter and full year net sales were up 3% to $4.4 billion and $14.7 billion, respectively. Our online division and international businesses, taken together, represented 22% of total revenue for the year, up two points from last year. Total sales in comps by division are listed in our press release. Turning to Slide 7. Fourth quarter gross margin was down 130 basis points to 38.2%. Merchandise margins were down 160 basis points, offset by 40 basis points of rent and occupancy leverage. Fourth quarter gross profit of $1.7 billion was nearly flat to last year. For the year, gross margin was 40.2%, down only 10 basis…

Thank you, Sabrina. Operator, that concludes our prepared remarks. We'll now open the call up to questions. And everyone, we'd like to get to as many of you as possible, so please limit your questions to one per person.

[Operator Instructions] Our first question is from the line of Janet Kloppenburg with JJK Research.

Glenn, I was wondering if you could spend a little bit of time talking about the transition going on at the Gap brand right now and what your outlook is for that brand's performance for fiscal '11. I assume we should expect better performance in the back half of the year. And I'd also like to -- if you could talk a little bit about the marketing plans for that brand as well.

Obviously, we have expectation for Gap brand North America to have improved performance. What I can say to you is that -- a couple of big changes. So one, Art Peck is not a new employee, he's been with us for six years. He opened at least 100 stores in our franchise business while still being our Head of Strategy, and then spent two and half years running our Outlet business while, again, being the Head of Strategy for the company. So he's familiar with the business, familiar with the brand, he sees all the strengths in Gap brand that need to be tightened up and makes sure that those continue to be strengths going forward, and of course, has been able to -- from a slight arm's lengths, been able to see some of the opportunities that maybe we should have been capitalizing on. So he hit the ground running. Now he's been to New York, he's with the team here, he's in LA today, and I think our large job is to make an immediate impact on the business, because we have expectations on that brand, it's a very important part of our portfolio. And I believe that some of the ways in which he brought great progress and very consistent, strong performance to our Outlet business, which still develops product, which still markets product, which still has merchandising and visual and everything else. It's a different channel, but it has a lot of the attributes of the main business. Granted, they're different, but they're not as different as they probably used to be 10 years ago. So I think given his track record there, and I think his respect inside the business, filling in for Marka, Marka obviously had a very good career for us for 24…

Should we expect any changes in that team or are there additions, or do you feel the team is complete?

Look, what I'd say Janet is that we're making it very clear to everybody in the company. I mean, I don't need the board to tell me. I'm on a constant assessment of whether I'm doing a good job inside this business. So I think everybody here knows this. Accountability matters, performance matters, and if people can't -- because we're not pleased, as I said, I think, in different levels of degrees to our North American business, I think it all centers in my opinion. I've made that very clear internally. I've said this externally in a meeting that is over, the product has to deliver more consistently than it delivers. And when we're good, we're good. But being good 2/3 of the time, in this environment, with this new consumer is not going to deliver. That's not going to deliver for us what we want. On the marketing front, I'm very excited about the change. I've known the Ogilvy people and their Chairman and CEO. Now I've known him well for about nine months. They have been getting ready, in case this was an opportunity for us to actually move forward on, but it wasn't. Until just very recently, we decided to make the change. Our contract with our previous agency ran out. We had an eight-year run with Trey Laird. It was time for a fresh set of eyes and a fresh way to actually get a fresh voice to the business. So we're excited with the Ogilvy team. We have a global CMO in place, named Seth Farbman. I think he's going to do a great job for us. So this is -- everybody knows we're in the now world. This has to -- the work that has to be done to move the business to where I expected it to be needs to happen now.

Our next question is from Kimberly Greenberger with Morgan Stanley.

I was wondering if you could talk to us about your pricing strategies in 2011. We noticed some slight pricing adjustments on a few items at Old Navy. Have you been testing price adjustments as you try to offset some sourcing cost inflation? And what has your experience been by brand?

Well, first of all, I'd say that we did some work in the last 12 to 18 months on category management, which is the first part you start before you get the pricing. So for us, what categories are we actually going to dominate on? Which ones are going to be -- are going to carry the load for the growth and the share we want to gain? So that's the first part. So understanding that clearly, being much more strategic, I think that helps us when the teams sit back and they look at what is your value proposition going to be, and what's your pricing going to look like? What's your promotional cadence? What's it going to look like? It's critical, you couldn't do that blindly. You can't do that evenly across the whole assortment. You have to know the categories that matter to you the most. So I think within that, there was a pricing architecture. So there's a framework that we didn't have 18 months ago, we now have inside the business. And what you need to know with us is we're not going to just do the math on this, which is if our prices were to go up by a x amount, that we're just going to spread that equally into our ticketed price. That, to me, is the way people priced maybe 20 years ago. You've got to be much more thoughtful when you know who your competition is, how you're going to win, what those categories are, that will dictate the pricing choices you're going to make. What I can say, whatever the one or two items at Old Navy are, regardless of inflationary pressures, cost is something you need to be mindful of. It definitely informs your decision, but it can't…

Glenn, is there an IT system that helps you make those surgical decisions on promotions? Can you just remind us what that system is?

Yes, there is. With my experience, and I've been around in different businesses, I've been around inflation my whole life. It may be new to the apparel business, it's not new to other sectors. This system is only as good as the person who's sitting in front of it. And the system helps. It expediates, it makes it efficient. It can make a recommendation, which at times is right, but the person in front of it needs to know exactly what that category stands for, has to have the competition information and as you're making good recommendations that the field can execute. So system-wise, I'd say we're good. Probably not great, but good, a few more tools coming. But I really think what needs to happen here is the people who ultimately control those decisions through the lessons we learned in 2010 need to apply those and make better decisions in 2011.

Our next question is from the line of Adrienne Tennant from Janney Capital Markets.

Glenn, my question is sort of on inventory philosophy. In 2009, it seemed you were going for gross margin rate, in 2010, gross margin dollars. And then sort of heading into this year and looking at the inventory guidance, it seems that perhaps you're still driving promotions and maybe driving comp. So my question really is about the philosophy with which you want to drive the business go forward.

Adrienne, I would say overall, and I'll let Glenn chime in afterward, but overall, our philosophy in '11 is to manage inventory units in a very disciplined manner. So we came off a year in 2010, which I discussed at Analyst Day, that we were operating for much in 2010 with levels of inventory above which we consider normalized because we made specific decisions to err on the side of the customer especially in these basic categories, and really go in deep with big categories like our bottoms, our denim, our black pants. Entering 2011, we definitely want to exercise more discipline against our units. I think with regard to our guidance in Q1 even, it's important for me to maybe elaborate a little about the composition of that. Because in North America, we've continued the last couple quarters to make a point that the North America inventory number is several points below Gap Inc. Now because there’s the sourcing cost inflation, the units are even below that. So we feel like in North America, our units will be managed appropriately and tightly against an increasing average unit cost environment. In international, as you know, we're growing quite a bit. In the first half, we have a very high single-digit store growth rate. Many of those stores are weighted toward outlets and flagship. And when they open, especially, we carry a healthy amount of units. Our merchandise margins internationally, by the way, are also higher. So we definitely have more of our inventory increase at the Gap Inc. level is weighted towards a growth initiative internationally than in North America, where our philosophy will be to keep units very tight. And in general, I would say to you, in an environment where average unit costs are increasing, we're going to bring our units down.

Would that suggest that units are flattish at the end of the first quarter? And then for the second of the year down?

Yes, we're not guiding for the units so we've just said high single digits in terms of cost per store, North America below that and units definitely below the cost in all regions.

[Operator Instructions] Our next question is from the line of Sam Panella with Raymond James. Samantha Panella - Raymond James & Associates, Inc.: In terms of the operating margin pressure in 2011, can you give us any color either in terms of the magnitude or how we should be thinking about this? Obviously, you have a tough compare in the first quarter, but perhaps sourcing cost pressure is greater in the second half?

Yes, think, overall, Sam, what I will tell you is we made the decision to make a prudent assumption underlying our guidance, which is because we have large businesses within our portfolio that play in the value sector, the average unit cost in those value segments may not be fully offset by the average unit retail that we're goaling ourselves on. We're obviously going to be working hard here everyday to get that equation as much in favorable balance as we can. But we made the decision to be very prudent about the guidance we put out in a very unique year for us as a company and for the sector. And so what the guidance signals is if you have the average unit cost exceeding the average unit retail in our value businesses, it's going to put pressure likely on the merchandise margins. And that, in turn, could pressure the operating margin. So that's sort of the underlying assumption for the year. Now I did go on to say in my remarks, and this is important to us, that we view this year as unique, but we are big believers in our long-term strategy. And I think beyond 2011, we feel highly confident that we're going to get right back on track to the operating margin levels we were operating at in 2010, which again, by the way, is the highest operating margin we've had since 1999.

Our next question is from the line of Betty Chen with Wedbush Securities.

I was wondering, Glenn or Sabrina, can you talk a little bit about the marketing spend for 2011 and also some of your strategies around that? I've noticed also you've shifted to a new campaign with Old Navy. Any sort of early reads on how the customer may be reacting to the new ads? And then also in terms of further expanding into some of the new marketing areas, should we expect additional efforts into like Groupon that you did with the Gap brand? Or what are some of the new innovative marketing that we can watch out for?

I would say that don't expect any big swings in our marketing investments. We actually have always said and have been pretty consistent, the pool of inventory that this company has needs to be a strategic advantage versus some of the global competitors that we're up against. If we look at our marketing as a percentage of our sales relative to an Inditex, relative to an H&M, relative to a fast retailing. So we're always telling our teams that if that pool, while available today and many times being used intelligently and driving the right traffic and enhancing our brand health, we're always challenging them to make sure that we're looking at it and going, "Are we getting the proper return on it?" The Old Navy new campaign, after a couple of years of being on one creative platform, I think has been a refreshing change. We have a brand new head of marketing at Old Navy, Amy Curtis-McIntyre, who comes with great credential. She's been an amazing hire for the business, and I think that she appreciated the creative platform we had before. But like any great marketer, when she looks at a brand like ours, it was time to just shift gears. And so far, I could quote you a bunch of metrics I got this morning, but so far when you look at the feedback and the comments, particularly coming through social media, it's been all very positive. And I think part of that is that all -- I think I mentioned earlier, everybody, Betty, in our business, we're not leading edge right now. We're certainly not trailing people. But the shift in our investment of this pool of marketing we had towards different mediums and trying different things and breaking some new ground. Some people look…

Our next question is from the line of Paul Lejuez with Nomura Securities.

It's Tracy Kogan filling in for Paul. I was wondering what level of expense savings you guys would expect to achieve from the restructuring at Gap brand and the consolidation of the outlets? And can overall expense dollars be flat next year?

Tracy, we're not guiding to expense dollars. But certainly, I put forth that we have a goal that for the full year, when we meet our goal of increasing total sales, that our expenses should leverage. And I think we've proven over the last several years that we've been quite disciplined with regard to our expenses. We're actually very pleased that in 2010, after having invested meaningfully in our growth initiatives, we delivered total expenses about flat to LY. So though we're not guiding to the dollars, I think you can count on us to be responsible on a full year basis with regard to the leverage. Did you want to expand on the Gap part? The Gap restructuring, Tracy, just overall was not done, it was not driven by a decision to save expense. Certainly, over time, do we see the potential of some benefits in leverage as we merge the two divisions? Certainly, we do. But that is not the driver to the overall reorganization with the Gap brand.

Our next question is from the line of Stacy Pak with Barclays Capital.

I was looking, focusing more on domestic sales per square foot. And I'm wondering, Sabrina, if you'll give us any metrics behind some of the drivers like the Old Navy remodels, what are you seeing in the improvements in sales per square foot and four one margins. And in the Gap store closures, anything on the volumes on the closed stores and benefit to surrounding stores, and also, I guess, more broadly, traffic still wasn't fabulous overall in 2010, and I obviously heard your answer to Betty's question. But what do you do about traffic across the brands in 2011?

Yes, I'll start with the productivity in the downsizes. So what we're pleased with is we are making progress, Stacy. In Our Q4 our overall Gap Inc. sales per square foot were up 3%. All of our divisions were up for the full year at the Gap Inc. level. Sales per square foot were up 4%, and all of our divisions were up. So we're pleased with the path we're on. We obviously want to continue on that path and improve it. What we are looking for with the 100 Old Navy Project ONE remodels will do this year, we think they're especially powerful because they are accompanied -- the vast majority of that 100 are accompanied by downsizing the square footage of those boxes. So last year, as you know, we did about 200. What we get from it is we definitely see those stores deliver incremental sales lift versus the trend they were on and versus the base fleet. The good part about the 100 we're moving forward with in 2011 is we expect to continue to see that lift, but on smaller square footage. So we're also going to help ROD leverage proposition with that, and we're going to help our sales per square foot with that. Now we're going to do some remodels at Gap, they're more modest. I think it's 15 or 20 of them. They're definitely around consolidations as well. So when we look at those, we're primarily in '11 focused on remodeling when we're seeing a reduction in square footage, and that should definitely help continue on the path of improvement in sales per square foot.

And on the traffic front, we were either flat to a positive comp in 10 to 12 months last year. Now that's comp, that's not just traffic. I think there's been moments when the business understood what are the right ways for us to come out with something again that's innovative, that's fresh, that's different than you see in the marketplace. So as we project forward to 2011, there was some good lessons learned in 2010. There were certain certainly some mistakes where the brand presidents are looking at it and going, "Wow, that was just not smart." And when we looked inside the marketplace, we didn't differentiate ourselves in how to get people to cross the lease line or to get off of the couch and come in to our store. The marketing part that I talked about earlier with Betty, I think that's critical to me. I think we have to and we will, we are going to find a way next year, and it's going to start sooner rather than later where the marketing messaging, there's going to be, yes, there's going to be value proposition. At times, there's going to be a clear price, particularly when you talk about Old Navy. But how to use marketing as a tool given the size of that pool to actually not use it exclusively on ways to get in traffic where the discount is the driving force. And there's a lot of different discussions we've had in tools, good lessons learned from 2010, but your comment is absolute spot on. As I look at the same numbers you look at and go, "Just not a great year." Was by no means a disaster, but we were not happy with the traffic we're able to get into the business. And there's been the moments of brilliance. We've got to make sure we build on those. I think the shift in the marketing attitude and the clear messaging, talking on whether it's about product or whether it's about an event or whether it's about introduction of a new category, all these different tools available to the teams to make sure that marketing plays a role in getting traffic that does not rely exclusively on a discount. That is definitely something we're focused on going forward.

Our next question is from the line of Michelle Tan with Goldman Sachs.

I was wondering if you could give us any more color on the international margins? What does international look like now on an operating margin basis relative to the domestic business? What are the store level margins like and what level of store count would you have to get to, to get the profitability of that all in at or above the U.S.?

When we say international, Michelle, they're actually very different models by region. But what I'll tell you generally is that merchandise margins internationally do tend to be higher. Rent and occupancy in certain regions like Europe also tend to be higher. So you actually want those higher merchandise margins. But it depends on your mix of full price stores to outlets, and that mix is changing today as we speak. In Asia, in particular like in Japan, we have a very nice leverage model because a lot of our stores are store-in-store at percentage rents. So international, it's hard to comment broadly because every market can be quite different. I think in general, it's fair to say the merchandise margins do tend to be higher. There can be other offsets on that P&L by the time you get down to operating margin.

And one of the other drivers in all of our margins is important that Sabrina brought up earlier, but I think we look at the mix, too, and return on invested capital. And when you have almost franchise stores, and we have said this publicly before, when you look at our online business, great return on invested capital, we're now taking that globally. If you look at our Outlet business, great return on invested capital and has been a U.S.-centric business up until three years ago, taking that globally. And our Franchise business, almost 200 stores, another 75 next year. And I think we presented in October that, that's easily a 400-store business, great return on invested capital. So one element inside of all three of those have in common is the ability to drive margin. Online business is obviously great margin business are operating with one store, for the most part, which is your DC. The Outlet business is a great margin business because of the re-engineered product that goes in. And I think that, that business has really found that balance between promotional activity and ticket pricing that I mentioned earlier. It's been a little less attractively executed in some of the brands in North America. And our Franchise business have very nice margins when you look at us basically how we report it being a Wholesale business. So I think as that mix, Michelle, gets bigger -- because that's where the real growth is coming in those three businesses. And I think we may have said in October, if you look at Italy, if you had to do it all over again through other countries we entered, but you can't change them. They were 15 years ago. Going to Italy with flagship stores and then core malls where we get a very nice return on invested capital and strong margins and then an Outlet business and an online business, all within 12 months makes that country profile so much different than we have, say today in the U.K. So as that gets replicated around the world, particularly in China, which we're counting on to be a cornerstone of future growth. But operating the way I just described in China will give us a much better shot at having better operating margins in those businesses as we start them right as opposed to trying to correct countries we entered into 15 years ago.

Our next question is from the line of Evren Kopelman with Wells Fargo.

I wanted to ask about occupancy expense. I was looking at the rent expense and the depreciation numbers you reported. Looks like rent expense has been up 4% or so the past couple of quarters when I look at it on a year-over-year basis. I assume because those are international openings then depreciation has been down 5%, 6%. I'm curious is that where you're getting the occupancy leverage, the lower depreciation? And also looking at 2011, you're planning on opening a larger number of stores. I assume rent expense will keep growing. Should we expect a similar -- if that’s kind of what's going on with the occupancy lever, should we expect kind of a similar dynamic? And I'm curious if you think you can get 60 basis points again.

I think the biggest driver to the occupancy leverage, and again on a one comp, we did the 60 basis points this year. We're pretty pleased with that. I think the two biggest drivers to that are the fact that we are downsizing the unproductive square footage in North America. So when you take in account the closures together with just the downsizes, that's helping the ROD profile quite a bit. And you add that, Evren, to the spread we're getting from our online sales and our international sales. And even though, of course, there's investments associated with that, and those investments get depreciated over time, the equation is such that between the downsizing of unproductive square footage and the sales spread growing with online and international, those are the two factors that are really driving the leverage. When we look forward into 2011, we feel confident that we will continue to leverage rent and occupancy with sales growth. Again, a big piece of that equation is that Old Navy portfolio of remodels we talked about. The vast majority of that 100 are downsizes. So that's going to continue, and then the growth of our global online and our international strategies will continue. So we feel confident the ROD leverage will continue on sales growth.

Our next question is from the line of John Morris with BMO Capital.

We noticed some pretty nice progress that you have been making at Gap Body with some of the emphasis on active athletics. So I'm wondering if you could give us a little bit more color there. Is this something that's more seasonal? Or is it one of the new categories that you speak of, Glenn, that you're focusing on? I mean, it's a smaller piece of the business, but inasmuch as you can give us a little bit more color about the progress you're making there at Gap Body. Is it being driven by active athletics? And how would it fit with the overall scheme of continuing to expand without Athleta as well.

I think that we made a conscious effort just about like 18 months ago that the business had a lack of clarity, but what we're going to do Gap Body, we have some stand-alone stores, then we start putting them as part of stores we were doing with, separate door beside the adult store, the kids and baby. And we went out and hired a very, very talented designer who works for Patrick in New York. She's been with us about 15, maybe 18 months. And I think the minute came in and got an assessment about where we want to take the business, how big could it be, and what the right aesthetic is, you're seeing, I would say, starting last fall definitely a holiday and clearly in spring, an overall lift in the business. I think she's done a great job in foundational products. I think she's done a great job in lounge products. She fought hard, and so did Patrick, to make sure the Global business was able to get it to Gap Body Fit, which is the athletic pants that you're referring to, John. And they've been a very nice success for us there in about, I'd say, 150 stores with the full offering, which might be somewhere between 400 to 500 square feet and another, I'm just guessing now 100, 150 stores and probably with 250 to 300 square feet. So that is exactly what I was referring to earlier is that I believe, culturally, as a company because we're constantly in and out of product every four to six weeks that the focus on new categories that other retailers have had has just been something that's been missed by us. And looking at that and going, I believe in Gap Body, and so do…

Our next question is from the line of Brian Tunick JPMorgan.

It's actually Ike calling in for Brian today. Just two quick ones. On the marketing spend, not anniversary, the TV advertising this Q4, taking the dollars down $20 million. How should we expect marketing dollars in Q1, and for the remainder of 2011, to kind of play out? And then on your EPS guidance for the full year, can you tell us how much buyback is assumed at the low and the high end of that range?

Yes, regarding the marketing spend, we don't guide to the full year. Our plans aren't even fully baked as Glenn said. I wouldn't expect any dramatic changes in the overall profile of our marketing spend. With regard to Q1, it's probably flat to up slightly. And we do reallocate our marketing spend to where we think we're getting the best return. So you're going to see more of that go to our international businesses and our online businesses. With regard to earnings per share, we haven't put a specific assumption in there because we, for many years, have had the philosophy of approaching our share repurchases opportunistically. So it is difficult to predict how much share repurchase we will get done in any one quarter, but we certainly reported up every quarter.

Operator, since we're beyond our time and we're having technical difficulties, maybe we should end the call there.

And at this time I'll turn the call back over to Mr. Webb for any closing remarks.

That concludes today's conference call. Thank you, everybody, for listening. And as always, the IR team will be around after the call to take questions. Thank you.