The company ended the quarter with 3152 stores and square footage increased 1%.

Free cash flow, defined as cash from operations less capital expenditures, was an in flow of $159 million.

The company ended first quarter with $2.8 billion in cash, and short term investments. The company did not purchase any shares in the quarter.

- Since the company began its share repurchase program in October 2004, it has repurchased over $4 billion in shares, and paid out over $0.5 billion in dividends.

Gap Inc.’s priorities are to improve the top line by getting the product and store environments right at Gap and Old Navy, to retain development, recruit the best talent in the industry, to simplify organization and prophecies so that it can become more nimble and efficient.

Banana Republic continues to focus on core customers, by offering accessible luxury and versatile essentials. The company is pleased with the performance of men’s business, where Gap has received strong customer response to pants, suiting and knits, such as solid pocket polo.

The company is pleased with women’s business which remains on track and offering elevated collections for weekend and work. The company experienced some challenges in women’s pant category. Overall customers did not respond well to casual pant assortment. Cotton stretch pant, skinny and slim style, did not perform as well as the company would have liked.

Old Navy initially focused on offering products found at specialty stores but at lower prices, then repositioned it to better compete with value players.

- In March, the company executed dresses campaign but this was not the direction the company was originally heading in for spring. The company planned to carry dresses but spread them out over the first five months of the year.
- Following dresses, the company executed a similar campaign on short shorts.

- The company has improved item focus. Item of the week, which is at the front of stores, has historically performed well but as the company has seen in other areas it didn’t always execute it well. In the past Old Navy set item of the week on Sunday to prepare for the week ahead. It is setting it on Friday to improve weekend traffic, and there were improved results.

- Another example of the shifts the company is making in key items is focusing on space productivity.
- In marketing, the company works to strike the right balance between value and fashion.
- The company plans to open approximately 50 new stores on a net basis and believes this will draw a healthy return for shareholders.
- Old Navy will refresh most of its stores.

- To drive traffic and sales to deliver great product, the company is focused on three specific product categories – fashion, fashion key items, and basics. In basics, the company is focusing on quality, value and being in stock.
- The company needs to improve gross margins. Goal is to sell more at regular price by making product more modern delivering it more frequently and making thoughtful investments. In all three product categories, fashion, key items and basics, the company is focusing on making product more modern and at selling more at regular price. The company is looking to reduce the price of goods, with better timely processes, strategic vendor alliances and clear roles and responsibilities and decision rights by function and by level.

- The company is building two new processes, a seasonal process and a fast process. The products, the company develops on seasonal development process, will represent approximately 85% of line.

Fiscal 2007 Outlook

- The company expects to distribute about $260 million in dividends, and repay about $325 million in debt.
- The company is updating guidance for the following metrics. The company expects a percent change in inventory per square foot at the end of the second and third quarters to be down in the low single digits in the year over year basis.
- Earnings per share, excluding Forth & Towne, is expected to be 80 cents to 90 cents. Earnings per share on a generally accepted accounting principles basis, including Forth & Towne, are expected to be 76 cents to 86 cents.

- Pre-tax net loss of Forth & Towne is still expected to be about $60 million, $45 million of which has been realized in the first quarter.
- The company expects all of Forth & Towne stores to be closed by the end of June.
- Operating margin is expected to be in the high single digits.
- Interest expense is expected to be about $35 million.
- Depreciation and amortization are expected to be about $550 million.
- Effective tax rate is expected to be about 39%.
- Free cash flow is expected to be about $500 million.

- Capital expenditures are expected to be about $700 million. This includes about $235 million for new stores, about $310 million for existing stores, about $110 million for IT, and about $45 million for headquarters and distribution centers.
- On a net basis, the company expects to open only 30 stores, with about 230 openings and 200 closures.
- Yielding a full year net square footage increase is expected to be about 1%.

- Old Navy has five key strategies for 2007, specifically it is stabilizing sales, improving gross margins, building the team, improving processes, starting with the way it brings product to market, and ensuring alignment and discipline.

Key questions from the first quarter earnings call conducted by Gap, Inc. on May 24, 2007.

Gabrielle Kivitz (Deutsche Banc): The Gap North America stores have not eroded much on per square foot productivity after a couple of years of negative comparisons. The underproductive store closures have helped to maintain a healthier productivity average and you had initiatives to reallocate square footage between men’s, women’s, body, et cetera, within the stores to be more efficient. How much did that reallocation help productivity if at all and if you can restore better full price selling levels and recapture lost customers can you surpass your past sales per square foot productivity levels with a smaller store base?