Byron Pollitt: It is all about sales productivity. For Gap brand, because there has not been a product recovery yet, the company does not have a true read on what the inherent sales productivity capacity is for within adult, male and baby categories. The major driver of maintaining the sales per square foot has been a relentless closing of unproductive stores. That has been the primary driver. Once the company has a better read on the capacity of the different product lines to produce, once it is generating positive comparisons again, the team will be in a better position to reallocate space, and that will be a key driver of determining how much productivity it can gain relative to what it has achieved historically.

Jennifer Black (Jennifer Black and Associates): Can you talk about your sourcing, IMU potential and your inventories at the Gap Brand?

Byron Pollitt: Spring and summer were originally bought with a more optimistic view of a product turn around for holiday and a more bullish view on what that would drive in traffic. What has happened, as history, the turn around did not occur, as anticipated the holiday traffic underperformed expectations but the project was bought. Gap Inc. entered fiscal year 2007 heavy in inventory. The team has been hard at work, through additional promotional and mark down activity, to rectify the over-inventory situation. The company fully expects that situation to be completely rectified by fall. The current team today is buying inventory in line with current traffic trends. The company expects to enter the second half with a strengthened inventory position relative to the run rate of the business. With regards to sourcing and IMU, there is considerable work underway to fix Gap Inc.’s pipeline. As the company streamlines its pipeline, it expects to be able to move the needle on average unit cost. With that, it expects to have some widening, at least the potential for improvement in gross margin.

Jennifer Black (Jennifer Black and Associates): What was the actual percent of the inventories at the Gap brand?

Byron Pollitt: The company expected the end of second and third quarter to be down low single digits, as for Gap Inc. inventory per square foot as a whole. It is focused on driving growth in gross margin dollars. It has to do that is to continue to pull units from the inventories that it is buying.

Margaret Mager (Goldman Sachs): How will you get the traffic back from competition?

Robert Fisher: The key with the focus on the target customer is the statement that the company is not trying to capture the 18 to 23 year old customer. It believes that there is a great deal of competition of that sector in the mall. Narrowing the target customer is going to allow Gap Inc. to deliver a more focused product assortment. When one is trying to design and merchandise for a broad customer, one ends up serving nobody. the focus on the late 20s customer is going to allow the company more focused product assortment, stronger marketing messages, a clearer store point of view and the key is that the company is focused on clean classic American style and casual options specifically for the work and for the weekend. The company was off target if looked at its holiday advertising campaign, and in store merchandising. The company is not going to market hoodies anymore.

Margaret Mager (Goldman Sachs): Online is doing well for you. Is it profitable or is it a drag on your business at this time?

Robert Fisher: Online grew 23% for the quarter. It has had strong double digit growth over the past several years. It is solidly profitable across all the brands, Banana, Old Navy, and Gap with an attractive return on investment.

Paul Lejuay (Credit Suisse): When you closed Gap stores, have you seen a pickup in nearby Gap store comparisons?

Byron Pollitt: When Gap Inc. evaluates any sort of lease action, when it opens a brand new store, where other stores are nearby, or when it considers closing a store, that is in an existing marketplace, with several other stores, one or more stores, it actually models cannibalization. In that case it is reverse cannibalization. Where the model predicts that there should be some reverse cannibalization, the company believes it does see a lift in the surrounding stores that are supposed to be affected by the closure of a store. Naturally, there is a degree of error associated with any of those projections. But they can be modeled. The company bases its decisions on the results that it sees when it both opens and closes stores, and measures the resulting cannibalization or reverses cannibalization.

Paul Lejuay (Credit Suisse): As you walk into an Old Navy store given your departments or background, do you feel like there is something missing?

Dawn Robertson: Old Navy did begin as a powerful brand. As time has gone on competitors have evolved. Looking at what the company competes on today it is not as exciting store environment as it used to be. What the company needs to focus on and takes steps to change is to stabilize its business by standing for something with a sharp focus on who the customer is. The company’s strategy over the years has evolved but has not been clear of who the customer is. The company has not had a strong focus on product or a strong focus on execution. What has happened so far is that, by executing dresses well, with exciting product at a great price, customers have responded positively. As the company brings those big ideas together with great product, in store experience, marketing the coordinated way, and is consistent with those fashion ideas, and adds the consistency back it will get the customers back.

Jeff Black (Lehman Brothers): When you look at the expense reductions, what ultimately are you targeting and over what timeframe and could you give a sense either in dollars or in magnitude of margin basis point contribution on the SG&A line?

Byron Pollitt: The company is not communicating a specific target at this point. From an operating margin perspective, the company is committed as a team that with positive comparisons, and SG&A and RA that is appropriately leveraging, it should be yielding as an enterprise mid teen operating margins. The company acknowledges that its cost structure today is out of line with its sales results. It is serious about tackling expenses. It is taking a measured amount of time to do it thoughtfully, to help ensure that these costs, once taken out, do not easily creep back into the structure. All divisions and departments are participating in this cost review. Each of them is in various stages of planning and execution. While Gap Inc. has no aggregate impact to communicate yet, it does expect additional actions this year and expense associated with those actions, and with each coming quarter, the company will update on what those actions are, and what the one time material financial impacts are associated with those initiatives.

Jeff Black (Lehman Brothers): Do you expect some of those to hit this year and then the bulk hitting in 2008 and 2009?

Byron Pollitt: The company is serious about taking action this year. To the extent that it implements this year, it is able to create a more attractive expense run rate going into reflection year.

Richard Jaffe (Stifel Nicolaus): How would you narrow the focus or limit the customer choices and how that would be effective in recapturing sales in the Gap brand?

Robert Fisher: It is about a clear point of view in the stores. The style proliferation is a real problem. When that problem comes up the customer does not know what it is that Gap Inc. is selling. That is a result of lack of confidence by the merchants. Lack of confidence how they are seeing the customer respond and lack of confidence in the design of the product that they are receiving. For fall, the company is going to reduce the number of CCs or customer choices by about 30%. That is going to provide a clear point of view in the stores around American style.

Richard Jaffe (Stifel Nicolaus): What is the hurdle rate for new stores and remodels and what kind of improvement are you seeing when you do the full remodel?