Byron Pollitt: The company naturally targets a hurdle rate that is an increment above its cost of capital. When it is a new store, new territory, the revenue stream not well understood, that hurdle rate is going to be higher. When the company is doing the renewal where the revenue stream is well understood, the hurdle rate is lower. With regard to remodeling, at its core, Gap Inc. has a large profitable fleet of stores that naturally require some degree of investment to preserve their appeal and brand health. The company is successful at preserving or modestly enhancing the returns that it is already generating in those successful stores. When it invests incrementally to expand square footage, adds new departments like BR Petites, it generally sees returns that meet or exceed its financial hurdles. The company’s hurdles are an increment above cost of capital.

Lorraine Maikis (Merrill Lynch): Why you did not buy back any stock this quarter, and what your plans are for the rest of the year?

Byron Pollitt: There is no change in philosophy. The company is fully committed to returning excess cash to shareholders. It is in the midst of a turn around. It has had a lot of management transition. It just decided to pause, until it sees business stabilize and gain more traction. Gap Inc. has repurchased over $4 billion in stock, paid out over $600 million in dividends over the past four years. in 2007, the company has already committed, in effect, $600 million of its free cash flow in the form of dividends that represent $260 million and in the form of bond repayment, about $325 million when it retires some debt in September. This as simply a pause until the business is more established

John Morris (Wachovia): The inventory on a per store basis is tracking to be better than expected in terms of being lower. Is that correct?

Byron Pollitt: The guidance for the second and third quarter is to be down on an inventory per square foot basis, company wide, low single digits. In the first quarter, Gap Inc. did do better than anticipated. It sold more units during the quarter than originally anticipated. BR and Old Navy have been disciplined during this period. In the quest of growing gross margin dollars, the company is convinced that one of the levers that it should absolutely be relentless on is continuing to pull out mark down units from its buys.

John Morris (Wachovia): You said you saw the improvement at Old Navy and Banana, did you see the same direction at Gap relative to your initial plan?

Byron Pollitt: The Gap came into the quarter with more inventory than was ideal. It also was able to move modestly more cost than originally projected. However, that created the gross margin pressure that contributed significantly to the margin deterioration in the first quarter.

John Morris (Wachovia): Do you have any benefit from the management of the cost structure so far in the first quarter, or is it all go forward from here?

Dawn Robertson: there was no benefit in the first quarter. Every one of these initiatives are going to have some one time cost. The closing of Forth & Towne generated significant one time cost. All the stores will be closed by the end of June. Gap Inc. expects all the cost related to the closing of Forth & Towne to be recorded by the end of the second quarter, from the third quarter forward the company would expect to see the benefit of that in its SG&A run rates as an example.

Randall Cummins (Bear Stearns): How long do you plan to delay buy back and what is your outlook on free cash flow?

Byron Pollitt: The company has guided earnings per share, 80% to 90%, so the company is guiding earnings under from an EPS standpoint what the company achieved last year. That will put pressure on free cash flow. The company has also been clear that it has stepped up its remodel and investment in existing stores. It has approximately doubled the capital expenditure associated with its existing stores to begin to catch up from the failure to keep many of its stores current and bringing those stores current is fundamental to its turn around strategies. Those two reasons alone explain the difference in free cash flow from 2006 to what the company is guiding about $500 million in 2007. Gap Inc. considers the level of capital spending this year to be above normal, because it is in catch up on existing stores. The company also expects, with the turn around, to return at some point to positive comparisons, which should then allow the business to leverage significantly on free cash flow, on top of the initiatives that the company is taking today in the SG&A arena to bring its operating leverage much closer to the ultimate objective of mid teen operating margins. The company is focused on driving increased free cash flow out of all of its business in the years to come. Gap Inc. earned the quarter with $2.8 billion in cash flow. When it guides to approximately $500 million in free cash flow, it recognizes that not much of that occurs in the first three quarters. It mostly occurs in the fourth quarter. As the company plans out to go back into the market for share repurchase, it is mindful of the timing of its cash flow, the company is retiring over $300 million in debt in September, at a point where it is building inventories to the highest level of the year in preparation for holiday selling. Gap Inc. will have paid out at least three quarters of dividends at that point, three quarters of $260 million.

Randall Cummins (Bear Stearns): CapEx requirements seem to be down as a percent of sales in future years. Given you said this was above normalized level, are you confident that your free cash flow can rise from the 2007 projected levels?

Byron Pollitt: The company only charts capital expenditures one year at a time. The amount the company is spending this year is above normal because the company is in catch up mode with regards to its existing stores. It does not expect to have fully caught up after one year. It will guide to capital expenditures one year at a time.

Marnie Shapiro (Retail Tracker): Could you talk about conversion at Gap, Old Navy and Banana and about it relative to the marketing that you have put forth, whether it is direct mail or television or circulars?

Dawn Robertson: The Old Navy stores were selling through more units in the first quarter. Some of that was accomplished by better marketing. The company’s television ads have worked more effectively in the first quarter than in the past being focused on the big ideas which have helped drive traffic to the store, but it has helped conversion in the store. For example dresses drove a lot of medium into the stores. They were converted once they got there. Short shorts drove a lot of the stores. They converted and bought other shorts when they were there. Now swimwear has driven people in, but that conversion of being in stock when they get in having exciting presentations when they get in, and having that alignment of marketing between circulars, television and other media is beginning to work which is helping Gap Inc.’s conversions. That has helped the company also by using its space productivity better.

Byron Pollitt: With regard to the other two brands, the issue has been more pressure on AUR with Gap and Banana in the first quarter, because of the challenge with women’s pants that the company would be marking down. The overall comparisons the company has reported, has been good at both brands against their traffic comparisons. That means in general their other comparisons levers are neutral taken together. Conversion has not changed dramatically at either brand.