Gap Inc. Reports Third Quarter Earnings Per Share of $0.63 – up from $0.38 Last Year

  Gap Inc. Reports Third Quarter Earnings Per Share of $0.63 – up from $0.38
  Last Year

            Net Sales Up 8 Percent, Comparable Sales Up 6 Percent

           Company Increases Full Year Earnings per Share Guidance

Business Wire

SAN FRANCISCO -- November 15, 2012

Gap Inc. (NYSE:GPS) today reported strong third quarter earnings, underscoring
its continued progress on key business strategies.

Net sales for the third quarter, which ended October 27, 2012, increased 8
percent to $3.86 billion compared with $3.59 billion for the third quarter
last year. The company’s third quarter comparable sales increased 6 percent.
Net income for the third quarter was $308 million, up 60 percent compared with
the third quarter last year. Third quarter diluted earnings per share rose 66
percent to $0.63 compared with $0.38 last year.

“We're very pleased with our strong third quarter financial performance,
highlighted by how well customers have responded to our product,” said Glenn
Murphy, chairman and chief executive officer of Gap Inc. “We are ready to
compete and win this holiday season as we drive to build upon our top line
growth.”

Given its progress year-to-date, the company raised its estimate for fiscal
year 2012 diluted earnings per share to be in the range of $2.20 to $2.25. It
also increased its fiscal year 2012 operating margin guidance from about 11
percent to about 12 percent.

Third Quarter Financial and Business Highlights

  *In North America, Gap, Banana Republic, and Old Navy each delivered
    positive comparable sales for the third consecutive quarter.
  *Total net sales for the Gap Inc. Direct division increased 23 percent to
    $509 million compared with $414 million last year, and the company
    launched e-commerce in Japan.
  *Net sales outside of the U.S. and Canada (including Gap Inc. Direct and
    Franchise) increased 7 percent, and the company opened its first Gap
    Outlet store in China in September.
  *The company opened 8 Athleta stores in the quarter, toward its goal of
    about 50 stores by the end of 2013.
  *The company announced a transition to a global brand management structure
    to support long-term growth.
  *Gap Foundation celebrated its 35th anniversary and, in November, Gap Inc.
    announced a donation of more than $1 million to aid recovery efforts
    following Hurricane Sandy.

Third Quarter Comparable Sales Results

Comparable sales for the third quarter of fiscal year 2012 were as follows:

  *Gap North America: positive 7 percent versus negative 6 percent last year
  *Banana Republic North America: positive 6 percent versus negative 1
    percent last year
  *Old Navy North America: positive 9 percent versus negative 4 percent last
    year
  *International: negative 3 percent versus negative 10 percent last year

Third Quarter Net Sales Results

The following tables detail the company’s third quarter net sales:

                                                                      
($ in
millions)
                       Old       Banana     Franchise   Piperlime   Total     Percentage
Quarter      Gap       Navy      Republic   (3)         and         (4)       of Net
Ended                                                   Athleta               Sales
October
27, 2012
U.S. (1)     $ 838     $ 1,194   $   515    $    -      $    -      $ 2,547   66     %
Canada         93        107         55          -           -        255     7
Europe         165       -           15          15          -        195     5
Asia           245       3           35          23          -        306     8
Other         -        -          -          52         -       52      1      
regions
Total
Stores         1,341     1,304       620         90          -        3,355   87
reportable
segment
Direct
reportable    146      210        64         -          89      509     13     
segment
(2)
Total        $ 1,487   $ 1,514   $   684    $    90     $    89     $ 3,864   100    %
                                                                              
                                                                              
($ in
millions)
                       Old       Banana     Franchise   Piperlime   Total     Percentage
Quarter      Gap       Navy      Republic   (3)         and         (4)       of Net
Ended                                                   Athleta               Sales
October
29, 2011
U.S. (1)     $ 819     $ 1,105   $   495    $    -      $    -      $ 2,419   67     %
Canada         89        100         48          -           -        237     7
Europe         171       -           13          22          -        206     6
Asia           219       -           31          21          -        271     7
Other         -        -          -          38         -       38      1      
regions
Total
Stores         1,298     1,205       587         81          -        3,171   88
reportable
segment
Direct
reportable    121      178        47         -          68      414     12     
segment
(2)
Total        $ 1,419   $ 1,383   $   634    $    81     $    68     $ 3,585   100    %

(1) U.S. includes the United States and Puerto Rico.

(2) Online sales shipped from distribution centers located outside the U.S.
were $44 million ($33 million for Canada and $11 million for Europe) and $34
million ($24 million for Canada and $10 million for Europe) for the thirteen
weeks ended October 27, 2012 and October 29, 2011, respectively.

(3) Franchise sales were $90 million ($78 million for Gap and $12 million for
Banana Republic) and $81 million ($71 million for Gap and $10 million for
Banana Republic) for the thirteen weeks ended October 27, 2012 and October 29,
2011, respectively.

(4) Net sales outside of the U.S. and Canada (including Direct and franchise)
were $564 million and $525 million for the thirteen weeks ended October 27,
2012 and October 29, 2011, respectively.

Additional Results and 2012 Outlook

Earnings per Share

Third quarter diluted earnings per share of $0.63 increased 66 percent
compared with $0.38 for the third quarter last year. This includes a benefit
of about $0.02 related to tax credits.

The company increased its fiscal year 2012 diluted earnings per share guidance
to be in the range of $2.20 to $2.25. This compares with diluted earnings per
share of $1.56 in fiscal year 2011.

Depreciation and Amortization

The company continues to expect depreciation and amortization expense, net of
amortization of lease incentives, for fiscal year 2012 to be about $475
million.

Operating Expenses

Third quarter operating expenses were $1.1 billion, up $105 million compared
with the third quarter last year, with continued investments in marketing and
store payroll. Marketing expenses for the quarter were $178 million, up $29
million compared with the third quarter last year, driven primarily by
investments in Gap brand marketing and customer relationship marketing.

The company is continuing to invest in its businesses, and on a year-over-year
basis, expects operating expenses in the fourth quarter of fiscal year 2012 to
increase by at least as much as the 11 percent increase in the third quarter.
As a result, the company continues to expect operating expenses to deleverage
in the fourth quarter.

Operating Margin

The company now expects operating margin for fiscal year 2012 to be about 12
percent, up from its previous guidance of about 11 percent.

Effective Tax Rate

The effective tax rate was 38.3 percent for the third quarter of fiscal year
2012. The company now expects the full year effective tax rate to be about
39.0 percent for fiscal year 2012, down from previous guidance of about 39.5
percent.

Inventory

On a year-over-year basis, inventory dollars per store were down 4 percent at
the end of the third quarter of fiscal year 2012. The company expects
inventory dollars per store to be up in the low single digits at the end of
fiscal year 2012 compared with the end of the 2011 fiscal year.

Cash, Cash Equivalents, and Short-Term Investments

As previously communicated, the company repaid the $360 million balance on its
term loan during the third quarter of fiscal year 2012. The company ended the
third quarter of fiscal year 2012 with $1.8 billion in cash, cash equivalents,
and short-term investments. Year-to-date, free cash flow, defined as net cash
provided by operating activities less purchases of property and equipment, was
an inflow of $776 million compared with an inflow of $222 million last year.
Please see the reconciliation of free cash flow, a non-GAAP financial measure,
from the GAAP financial measure in the tables at the end of this press
release.

Share Repurchases

The company has repurchased $463 million in shares year-to-date. Third quarter
share repurchases were 2.7 million shares for $96 million, and the company
ended the third quarter of fiscal year 2012 with 480 million shares
outstanding.

Dividends

The company paid a dividend of $0.125 per share during the third quarter of
fiscal year 2012, which was an increase of 11 percent compared with the third
quarter last year. The company announced on Monday of this week that its Board
of Directors authorized a quarterly dividend of $0.125 per share payable on or
after January 30, 2013 to shareholders of record at the close of business on
January 2, 2013. With this announcement, the company will pay a total of $0.50
per share in dividends for fiscal year 2012.

Capital Expenditures

Year-to-date capital expenditures were $449 million. The company expects
fiscal year 2012 capital spending of about $675 million.

Real Estate

The company ended the third quarter of fiscal year 2012 with a total of 3,339
store locations in 45 countries, 3,068 of which were company-operated.

On a year-to-date basis, the company opened 107 and closed 75 company-operated
store locations. Square footage of company-operated stores was 36.9 million at
the end of the third quarter, a decrease of about 2 percent from 37.6 million
at the end of the third quarter of fiscal year 2011. This decrease reflects
Gap Inc.’s strategy to optimize square footage in North America.

The company continues to expect net openings of about 15 company-operated
stores and about 50 to 75 franchise stores during fiscal year 2012. Square
footage for company-operated stores is expected to decrease by about 1 percent
by the end of fiscal year 2012 compared with the end of fiscal year 2011.

Store count, openings, closings, and square footage for our stores are as
follows:

                   Quarter Ended October 27, 2012
                    Store       Store       Store       Store       Square
                    Locations  Locations  Locations  Locations  Feet
                    Beginning   Opened      Closed      End of Q3   (millions)
                    of Q3
Gap North America   1,014       6           4           1,016       10.5
Gap Europe          194         2           -           196         1.7
Gap Asia            165         11          1           175         1.7
Old Navy North      1,010       9           6           1,013       17.7
America
Old Navy Asia       1           -           -           1           -
Banana Republic     586         5           2           589         4.9
North America
Banana Republic     33          4           -           37          0.2
Asia
Banana Republic     10          -           -           10          0.1
Europe
Athleta North       22          8           -           30          0.1
America
Piperlime North     -           1           -           1           -
America
Company-operated    3,035       46          13          3,068       36.9
stores total
Franchise           250         25          4           271         N/A
Total               3,285       71          17          3,339       36.9

Webcast and Conference Call Information

Katrina O'Connell, vice president of Corporate Finance and Investor Relations
at Gap Inc., will host a summary of the company’s third quarter fiscal year
2012 results during a live conference call and real-time webcast at
approximately 5 p.m. Eastern Time today. Ms. O’Connell will be joined by Glenn
Murphy, Gap Inc. chairman and chief executive officer, and Sabrina Simmons,
Gap Inc. chief financial officer.

To access the conference call, please dial (800) 374-1731, or (706) 679-5876
for international callers. The webcast can be accessed from the Financial News
and Events page of the Investors section at www.gapinc.com. A replay of the
call will be available on www.gapinc.com.

November Sales

The company will report November sales on November 29, 2012.

Forward-Looking Statements

This press release and related conference call and webcast contain
forward-looking statements within the “safe harbor” provisions of the Private
Securities Litigation Reform Act of 1995. All statements other than those that
are purely historical are forward-looking statements. Words such as “expect,”
“anticipate,” “believe,” “estimate,” “intend,” “plan,” “project,” and similar
expressions also identify forward-looking statements. Forward-looking
statements include statements regarding the following:

  *delivering top line and long-term growth;
  *earnings per share for fiscal year 2012;
  *depreciation and amortization for fiscal year 2012;
  *operating expenses in the fourth quarter of fiscal year 2012;
  *operating expense deleverage in the fourth quarter of fiscal year 2012;
  *operating margin for fiscal year 2012;
  *effective tax rate for fiscal year 2012;
  *inventory dollars per store at the end of fiscal year 2012;
  *dividends per share for fiscal year 2012;
  *capital expenditures for fiscal year 2012;
  *optimizing square footage;
  *store openings and closings for fiscal year 2012;
  *real estate square footage for fiscal year 2012;
  *increasing sales with healthy merchandise margins;
  *growing earnings per share;
  *share repurchases, including the level of repurchases in 2012; and
  *future growth, including international stores and Athleta stores.

Because these forward-looking statements involve risks and uncertainties,
there are important factors that could cause the company’s actual results to
differ materially from those in the forward-looking statements. These factors
include, without limitation, the following:

  *the risk that additional information may arise during the company's close
    process or as a result of subsequent events that would require the company
    to make adjustments to the financial information;
  *the risk that adoption of new accounting pronouncements will impact future
    results;
  *the risk that changes in general economic conditions or consumer spending
    patterns could adversely impact the company's results of operations;
  *the highly competitive nature of the company's business in the United
    States and internationally;
  *the risk that the company or its franchisees will be unsuccessful in
    gauging apparel trends and changing consumer preferences;
  *the risk to the company's business associated with global sourcing and
    manufacturing, including sourcing costs, events causing disruptions in
    product shipment, or an inability to secure sufficient manufacturing
    capacity;
  *the risk that the company's franchisees will be unable to successfully
    open, operate, and grow their franchised stores in a manner consistent
    with the company's requirements regarding its brand identities and
    customer experience standards;
  *the risk that the company or its franchisees will be unsuccessful in
    identifying, negotiating, and securing new store locations and renewing,
    modifying or terminating leases for existing store locations effectively;
  *the risk that comparable sales and margins will experience fluctuations;
  *the risk that changes in the company's credit profile or deterioration in
    market conditions may limit its access to the capital markets and
    adversely impact its financial results and its ability to service its debt
    while maintaining other initiatives;
  *the risk that trade matters could increase the cost or reduce the supply
    of apparel available to the company and adversely affect its business,
    financial condition, and results of operations;
  *the risk that updates or changes to the company's information technology
    ("IT") systems may disrupt its operations;
  *the risk that actual or anticipated cyber attacks, and other cybersecurity
    risks, may cause the company to incur increasing costs;
  *the risk that natural disasters, public health crises, political crises,
    or other catastrophic events could adversely affect the company's
    operations and financial results;
  *the risk that acts or omissions by the company's third-party vendors,
    including a failure to comply with the company's code of vendor conduct,
    could have a negative impact on its reputation or operations;
  *the risk that the company does not repurchase some or all of the shares it
    anticipates purchasing pursuant to its repurchase program;
  *the risk that the company will not be successful in defending various
    proceedings, lawsuits, disputes, claims, and audits; and
  *the risk that changes in the regulatory or administrative landscape could
    adversely affect the company's financial condition, strategies, and
    results of operations.

Additional information regarding factors that could cause results to differ
can be found in the company’s Annual Report on Form 10-K for the fiscal year
ended January 28, 2012, as well as the company’s subsequent filings with the
Securities and Exchange Commission.

These forward-looking statements are based on information as of November 15,
2012. The company assumes no obligation to publicly update or revise its
forward-looking statements even if experience or future changes make it clear
that any projected results expressed or implied therein will not be realized.

About Gap Inc.

Gap Inc. is a leading global specialty retailer offering clothing,
accessories, and personal care products for men, women, children, and babies
under the Gap, Banana Republic, Old Navy, Piperlime, and Athleta brands.
Fiscal 2011 net sales were $14.5 billion. Gap Inc. products are available for
purchase in about 90 countries worldwide through about 3,000 company-operated
stores, about 250 franchise stores, and e-commerce sites. For more
information, please visit www.gapinc.com.

The Gap, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
                                                                
($ in millions)                                      October 27,   October 29,
                                                     2012          2011
ASSETS
Current assets:
Cash, cash equivalents, and short-term investments   $   1,770     $   1,417
Merchandise inventory                                    2,269         2,322
Other current assets                                    794          815
Total current assets                                     4,833         4,554
Property and equipment, net                              2,559         2,550
Other long-term assets                                  615          553
Total assets                                         $   8,007     $   7,657
                                                                   
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of debt                           $   2         $   52
Accounts payable                                         1,584         1,472
Accrued expenses and other current liabilities           1,041         957
Income taxes payable                                    1            1
Total current liabilities                               2,628        2,482
Long-term liabilities:
Long-term debt                                           1,246         1,606
Lease incentives and other long-term liabilities        972          910
Total long-term liabilities                             2,218        2,516
Total stockholders' equity                              3,161        2,659
Total liabilities and stockholders' equity           $   8,007     $   7,657

The Gap, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

UNAUDITED
                                                               
                          13 Weeks Ended              39 Weeks Ended
($ and shares in          October 27,   October 29,   October 27,   October
millions except per                                                 29,
share amounts)            2012          2011          2012
                                                                    2011
Net sales                 $   3,864     $   3,585     $   10,926    $  10,266
Cost of goods sold and       2,271        2,271        6,531       6,397
occupancy expenses
Gross profit                  1,593         1,314         4,395        3,869
Operating expenses           1,073        968          3,055       2,803
Operating income              520           346           1,340        1,066
Interest, net                21           21           63          47
Income before income          499           325           1,277        1,019
taxes
Income taxes                 191          132          493         404
Net income                $   308       $   193       $   784       $  615
                                                                    
Weighted-average number       481           503           485          542
of shares - basic
Weighted-average number       488           505           491          547
of shares - diluted
                                                                    
Earnings per share -      $   0.64      $   0.38      $   1.62      $  1.13
basic
Earnings per share -      $   0.63      $   0.38      $   1.60      $  1.12
diluted

The Gap, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
                                                                
                                                     39 Weeks Ended
                                                     October 27,   October 29,
($ in millions)
                                                     2012          2011
Cash flows from operating activities:
Net income                                           $  784        $  615
Depreciation and amortization (a)                       363           382
Change in merchandise inventory                         (655   )      (694   )
Other, net                                             733         335    
Net cash provided by operating activities              1,225       638    
                                                                   
Cash flows from investing activities:
Purchases of property and equipment                     (449   )      (416   )
Purchases of short-term investments                     (175   )      (50    )
Maturities of short-term investments                    125           125
Change in other assets                                 (12    )     (4     )
Net cash used for investing activities                 (511   )     (345   )
                                                                   
Cash flows from financing activities:
Proceeds from issuance of short-term debt               -             9
Payments of short-term debt                             (17    )      -
Proceeds from issuance of long-term debt                -             1,646
Payments of long-term debt issuance costs               -             (11    )
Payments of long-term debt                              (400   )      -
Proceeds from issuances under share-based
compensation plans, net of withholding tax              159           55
payments
Repurchases of common stock                             (467   )      (2,013 )
Excess tax benefit from exercise of stock options       32            11
and vesting of stock units
Cash dividends paid                                    (182   )     (181   )
Net cash used for financing activities                 (875   )     (484   )
                                                                   
Effect of foreign exchange rate fluctuations on        (4     )     22     
cash
Net decrease in cash and cash equivalents               (165   )      (169   )
Cash and cash equivalents at beginning of period       1,885       1,561  
Cash and cash equivalents at end of period           $  1,720     $  1,392  
                                                                   
                                                                   
                                                                   
(a) Depreciation and amortization is net of amortization of lease incentives.

The Gap, Inc.
SEC REGULATION G
UNAUDITED
                                                  
                                                         
RECONCILIATION OF NET CASH PROVIDED BY OPERATING ACTIVITIES TO FREE CASH FLOW
                                                         
                             39 Weeks Ended
                             October 27,                 October 29,
($ in millions)
                             2012                        2011
Net cash provided by         $     1,225                 $      638
operating activities
Less: purchases of
property and                      (449      )                 (416     )
equipment
Free cash flow (a)           $     776                  $      222      
_________
(a) Free cash flow is a non-GAAP financial measure. We believe free cash flow
is an important metric because it represents a measure of how much cash a
company has available for discretionary and non-discretionary items after the
deduction of capital expenditures, as we require regular capital expenditures
to build and maintain stores and purchase new equipment to improve our
business. We use this metric internally, as we believe our sustained ability
to generate free cash flow is an important driver of value creation. However,
this non-GAAP financial measure is not intended to supersede or replace our
GAAP results.

Contact:

Gap Inc.
Mike Jenkins, 415-427-4454 (Investor Relations)
investor_relations@gap.com
Stacy Rollo, 415-420-8203 (Media Relations)
press@gap.com
 
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