Gap Inc. Reports Third Quarter Earnings Per Share of $0.30



    Gap Inc. Increases FY 2007 GAAP Diluted EPS Guidance to $0.92-$0.98

    Non-GAAP FY 2007 Diluted EPS Guidance Increased to $0.99-$1.05

    SAN FRANCISCO, November 21 /CNW/ - Gap Inc. (NYSE:  GPS) today reported
that net earnings for the third quarter, which ended November 3, 2007,
increased 26 percent to $238 million, or $0.30 per share on a diluted basis,
compared with $189 million, or $0.23 per share on a diluted basis, for the
third quarter of last year.

    Third quarter net sales were $3.9 billion, which is flat compared with
the third quarter of last year. Due to the 53rd week in fiscal year 2006,
third quarter 2007 comparable store sales are compared with the thirteen weeks
ended November 4, 2006. On this basis, comparable store sales decreased 5
percent, compared with a decrease of 5 percent for the third quarter of 2006.
The company's online sales for the third quarter increased 36 percent to $247
million, compared with $182 million for the third quarter of last year.

    "During the third quarter, we made progress in driving earnings growth by
managing our inventory and reducing expenses," said Glenn Murphy, chairman and
chief executive officer of Gap Inc. "Our brands are focused on the upcoming
holiday season and providing customers with a compelling store experience."

    Sales Results By Division

    The following table represents the company's third quarter comparable
store sales and net sales by division:

    
                                     Third
                                     Quarter
                                   Comparable
                                      Store           Third Quarter
                                      Sales             Net Sales
                                  ----------------------------------------
                                   2007  2006      2007          2006
    ----------------------------------------------------------------------
    Gap North America              -6%   -7%   $1.1 billion  $1.2 billion
    ----------------------------------------------------------------------
    Banana Republic North America  1%    3%    $607 million  $563 million
    ----------------------------------------------------------------------
    Old Navy North America         -8%   -7%   $1.5 billion  $1.6 billion
    ----------------------------------------------------------------------
    International                  -4%   -6%   $379 million  $335 million
    ----------------------------------------------------------------------
    Gap Inc. Direct (Online)       n/a   n/a   $247 million  $182 million
    ----------------------------------------------------------------------
    

    Additional Results and 2007 Outlook

    Earnings

    The company's third quarter of fiscal year 2007 diluted earnings per
share of $0.30 benefited from lower marketing expenses compared with the prior
year. As the company had previously stated, it did not intend to make the
incremental marketing investments that it had made in the second half of
fiscal year 2006. The incremental marketing expenses in the second half of
fiscal year 2006 amounted to about $80 million.

    The company realized substantially all of these savings -- about $75
million -- in the third quarter of fiscal year 2007. The company does not
anticipate further significant reductions in marketing expenses in the fourth
quarter of fiscal year 2007 as compared with the fourth quarter of last year.

    As a result of the improvement in the third quarter, Gap Inc. is
increasing its fiscal year 2007 guidance of GAAP diluted earnings per share to
$0.92 to $0.98 from its prior guidance of $0.83 to $0.88 per diluted share.

    The company continues to expect expenses related to its cost reduction
initiatives to be about $35 million for the full year. There were
approximately $6 million of related expenses in the third quarter, bringing
the year-to-date expenses to about $32 million.

    Excluding about $0.07 per diluted share of expenses associated with the
cost reduction initiatives and the discontinued operation of Forth & Towne,
the company is revising its fiscal year 2007 guidance upwards to $0.99 to
$1.05 from its prior guidance of $0.90 to $0.95 diluted earnings per share.
Please see the reconciliation of expected diluted earnings per share excluding
these costs, a non-GAAP financial measure, to a GAAP financial measure in the
table at the end of this release.

    Effective Tax Rate

    The effective tax rate was 39.5 percent for the third quarter of 2007.
The company continues to expect the effective tax rate to be about 39 percent
for full year 2007.

    Cash and Debt

    The company ended the third quarter with $1.7 billion in cash and
investments, and $188 million in long-term debt. For the first three quarters
of fiscal year 2007, free cash flow was an inflow of $484 million, compared
with an inflow of $214 million last year. This increase was primarily driven
by lower inventory levels and a change in vendor payment terms.

    The company now expects to generate about $900 million in free cash flow
for fiscal year 2007, driven by its upward revision in earnings, continued
disciplined inventory management and change in vendor payment terms. Please
see the reconciliation of free cash flow, a non-GAAP financial measure, to the
GAAP financial measure in the table at the end of this release.

    Share Repurchases and Dividends

    During the third quarter, the company repurchased 48 million shares. The
company has utilized $887 million of the $1.5 billion share repurchase program
that was announced on August 23, 2007. Eight million of the total 48 million
shares were repurchased from individual members of the Fisher family as part
of the previously announced purchase agreements with them.

    The company paid a dividend of $0.08 per share in the third quarter.

    Margins

    Gross margin of 37.5 percent increased 0.1 point in the third quarter of
fiscal year 2007 compared with the prior year. Operating margin for the third
quarter was 9.5 percent, which is 2.2 points higher than last year. The
company reaffirmed that it expects operating margin for fiscal year 2007 to be
in the high single-digits. Please see the financials sections on
www.gapinc.com for the company's explanation of numerical range guidance.

    Inventory

    The company reported that inventory per square foot was down 8 percent at
the end of the third quarter on a year-over-year basis as compared with flat
inventory last year. The company continues to expect the percent change in
inventory per square foot on a year-over-year basis to be down in the
mid-single digits at the end of the fourth quarter of fiscal year 2007.

    Interest Expense

    The company now expects fiscal year 2007 interest expense to be about $28
million.

    Depreciation and Amortization

    The company reaffirmed that it expects depreciation and amortization
expense for fiscal year 2007 to be about $550 million.

    Capital Expenditures

    Year-to-date capital expenditures were $519 million. The company
reaffirmed that it expects capital spending to be about $700 million in fiscal
year 2007, which includes about $235 million for new stores, about $310
million for existing stores, about $110 million for information technology and
about $45 million for headquarters and distribution centers.

    Real Estate

    For the first three quarters of fiscal year 2007, the company opened 187
store locations and closed 127 store locations, and square footage increased 2
percent. This includes 19 Forth & Towne store closures and 45 Old Navy Outlet
store conversions. The company reaffirmed that it expects to open 30 store
locations on a net basis for fiscal year 2007. Square footage is still
expected to increase about 1 percent for fiscal year 2007.

    Third Quarter Store Activity

    The following tables represent the number of store location openings and
closings, and square footage by brand.

    
                                         November 3, 2007
                       ---------------------------------------------------
                        Beginning   Store     Store   Net Store  Sq. Ft.
                         Q3 Store Locations Locations Locations (millions)
                        Locations  Opened    Closed   End of Q3
    ----------------------------------------------------------------------
    Gap North America       1,281         9        12     1,278       12.4
    ----------------------------------------------------------------------
    Gap Europe                170         6         4       172        1.5
    ----------------------------------------------------------------------
    Gap Japan                 107         4         2       109        1.0
    ----------------------------------------------------------------------
    Old Navy North
     America                1,034        74        46     1,062       20.0
    ----------------------------------------------------------------------
    Banana Republic
    North America             532        20         3       549        4.7
    ----------------------------------------------------------------------
    Banana Republic
     Japan                     19         2         -        21        0.1
    ----------------------------------------------------------------------
    Total                   3,143       115        67     3,191       39.7
    ----------------------------------------------------------------------
    

    
                                         October 28, 2006
                       ---------------------------------------------------
                        Beginning   Store     Store   Net Store  Sq. Ft.
                         Q3 Store Locations Locations Locations (millions)
                        Locations  Opened    Closed   End of Q3
    ----------------------------------------------------------------------
    Gap North America       1,327        14         3     1,338       12.7
    ----------------------------------------------------------------------
    Gap Europe                162         5         -       167        1.5
    ----------------------------------------------------------------------
    Gap Japan                  98         6         2       102        1.0
    ----------------------------------------------------------------------
    Old Navy North
     America                  982        31         5     1,008       19.2
    ----------------------------------------------------------------------
    Banana Republic
    North America             503        14         3       514        4.4
    ----------------------------------------------------------------------
    Banana Republic
     Japan                      8         5         -        13        0.1
    ----------------------------------------------------------------------
    Forth & Towne               5        10         -        15        0.2
    ----------------------------------------------------------------------
    Total                   3,085        85        13     3,157       39.1
    ----------------------------------------------------------------------
    

    Webcast and Conference Call Information

    Evan Price, vice president of Investor Relations, will host a summary of
Gap Inc.'s third quarter 2007 results in a live conference call and real-time
webcast at approximately 8:00 a.m. Pacific time today. Mr. Price will be
joined by Glenn Murphy, Gap Inc. chairman and chief executive officer; and
Sabrina Simmons, executive vice president of Gap Inc. Finance and acting chief
financial officer of Gap Inc., to discuss details on the business.

    To access the conference call, please dial (800) 374-0168 or (706)
634-0994 for international callers. The webcast is located on the Conference
Calls & Webcasts page in the Financials section of www.gapinc.com. Replay of
this event will be made available on (800) GAP-NEWS for four weeks after this
announcement and archived on www.gapinc.com.

    November Sales

    The company will report November sales on December 6, 2007.

    Forward-Looking Statements

    This press release and related conference call and webcast contain
unaudited financial information for the third quarter of 2007 and
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," and similar expressions
also identify forward-looking statements. Forward-looking statements include
statements regarding: (i) earnings and marketing expenses in the fourth
quarter of fiscal year 2007; (ii) outlook for the fourth quarter of fiscal
year 2007; (iii) diluted earnings per share on a GAAP basis for fiscal year
2007; (iv) expenses related to the company's cost reduction initiatives for
fiscal year 2007; (v) diluted earnings per share for fiscal year 2007
excluding the expenses associated with the company's cost reduction
initiatives and discontinued operation of Forth & Towne; (vi) effective tax
rate for fiscal year 2007; (vii) free cash flow for fiscal year 2007; (viii)
operating margin for fiscal year 2007; (ix) year-over-year change in inventory
per square foot at the end of the fourth quarter of fiscal year 2007; (*)
interest expense for fiscal year 2007; (xi) depreciation and amortization for
fiscal year 2007; (xii) capital spending for fiscal year 2007; (xiii) store
openings and closings for fiscal year 2007; (xiv) increase in real estate
square footage for fiscal year 2007; and (xv) net cash provided by operating
activities for fiscal year 2007.

    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 subsequent events
may occur that require adjustments to the company's unaudited financial
statements; the risk that the adoption of new accounting pronouncements will
impact future results; the risk that the company will be unsuccessful in
gauging fashion trends and changing consumer preferences; the highly
competitive nature of the company's business in the U.S. and internationally
and its dependence on consumer spending patterns, which are influenced by
numerous other factors; the risk that the company will be unsuccessful in
identifying and negotiating new store locations effectively; the risk that
comparable store sales and margins will experience fluctuations; the risk that
the company will be unsuccessful in implementing its strategic, operating and
people initiatives; the risk that adverse changes in the company's credit
ratings may have a negative impact on its financing costs and structure in
future periods; the risk that trade matters, events causing disruptions in
product shipments from China and other foreign countries, or IT systems
changes may disrupt the company's supply chain or operations; the risk that
acts or omissions by the company's third party vendors could have a negative
impact on the company's reputation or operations; the risk that the company
will not be successful in defending various proceedings, lawsuits, disputes,
claims, and audits; and the risk that the company does not repurchase some or
all of the shares it anticipates purchasing pursuant to its repurchase
program; any of which could impact net sales, costs and expenses, and/or
planned strategies. 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 February 3, 2007. Readers should also consult the
company's quarterly reports on Form 10-Q for the fiscal quarters ended August
4, 2007 and May 5, 2007.

    Future economic and industry trends that could potentially impact net
sales and profitability are difficult to predict. These forward-looking
statements are based on information as of November 21, 2007 and 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.

    Gap Inc. Copyright Information

    All recordings made on 800-GAP-NEWS have been recorded on behalf of Gap
Inc. and consist of copyrighted material. They may not be re-recorded,
reproduced, retransmitted or rebroadcast without Gap Inc.'s express written
permission. Your participation represents your consent to these terms and
conditions, which are governed under California law.

    
    The Gap, Inc.
    CONDENSED CONSOLIDATED BALANCE SHEETS
    UNAUDITED

    ($ in millions)                            November 3,   October 28,
                                                    2007          2006
                                               ------------- -------------
    ASSETS
    Current assets:
        Cash and cash equivalents              $       1,491 $       1,753
        Short-term investments                           165           613
        Restricted cash                                   43            60
        Merchandise inventory                          2,480         2,617
        Other current assets                             682           546
                                               ------------- -------------
            Total current assets                       4,861         5,589
    Property and equipment, net                        3,302         3,245
    Other assets                                         421           373
                                               ------------- -------------
            Total assets                       $       8,584 $       9,207
                                               ------------- -------------

    LIABILITIES AND STOCKHOLDERS' EQUITY
    Current liabilities:
        Current maturities of long-term debt   $           - $         325
        Accounts payable                               1,681         1,613
        Accrued expenses and other current
         liabilities                                   1,008           926
        Income taxes payable                              25            35
                                               ------------- -------------
            Total current liabilities                  2,714         2,899
                                               ------------- -------------
    Long-term liabilities:
        Long-term debt                                   188           188
        Lease incentives and other liabilities         1,072           927
                                               ------------- -------------
            Total long-term liabilities                1,260         1,115
                                               ------------- -------------

    Total stockholders' equity                         4,610         5,193
                                               ------------- -------------
            Total liabilities and
             stockholders' equity              $       8,584 $       9,207
                                               ------------- -------------
    

    
    The Gap, Inc.
    CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
    UNAUDITED

                                    13 Weeks 13 Weeks  39 Weeks  39 Weeks
                                      Ended    Ended     Ended     Ended
    ($ and shares in millions       November October   November  October
     except per share amounts)       3, 2007  28, 2006  3, 2007   28, 2006
                                    -------- --------- --------- ---------

    Net sales                       $ 3,854  $  3,851  $ 11,088  $ 11,004
    Cost of goods sold and
     occupancy expenses               2,407     2,409     7,022     6,952
                                    -------- --------- --------- ---------
    Gross profit                      1,447     1,442     4,066     4,052
    Operating expenses                1,079     1,161     3,169     3,194
    Interest expense                      1         9        21        30
    Interest income                     (28)      (33)      (97)      (96)
                                    -------- --------- --------- ---------
    Earnings from continuing
     operations before income taxes     395       305       973       924
    Income taxes                        156       108       371       345
                                    -------- --------- --------- ---------
    Earnings from continuing
     operations, net of income
     taxes                              239       197       602       579
    Loss from discontinued
     operation, net of income tax
     benefit                             (1)       (8)      (34)      (20)
                                    -------- --------- --------- ---------
    Net earnings                    $   238  $    189  $    568  $    559
                                    -------- --------- --------- ---------

    Weighted average number of
     shares - basic                     788       825       806       838
    Weighted average number of
     shares - diluted                   791       832       809       845

    Basic earnings per share:
      Earnings from continuing
       operations, net of income
       taxes                        $  0.30  $   0.24  $   0.75  $   0.69
      Loss from discontinued
       operation, net of income tax
       benefit                            -     (0.01)    (0.05)    (0.02)
                                    -------- --------- --------- ---------
      Net earnings per share        $  0.30  $   0.23  $   0.70  $   0.67
                                    -------- --------- --------- ---------
                                          .

    Diluted earnings per share:
      Earnings from continuing
       operations, net of income
       taxes                        $  0.30  $   0.24  $   0.74  $   0.69
      Loss from discontinued
       operation, net of income tax
       benefit                            -     (0.01)    (0.04)    (0.03)
                                    -------- --------- --------- ---------
      Net earnings per share        $  0.30  $   0.23  $   0.70  $   0.66
                                    -------- --------- --------- ---------
    

    
    The Gap, Inc.
    CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
    UNAUDITED

                                                        39 Weeks 39 Weeks
                                                          Ended    Ended
    ($ in millions)                                     November October
                                                         3, 2007  28, 2006
                                                        -------- ---------

    Cash flows from operating activities:
    Net earnings                                        $   568  $    559
    Adjustments to reconcile net earnings to cash flows
     provided by operating activities:
      Depreciation and amortization (a)                     407       404
      Share-based compensation                               38        38
      Tax benefit from exercise of stock options and
       vesting of service awards                              5        10
      Excess tax benefit from exercise of stock options
       and vesting of service awards                         (4)       (4)
      Non-cash and other items                               37       (17)
      Deferred income taxes                                (149)      (75)
      Changes in operating assets and liabilities:
        Merchandise inventory                              (645)     (913)
        Other current assets and other assets               (29)      (10)
        Accounts payable                                    524       460
        Accrued expenses and other current liabilities       44       177
        Income taxes payable, net of prepaid income
         taxes                                               23       (47)
        Lease incentives and other liabilities              184        38
                                                        -------- ---------
    Net cash provided by operating activities             1,003       620
                                                        -------- ---------

    Cash flows from investing activities:
    Purchases of property and equipment                    (519)     (406)
    Proceeds from sale of property and equipment             11        22
    Purchases of short-term investments                    (719)   (1,205)
    Maturities of short-term investments                  1,124     1,544
    Change in restricted cash                                 1        (4)
    Change in other assets                                   (3)       (1)
                                                        -------- ---------
    Net cash used for investing activities                 (105)      (50)
                                                        -------- ---------

    Cash flows from financing activities:
    Payments of long-term debt                             (326)        -
    Proceeds from share-based compensation                   86       109
    Purchase of treasury stock                           (1,050)     (771)
    Excess tax benefit from exercise of stock options
     and vesting of service awards                            4         4
    Cash dividends paid                                    (192)     (201)
                                                        -------- ---------
    Net cash used for financing activities               (1,478)     (859)
                                                        -------- ---------
    Effect of exchange rate fluctuations on cash             41         7
                                                        -------- ---------
    Net decrease in cash and cash equivalents              (539)     (282)
    Cash and cash equivalents at beginning of period      2,030     2,035
                                                        -------- ---------
    Cash and cash equivalents at end of period          $ 1,491  $  1,753
                                                        -------- ---------


    (a) Depreciation and amortization includes the amortization of lease
     incentives.
    

    
    The Gap, Inc.
    SEC REGULATION G
    UNAUDITED

    RECONCILIATION OF EXPECTED DILUTED EARNINGS PER SHARE ON A GAAP BASIS
     TO EXPECTED DILUTED EARNINGS PER SHARE ON A NON-GAAP BASIS

                                                        Previously Issued
                                          Expected       Guidance for the
                                       52 Weeks Ending   52 Weeks Ending
                                      February 2, 2008   February 2, 2008
                                      ----------------- ------------------

    Expected diluted earnings per
     share on a GAAP basis            $   0.92 to 0.98  $    0.83 to 0.88
    Add: loss from the discontinued
     operation of Forth & Towne                   0.04               0.04
    Add: expenses related to the cost
     reduction initiatives                        0.03               0.03
                                      ----------------- ------------------
    Expected diluted earnings per
     share on a non-GAAP basis (a)    $   0.99 to 1.05  $    0.90 to 0.95
                                      ----------------- ------------------

    (a) Expected diluted earnings per share excluding the amounts noted
     above is a non-GAAP financial measure. We believe this is an
     important metric as it represents our expected diluted earnings per
     share from ongoing operations.

    RECONCILIATION OF NET CASH PROVIDED BY OPERATING ACTIVITIES TO FREE
     CASH FLOW

                                       39 Weeks Ended     39 Weeks Ended
    ($ in millions)                   November 3, 2007   October 28, 2006
                                      ----------------- ------------------

    Net cash provided by operating
     activities                       $          1,003  $             620
    Less: purchases of property and
     equipment                                    (519)              (406)
                                      ----------------- ------------------
    Free cash flow (b)                $            484  $             214
                                      ----------------- ------------------


    RECONCILIATION OF EXPECTED NET CASH PROVIDED BY OPERATING ACTIVITIES
     TO EXPECTED FREE CASH FLOW

                                          Expected
                                       52 Weeks Ending
    ($ in millions)                   February 2, 2008
                                      -----------------

    Expected net cash provided by
     operating activities             $          1,600
    Less: expected purchases of
     property and equipment                       (700)
                                      -----------------
    Expected free cash flow (b)       $            900
                                      -----------------

    (b) Free cash flow is a non-GAAP financial measure. We believe free
     cash flow is an important metric as it represents a measure of how
     much cash a company has available after the deduction of capital
     expenditures and we require regular capital expenditures to build and
     maintain stores and purchase new equipment to keep the business
     growing. We use this metric internally, as we believe our sustained
     ability to increase free cash flow is an important driver of value
     creation.
    




For further information:

For further information: for Gap Inc. investor relations: Evan Price,
415-427-2161 media relations: Kris Marubio, 415-427-1798 Greg Rossiter,
415-427-2360

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