Gap (GPS)

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.