Gap (GPS)

Additional Results and 2008 Outlook

Effective Tax Rate

The effective tax rate was 38.2 percent for the third quarter of fiscal year 2008. The company continues to expect that the effective tax rate will be about 39 percent for fiscal year 2008.

Cash and Investments

The company continues to expect to generate about $1 billion in free cash flow for the full year. Please see the reconciliation of expected free cash flow, a non-GAAP financial measure, from the GAAP financial measure in the tables at the end of this release.

Share Repurchases

During the third quarter, the company repurchased 5.7 million shares for a total of $100 million. Approximately 0.9 million of these 5.7 million shares were repurchased from individual members of the Fisher family as part of the company’s previously announced purchase agreements with them.

Year-to-date, the company has repurchased 33.4 million shares for a total of $600 million.

Dividends

The company paid a dividend of $0.085 per share during the third quarter.

Margins

Gross margin of 38.7 percent increased 120 basis points in the third quarter compared with the prior year.

Operating margin for the third quarter was 11.1 percent compared with 9.5 percent for the third quarter of fiscal year 2007. The company continues to expect operating margin to be about 10 percent for fiscal year 2008.

Inventory

On a year-over-year basis, the company reported that inventory per square foot was down 13 percent at the end of the third quarter. At the end of the fourth quarter of fiscal year 2008, the company expects inventory per square foot to be down in the high-single digits compared with the fourth quarter of fiscal year 2007. This reduction is on top of a 15 percent decline as reported at the end of the fourth quarter of fiscal year 2007. Please see the Financials section on www.gapinc.com for the company’s explanation of numerical range guidance.

Interest Expense

The company continues to expect fiscal year 2008 interest expense to be about $5 million.

Depreciation and Amortization

The company continues to expect depreciation and amortization expense for fiscal year 2008 to be about $550 million.

Capital Expenditures

Year-to-date capital expenditures were $315 million. The company continues to expect capital spending of about $450 million in fiscal year 2008.

Real Estate

During the third quarter of fiscal year 2008, the company opened 37 store locations and closed 17 store locations. This compares with 115 openings and 67 closings for the third quarter of the prior year, which included 45 Old Navy Outlet store conversions.

The company ended the third quarter of fiscal year 2008 with 3,190 store locations, and net square footage increased 0.8 percent from the end of fiscal year 2007.

Year-to-date, the company has opened 92 store locations and closed 69 store locations. These numbers include 16 repositions, which are reflected as both an opening and a closing.

The company continues to expect that it will open about 100 stores and close about 115 stores for fiscal year 2008, including repositions. The company continues to expect that net square footage will remain roughly flat in fiscal year 2008 over last year.

The following table contains divisional third quarter store openings and closings, and square footage as of November 1, 2008:

Additional Results and 2008 Outlook

Earnings

The company reaffirmed that it expects fiscal year diluted earnings per share on a GAAP basis to be $1.30 to $1.35.

Effective Tax Rate

The effective tax rate was 39.3 percent for the second quarter of fiscal year 2008. The company continues to expect that the effective tax rate will be about 39 percent for full year 2008.

Cash and Investments

The company ended the second quarter with $1.7 billion in cash and investments. For the second quarter, free cash flow, defined as net cash provided by operating activities less purchases of property and equipment, was an inflow of $354 million. The company now expects to generate about $1 billion in free cash flow for the full year up from its previous guidance of about $900 million. 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 release.

Share Repurchases

During the second quarter, the company repurchased 16.3 million shares for a total of $284 million, approximately 2.6 million of the total 16.3 million shares were repurchased from individual members of the Fisher family as part of previously announced purchase agreements with them.

Dividends

The company paid a dividend of $0.085 per share during the second quarter.

Margins

Gross margin of 38.2 percent increased by 390 basis points in the second quarter compared with the prior year.

Operating margin for the second quarter was 10.7 percent. The company now expects operating margin to be about 10 percent for fiscal year 2008 compared with its previous guidance of 8.5 percent to 9.5 percent.

Inventory

On a year over year basis, the company reported that inventory per square foot was down 17 percent at the end of the second quarter. Looking toward the third quarter of 2008, the company expects inventory per square foot to be down in the mid teens compared with the third quarter of 2007. Please see the Financials section on www.gapinc.com for the company’s explanation of numerical range guidance.

Interest Expense

The company continues to expect fiscal year 2008 interest expense to be about $5 million.

Depreciation and Amortization

The company continues to expect depreciation and amortization expense for fiscal year 2008 to be about $550 million.

Capital Expenditures

Year to date capital expenditures were $208 million. Due to fewer new stores and store remodels, the company now expects capital spending of about $450 million in fiscal year 2008, down from its previous guidance of $500 million.

Real Estate

During the second quarter of fiscal year 2008, the company opened 22 store locations and closed 29 store locations. This compares with 32 openings and 41 closings for the second quarter of the prior year, including 18 store closures related to Forth & Towne.

The company ended the second quarter with 3,170 store locations and net square footage was flat from the end of fiscal year 2007.

Year to date, the company has opened 55 store locations and closed 52 store locations.

The company revised its guidance for store openings. The expected number of store openings has decreased by 15 stores, driven primarily by Banana Republic, to about 100 openings for the full year. The number of store closings has not changed from the company’s previous guidance of about 115. These figures include about 15 store repositions, which are reflected as both an opening and a closing. The company continues to expect that net square footage will remain roughly flat in fiscal year 2008.

The following table contains divisional second quarter store openings and closings, and square footage as of August 2, 2008.

Additional Results and 2008 Outlook

Earnings

The company is reaffirming that it expects fiscal year 2008 diluted earnings per share on a GAAP basis to be $1.20 to $1.27.

Effective Tax Rate

The effective tax rate was 39 percent for the first quarter of 2008. The company continues to expect the effective tax rate will be about 39 percent for full year 2008.

Cash and Investments

The company ended the first quarter with $1.8 billion in cash and investments. For the first quarter, free cash flow, defined as net cash provided by operating activities less purchases of property and equipment, was an inflow of $62 million. The company reaffirmed that for the full year it expects to generate about $900 million in free cash flow. Please see the reconciliation of free cash flow, a non-GAAP financial measure, to the GAAP financial measure in the tables at the end of this release.

Share Repurchases

During the first quarter, the company repurchased about 11 million shares for a total of $216 million.

Dividends

The company paid a dividend of $0.085 per share during the first quarter.

Margins

Gross margin of 39.7 percent increased 150 basis points in the first quarter compared with the prior year. Operating margin for the first quarter was 11.3 percent. The company continues to expect operating margin to be 8.5 percent to 9.5 percent for fiscal year 2008.

Inventory

On a year over year basis, the company reported that inventory per square foot was down 17 percent at the end of the first quarter. Looking toward the second quarter of 2008, the company expects inventory per square foot to be down in the mid teens compared with the second quarter of 2007. Please see the financials section on www.gapinc.com for the company’s explanation of numerical range guidance.

Interest Expense

The company now expects fiscal year 2008 interest expense to be about $5 million, compared with its prior guidance of $20 million. The difference is due to a $15 million pre-tax earnings benefit from a reduction of interest expense accruals resulting primarily from foreign tax audit events that occurred in the quarter.

Depreciation and Amortization

The company continues to expect depreciation and amortization expense for fiscal year 2008 to be about $550 million.

Capital Expenditures

First quarter capital expenditures were $114 million. The company continues to expect capital spending of about $500 million in fiscal year 2008.

Real Estate

During the first quarter of fiscal year 2008, the company opened 33 store locations and closed 23 store locations. This compares with 41 openings and 20 closings for the first quarter of the prior year, including one store closure related to Forth & Towne.

The company ended the quarter with 3,177 store locations and net square footage increased less than half a percentage point from the end of fiscal year 2007.

The company increased its guidance for store closures in fiscal year 2008 by 15 store locations, driven primarily by Gap brand. The company now expects to open about 115 store locations and to close about 115 store locations. As such, the company does not expect any net square footage growth in fiscal year 2008.

The following table contains divisional first quarter store openings and closings, and square footage as of May 3, 2008.

Additional Results and 2008 Outlook

Earnings and Effective Tax Rate

The company stated that it expects diluted earnings per share of $1.20 to $1.27 for fiscal year 2008. This guidance takes into account a range of outcomes dependent in part on product acceptance and the volatile macroeconomic environment.

The company’s fourth quarter tax rate was 38.8 percent. The effective tax rate for fiscal year 2007 was 38.3 percent. The company expects the effective tax rate to be about 39 percent for fiscal year 2008.

Cash

The company ended the fourth quarter with $1.9 billion in cash and short-term investments. Fiscal year 2007 free cash flow, defined as net cash provided by operating activities less purchases of property and equipment, was an inflow of $1.4 billion compared with $678 million last year. The increase was driven primarily by lower inventory levels as well as changes in vendor payment terms. The company expects free cash flow to be about $900 million in fiscal year 2008. Please see the reconciliation of free cash flow, a non-GAAP financial measure, to a GAAP financial measure in the table at the end of this release.

Share Repurchases

During the fourth quarter, the company completed its $1.5 billion share repurchase program and repurchased about 30 million shares for a total of $613 million in the quarter.

In a separate press release today, the company announced that its board of directors authorized an additional $1 billion share repurchase program, and that it has entered into purchase agreements with individual members of the Fisher family whose ownership represents approximately 16 percent of the company’s outstanding shares. The company expects that about $158 million (approximately 16 percent) of the $1 billion share repurchase program will be purchased from these Fisher family members.

Dividends

In a separate press release today, the company announced that it intends to increase the annual dividend per share from $0.32 in fiscal year 2007 to $0.34 for fiscal year 2008. The dividend is expected to be paid quarterly in April, July, October, and January.

Margins

Gross margin for fiscal year 2007 was 36.1 percent and increased 60 basis points compared with fiscal year 2006. Operating margin for fiscal year 2007 was 8.3 percent. Operating margin for fiscal year 2008 is expected to be 8.5 percent to 9.5 percent.

Inventory

The company reported that year-over-year inventory per square foot decreased 15 percent at the end of the fourth quarter compared with an increase of 2 percent at the end of the fourth quarter of fiscal year 2006. The company expects the percentage change in inventory per square foot on a year-over-year basis to be down in the low teens at the end of the first quarter of 2008, versus an 8 percent decrease in the first quarter of fiscal year 2007. Please see the financials section on www.gapinc.com for the company’s explanation of numerical range guidance.

Interest Expense

Fiscal year 2007 interest expense was $26 million. The company expects fiscal year 2008 interest expense to be about $20 million.

Depreciation and Amortization

Fiscal year 2007 depreciation and amortization expense was $547 million. The company expects depreciation and amortization expense for fiscal year 2008 to be about $550 million.