Good afternoon, ladies and gentlemen. My name is Kevin, and I will be your conference operator today. At this time, I would like to welcome everyone to the Gap Incorporated Second Quarter 2014 Conference Call. At this time, all participants are in a listen-only mode. For those analysts who wish to participate in the question and answer session after the presentation, you may now press star one to enter the Q&A queue. As a reminder, please limit your questions to one per participant. If anyone should require assistance during the call, please press the star key followed by the zero key on your touchtone phone. I would now like to introduce your host, Katrina O'Connell, Vice President of Investor Relations.
Good afternoon, everyone. Welcome to Gap Inc.'s Second Quarter 2014 Earnings Conference Call. I'd like to remind you that the information made available on this webcast and conference call contains forward-looking statements. For information on factors that could cause our actual results to differ materially from the forward-looking statements, as well as reconciliations or descriptions of measures were required to reconcile to GAAP financial measures, please refer to today's press release, as well as our most recent annual report on Form 10-K and our subsequent filings with the SEC, all of which are available on gapinc.com. These forward-looking statements are based on information as of August 21st, 2014, we assume no obligation to publicly update or revise our forward-looking statements.
Before we begin, I also want to mention that Sabrina will be using slides to supplement her remarks, which you can view by going to the investor relations section at gapinc.com. Joining us on the call today are Chairman and CEO, Glenn Murphy, and Executive Vice President and CFO, Sabrina Simmons. Now I'd like to turn the call over to Glenn.
Thank you, Katrina, and good afternoon, everybody. Before I hand the call over to Sabrina, who will take you through the Q2 financial highlights for Gap Inc., I thought I'd just give you my customary take on the quarter and also give you a few highlights of the upcoming quarter in Q3. Q2, internally, we've been thinking about the quarter as a quarter in which we made some progress. Some progress from the first quarter, which we needed to make on a number of different areas, it's progress nevertheless, we are committed to making further progress as we look towards the back half. First, Sabrina will talk to you about progress on margin rate. Obviously, an improvement from Q1, which we needed to make.
I think that that's a sign of some of the changes we're making to the business to improve that very important line item in our P&L. We've definitely made progress at Old Navy. That was really a very strong second quarter with a four comp on top of last year's six comp. That is market share gaining in really the most important sector that we compete in, the value sector, with the most competitors, where ingenuity and innovation matters the most. I'm very impressed with the Old Navy team. We opened up three stores in China for Old Navy. Now we have four stores. We have at least one more to go this year, maybe a second one, but that's a big milestone move for us as we look at the China market, as everybody knows, critical to the future growth for Gap Inc.
We'll end this year with 110 Gap stores still on plan, up to six Old Navy stores. I think that combination of the two of them in the China market is going to be very strong for us. Our omnichannel initiatives continue to grow. We really saw some step up in our reservations on a daily basis at Banana Republic and Gap stores. I feel good about what that means for the second half. People are time-pressed, and this Reserve in Store is unique. It's a competitive advantage. I think that that's really going to shine for us in the second half. More importantly, we tested Order in Store. As everyone on the phone knows, that's the ability for somebody to come into our store. We have the device with us that's connected to Wi-Fi.
We can actually complete orders when something's not available in the store or something's in a flagship store, but you're not in a flagship city. We can get you that product. That's been in Banana Republic, Gap, and Old Navy being tested. We're going to roll that out to 1,000 stores in the month of October. We've been testing a loyalty program. What we've been doing at Gap Inc. for a number of years now is continually trying to find different ways and voices, something creative when it comes to talking about our value proposition.
Let's face it, there's a bit of a promotional merry-go-round in the marketplace, and to the companies who are willing to be bold, to be different, to try something that's different in terms of offering value to people, but not in a way that's predictable, those are the companies who are going to win. I believe this test we're doing in only 25 Banana Republic stores could become the basis of something we can use down the road to present a different twist on our value proposition. Lastly, we have spent an incredible amount of time the last three months getting ready for the second half and getting our preparatory work ready, not only on product, but on merchandising, on marketing, on digital communication, on innovation, on customer messaging, you name it. There's a lot of lessons the business learned in 2013.
We've addressed those as we come into the second half of 2014. Some quick thoughts about the third quarter, which we're two weeks into, before I hand the phone call over to Sabrina. Last week at Banana Republic, we launched a new marketing campaign called The New Look. It's the beginning of enhancements in product and marketing, digital content from now right till the end of the year and beyond. I think it was a nice start for the team. I think they really made a change in terms of this path that Banana Republic has been on from too conservative to more of a contemporary product appeal. I'm speaking mostly here about women's product. I think our men's business has been strong. This is mostly about women's product.
What you're going to see going forward is a step up in that messaging in the months of September, October, and into the holiday season. In the month of September, you're going to see a similar change go on at Gap brand, which is much needed. It's going to be a combination of first product put together by our merchant and design team of Michelle DeMartini and Rebekka Bay, brand new marketing campaign from Wieden+Kennedy, big change in our online site to match up. It's a fully integrated communication plan. I just want to be clear that the store business in North America has not been as strong as Stephen wants it, and I want it so far this year. While we're both pleased with what consumers are going to see in the month of September, it's just the beginning.
At least it positions us in a much better way as we look forward to September, going into the fall, going into holiday season. Some other updates for Q3. The team feels a lot better about our inventory position on a per foot basis across all of our markets, which will bode well in terms of the health of business for the back half. In the second half of this year, you're going to see the company push much harder into personalization. This is on our mobile devices, on our desktops, on iPads. We believe there's a huge opportunity here to personalize homepages, personalize content more than we ever have before. We've been testing that in the first half, and this is the ultimate definition of the use of big data. This week, we relaunched Piperlime. We don't talk about Piperlime much.
It only has one physical store, and it's an online business. While it's easy to look at Piperlime as a small part of the Gap Inc. portfolio, what I will tell you is we use it continuously as a site where we test a lot of ideas. Ideas that can work for that business because that's what matters first, but then can be taken to our other brands. I believe the relaunch of their site provides for a lot of innovative ways to present our online business to customers. Just a quick update on our franchise business because the company operates in about 50 countries. It's been a unique year with some franchise markets clearly showing some declines, like in Russia, Ukraine, and Israel. We've been very pleased with some long-term future markets like Brazil, Mexico, UAE, with strong growth midway through this year.
As a matter of fact, as I'm speaking to you, we're putting out a release today that says we're going to be opening up stores in India in 2015. We believe the Gap brand has very strong brand awareness and looking forward to adding it to our franchise portfolio. In closing, I just have one comment to make. Today is the 45th anniversary of Gap Inc. This was the day in 1969 that Doris and Don Fisher both spent $21,000 each of their own money to start this incredible company. What I'd like to say is on behalf of the 140,000 employees and the millions of people who have worked in this company, a big thank you to the Fishers, this incredible couple who founded this business, who make us proud every single day.
I think that it's a testimony to the strength of our brands, of our people, of our creativity, of our commitment to the customer, that this business has been around for 45 years and continues to move forward and to blaze trails and be a formidable force in the apparel business. We have one goal and one goal only, and I think Don Fisher, who passed away five years ago in September, would appreciate this, is to become the number one global apparel company in the world. If we keep not being afraid to take risk and push forward in the business, we will achieve that goal. With that said, let me hand it over to our CFO, Sabrina Simmons.
Thank you, Glenn. Good afternoon, everyone. As we begin the second half of the year, I'd like to take a moment to reiterate the priorities we set at the beginning of the year. We continue to focus on a balanced approach to driving long-term value. As a reminder, our financial priorities for the year are growing sales with healthy merchandise margins, managing our expenses, delivering earnings per share growth, and returning excess cash to shareholders. As I describe the financial results for the quarter, it's worth noting that all reported numbers include a $39 million gain on asset sale that we reported with our July sales. In Q2, we made progress against several of our financial priorities. Specifically, we grew net sales by 3%. Expenses were managed very tightly with operating expenses down $44 million, including the gain.
We delivered earnings of $332 million and earnings per share of $0.75 versus $0.64 last year. Year to date, we've generated free cash flow of $668 million, and we've distributed $802 million through share repurchases and dividends. Regarding sales for the second quarter, total net sales were $4 billion, and comp sales were flat for the quarter following last year's five comp. Total sales and comp by division are listed in our press release. Moving to gross margin. The second quarter gross margin was down 110 basis points to 39.4%. This is an improvement in our trend from Q1. Merchandise margins were down 90 basis points for the quarter, driven by elevated promotional levels at Gap. Rent and occupancy deleveraged 20 basis points.
As a reminder, we need positive comps to leverage rent and occupancy. The threshold for raw leverage is higher this year given our mix shift toward international markets like China that have higher raw costs. Regarding SG&A, second quarter total operating expenses were $1 billion, down $44 million from the prior year. Operating expenses versus last year benefit $39 million from the gain on sale. Marketing expenses were down $6 million to last year at $142 million. As a % of sales, total operating expenses leveraged 180 basis points versus last year to 25.2%. Regarding the balance sheet, we're pleased that we're meeting our goal of better aligning inventory with sales in each period. Inventory dollars per store were up 2% at the end of the second quarter.
We ended the quarter with about $1.5 billion in cash and used $364 million to repurchase nine million shares, resulting in a quarter-end share count of 434 million. Regarding capital expenditures and store count, year-to-date capital expenditures were $328 million. Year-to-date, we opened 36 company-operated stores on a net basis and ended the quarter with 3,200 stores. Square footage was up 1.6% compared with Q2 2013. Store count and square footage details are listed in our press release. Now I'd like to share our outlook for the rest of the year. Our full-year operating outlook remains unchanged. However, we are updating our full-year guidance to reflect the gain on sale worth $0.05. Therefore, our full-year guidance range has increased from $2.90-$2.95 to $2.95-$3.00. At its midpoint, including the gain, this represents growth of approximately 9%.
On a constant currency basis, the growth rate is estimated to be five percentage points higher or a solid double-digit growth rate over last year's 18% growth rate. Underlying this guidance is the expectation that we maintain tighter inventory levels that are more in line with sales. At the end of the third quarter, we expect year-over-year inventory dollars per store to be up in the low single digits. Regarding expenses, it's important to note that there is no change to our full-year goal of achieving leverage. However, as we mentioned last quarter, we expect full-year leverage to be very modest given the shift of about $160 million of income out of expense into merchandise margin, as we discussed in depth on the Q1 call. We achieved one point of leverage in the first half of the year in the face of more challenging sales and traffic trends.
In the second half of the year, assuming we meet our sales goals, this dynamic will likely change as we lap difficult comparisons from expense savings last year and as we invest to support marketing, especially at Gap. We expect marketing expenses in the third quarter to be up about $25 million versus last year. For the full year, the following guidance metrics remain substantially unchanged. We expect operating margins to remain flattish on a reported basis. We continue to expect square footage to be up about 2.5%. We still plan to open about 185 company-operated stores and close about 70 net of repositions. Store closures are weighted toward Gap North America. Store openings are weighted toward China, Old Navy in Japan, Athleta, and global outlets.
We expect capital expenditures to be about $750 million and depreciation and amortization to be about $520 million, and our full-year effective tax rate to be about 38.5%. In closing, as we commence the second half of the year, we'll continue to focus on the levers that we control while we work to deliver compelling product and marketing. Thank you, and now I'll turn it back over to Katrina.
That concludes our prepared remarks. We'll now open up the call to questions, and we'd appreciate limiting your questions to one per person, please.
Thank you. We'll take our first question from Oliver Chen with Citi. Please go ahead.
Hi. Thank you. We had a question related to the Gap division. What do you think the next major hurdles are there for what we should watch for as you look to further move along with merchandise execution? Just as a quick follow-up, could you talk briefly about supply chain and how you're feeling about fabric platforming and test, read, and react? Thank you.
That's two questions, you know that, right, Oliver? Kidding aside, look, the Gap business, as I talked in my opening comments, I think that if we wanted to, we could rationalize away the first quarter, which was a difficult quarter for a business that has a strong U.S.-based division. That's been the division that clearly has been underperforming the most for Gap brand. Of all its global presence, the U.S. has been the business that we're most disappointed in. Second quarter was a bit of a carryover from the first quarter, combination of product and other issues they've got in the second quarter. I think they've made a lot of changes.
People on the call, and mostly our customers who are going to be shopping that business on their device or in one of our stores around the world, are going to see a better face of the brand from a product perspective starting the first week of September. Much better communication. I don't want to get into the full integrated plan. You're really focused on merchandise, I think you see some changes in the product, you start to see now what the benefit is of teamwork between a very strong and talented designer and a commercial merchant, not a product merchant, a commercial merchant in Michelle DeMartini, who partners with Rebekka Bay. We see how that works over at Old Navy, it's producing the results we're seeing now as we redefine the role of the merchant to make it much more commercial.
Somebody who drives the business and doesn't necessarily just pick product. We're seeing that in the early days of the relationship between our Banana Republic twosome of Julie Rosen and Marissa Webb. I think you will see a change in the merchandising. As I said in my opening comments, it's the beginning. Gap had a very nice run in 2012 and 2013. First two quarters, I said that you could explain them. I'm not happy with them. You could explain them. Now I think you'll see the beginning of the change in the first week of September, take us all the way through holiday. Actually, I've seen spring, and I think they continue to do what any good brand should do, is deliver a better and better assortment every single season. I think this will be just the beginning in this fall launch.
On supply chain fabric platforming, I'm really impressed with how much progress we've made. It's taken us a while to get there as we've shifted our relationship from vendor-based relationships to mill-based relationships. We'll have a significant amount for us of our assortment on fabric platforming in the second half, that's going to help us a little bit with cost of goods compared to the first half. That's the whole intention behind. It's not only the platform to run our responsive supply chain tools off of. You can't run the tools without a significant amount of your assortment on fabric platform, also as you consolidate your fabrics and create a much tighter library of fabrics and negotiate directly with mills, that allows you to get the benefit of cost of goods.
Thanks a lot. Best regards for the holiday season.
Our next question will come from Matt McClintock with Barclays. Please go ahead.
Hi, yes. Good afternoon, everyone. Glenn, I was just wondering, you've outlined a lot of very strong digital initiatives. You've talked about Reserve in Store, Order in Store, you also talk about personalization. Yet overall, the digital growth rate for revenue has actually decelerated meaningfully from the run rate last year. I was just wondering, could you maybe speak to that a little bit? I'm not trying to put holes in a double-digit growth rate because clearly that's very strong, but the deceleration itself. What are you seeing in that business that's driving that, and when could we potentially expect a re-acceleration? Thank you.
Well, a couple of comments on that, Matt. One, I would say that inside of that double-digit growth rate in the second quarter was poor performance at Gap brand. Some of the reasons I just explained to Oliver earlier, and I think they're a matter of record now. We weren't as happy with our assortment in North America in particular, or U.S. in particular. It was an 11 on top of the 27, so it was a two-year 36. That's 18% per year. Definitely market share gaining over two years, but I won't disagree with you. I thought we should do better than 11%. Now, Order in Store drives business in the store, and it's only being tested in 30 stores right now. Reserve in Store that stepped up in the second quarter drives business to the stores.
Even though those tools are there, you get the eyeballs from online, the sale goes to the store. I think personalization, what I tried to say in my opening comments possibly wasn't clear. We're just testing it. It's been about six months we've been in beta test, but we now believe that personalized content and personalized promotions eventually on our homepage, in our emails, in our messaging, will definitely help online business going forward. Look, I think it was good performance online over two years. I said if the market's growing between 10% and 12%, maybe I'm being generous when it comes to apparel. Two years of back-to-back 18s is good. I have my eye on that 11%. I won't deny that.
That was a number we circled at the end of our P&L because we know every part of our business has to fire on all cylinders for us to reach our goal. The online business did a decent job in the second quarter, we are always looking for strength, especially given your point, the investments we're making.
Thank you very much, Glenn.
We go next to Simeon Siegel with Nomura. Please go ahead.
Great, thanks. Can you provide any color on the trend of the outlets? We've heard broader challenges across that channel.
I think that it's a business that when the core brands are strong, they do very well. There's just this incredible relationship between the specialty business and our outlet business. Our outlet business did very well in 2012 and 2013 because our core business was stronger at that time. If certain malls around the country, mostly B malls and maybe the odd C malls, start to act promotionally like an outlet mall that's 10 miles away, it's more difficult to drive traffic to the outlet mall. I think over time, especially in our business, but this is maybe a macro comment about the specialty mall business in general.
As it becomes and needs to become more innovative, as it puts product separation between its outlet business and its specialty business, which is critical, as it speaks and engages customers in a way that's not so dependent on just pure discounting. I think the outlet business is in its rightful home, and within our portfolio, is a critical part and a very important channel inside our business. I think for that reason, Jack Calhoun and Stephen Sunnucks are really focused in the back half to make sure the specialty business gets to the right position on the continuum of our portfolio. From Old Navy on the left-hand side of the portfolio, value based, to Intermix on the right-hand side of the portfolio, which is luxury.
For our outlet business, even though traffic ebbs and flows, for it to be really successful, we need strong specialty business. Strong brand recognition is there, but strong brand acceptance and a value proposition that is less baked in a % off as a tool to express your value, which is really the tool of the outlet business. I'd say the last comment is there's been some new real estate lately. It's the only place that we're seeing real estate growing and square footage increasing is in lifestyle centers, either being converted to power centers or being converted to outlet centers.
We participate in those where we think it's right, for the most part, our investment for the last couple of years have been in inner urban locations, street locations, and power centers as we try to make sure we stay in only the best outlet malls, but look at where the customer is going and where traffic is. There's a lot of street locations we've gone into in inner urban locations where there's no crossover to in a specialty store. We've dropped in one of our factory store businesses there and done very well. We're being careful not to just react like we did years ago to new square footage, but be thoughtful and strategic on how we spread our outlet stores across the country.
We go next to Kimberly Greenberger with Morgan Stanley. Please go ahead.
Hi, this is Amber Turley on for Kimberly Greenberger. As you think about moving into fall and this promotional merry-go-round that you talk about, what kind of steps are you thinking about in terms of easing up the promotions but still maintaining a shopper? Are you thinking in terms more of developing the fabric platforming such that the cost of goods decreases and maintaining the promotions to keep the shopper interested? What sorts of lessons did you learn from last year that you'd like to implement this year?
Well, there's lots of lessons from last year I think have already been implemented, these are in no order of importance, but I think that ourselves and my opinion is a significant amount of the rest of the apparel market is in a much better, leaner inventory position than they were 12 months ago coming into the back half. I think that drove a lot of the depth of promotions that we saw in 2013. I think the consumer is feeling slightly better, which we think is good for the overall industry. Whether the consumer feels slightly better about apparel comes up to how well all of us, but I'll speak for Gap Inc., how well we bring product that they love because that's what it needs these days.
That you have the incredible marketing that reaches out to them through all the different tools we have to speak about our brands. We, as I talked about earlier, I think it was Matt's question, are going to talk quite a bit about the convenience in the back half and using our tools of Reserve in Store, sorry, Reserve in Store, Order in Store, other tools we have. We can talk about much more than the, let's say, the more traditional definition of a value proposition. I think the marketing we're investing in is because we do believe we've made some really good decisions in the back half. I think our marketing is much better.
I look at it as a step between product channel execution led by online, supported by stores, integrate marketing into unique, innovative ideas like our omnichannel tools, which are unique to other people in the marketplace. Better inventory, work your way up, and we're trying to avoid, and only when necessary, have to play a more traditional game of communication with customers, as was more predominant last year. At the end of the day, we're ready for whatever outcome develops in the marketplace. That's why we have Old Navy to go out on behalf of the portfolio, gain shares, it did in Q2 with a four comp over six, be aggressive, and that's its role in the portfolio. That's to a previous question why Gap Outlet is so important was. We have those three businesses. Old Navy, Gap Outlet, Banana Republic Factory Store.
Those are the businesses that go out on behalf of the Gap Inc. portfolio and become more aggressive and play more of a promotional game. The other brands are to be positioned differently. That's the work of the work that Gap and Banana Republic need to execute on their specialty business in the back half.
Great. Thanks.
Our next question will come from Lorraine Hutchinson with Bank of America Merrill Lynch.
Thank you. Good afternoon. Glenn, now that Old Navy has rolled out in China, can you take a step back and just talk about where you think you have the greatest opportunity there, whether it's full price Gap stores, the outlets, or the Old Navy concept?
That's a good question, Lorraine. It's so early. I was there three weeks ago when the fourth Old Navy opened. I'm probably just a little painted just because that was a big to-do. It's our fourth store, second one in Shanghai. The first one is off to a tremendous start, this one so far so good after just a few weeks. I would say that my instinct sitting here today was Old Navy will have a chance to go deeper into the country than Gap will. The number of stores to be determined. Obviously, here in the U.S., we have 50% more Old Navy stores than we have Gap store specialty. I don't see any reason why that couldn't play itself out in China over time. Some people may have a different view.
What matters, I guess, right now sitting here is my view, I'd say I could see that playing out in China. Definitely we'll be able to go deeper. Gap right now is in some, let's call them for argument's sake, tier 4, tier 5 cities, doing well. Everything in China we've uncovered so far is customers love fashion. It is a big family play, which obviously fits well, maybe, and for Gap. Value proposition, but not discounting, just being money, not overpaying for quality, which is a good definition of value, which is important to the Chinese. I think as we look at that and add it all together, I think we're super happy to have both brands in our outlet business and a strong online business in China.
If I looked out the next five years, I could see where we would have more Old Navys going deeper into the country as we plan out our real estate strategy.
Thank you.
Our next question will come from Jennifer Davis with Buckingham Research Group. Please go ahead.
Hey, guys. Good afternoon. I was wondering if you could talk a little bit about Athleta, give us some color on how that's doing and maybe any kind of metrics that you're willing to share around the stores. Glenn, it's good to hear you talk about starting to maybe utilize some of the big data. Thanks.
You guys know Sabrina's here, too, right?
Yes. Hi, Sabrina.
She's sitting there smiling at me. Anyways. Look, we feel good about Athleta. Nothing's changed. I think the team has done a really good job taking a business that was very solid. We'll get to, and we were joking the other day, it's amazing how quickly we got to 100 stores. We'll get to 100 stores by the end of this year. What I like about it is it fits in all types of real estate, which is very important for a brand. Can you work in a mall? Can you work in street? Can you work in a strip center? We've proven all of that. Its online business is doing really well. We have all the metrics that say we go into a trade area, we do not have a store.
When we drop a physical store in, the multiplier on the pool of online business we do is very attractive. I think that it's in multiple activities. We continue to push that. This is not a one-dimensional business. I've also said many times our key competitor is Nike. I know there's other competitors who get a lot more air time, but at the end of the day, Nike is the big player here and the person we look at the most and where the share is going to come from for Athleta. Its metrics in store productivity, sell-through at reg, which is something we continue to push inside of our other businesses. Store productivity, sell-through at reg, service scores in terms of the people and the quality of people we have.
The relationship, because it's our only business as we move to a seamless inventory model here over the next couple of years. Athleta already is a seamless inventory business. One team oversees all of its inventory between an online catalog and a store business. We really get a lot of benefit out of that. I said at the April analyst meeting and still believe it, I think it's going to be our fourth global brand. I think it's earned the right to be considered for that. We haven't decided yet, but it's earned the right to be given consideration. Lastly, what every business wants, but especially a business if you're in apparel, is the trend is their friend. Right? The business they are going after, performance is their friend. The new way of dressing is their friend.
Streetwear, everything that's happening right now, the women who are coming forward, the millennials, many things are going in their direction. We're very happy with it. Love the team there and their leadership. We're going to continue. Sabrina and I get a very nice return on capital, which always makes the two of us happy. We're going to continue to invest behind them.
All right. Great. Thanks, best of luck.
We go next to John Morris with BMO Capital Markets. Please go ahead.
Hi. It's actually Janine Stichter for John. I was wondering if you could talk a little bit about your product testing and your rapid response initiative. I know you had some pretty big wins at Old Navy earlier this year. Just if you could give us kind of what % of the assortment at each brand is being tested right now, and what are the learnings and how you see it rolling out go forward. Thank you.
We talked in April at the analyst meeting, I think at the end of the meeting, I had Q&A, I think John was there, that I really was hoping that testing at a minimum, but also another important tool for us, rapid response, would be a little more developed for the back half. Most of the benefit from the testing will come in the first quarter. Same with rapid response. We have a little bit of benefit come in the second half. That wasn't the original plan. The fabric platforming work we've done should help us on the gross margin in the back half of 2014. I'd say I've seen every week I get a report on all the tests we do. We just finished doing a number of tests across all the businesses for the first quarter.
What it tends to point to, it helps us with the range bound of inventory and how big a buy it is. This is not a test about whether designers know what they're doing. We trust our designers. This is whether something's 300,000 unit buy, 350,000, or 400,000. Within that, it helps us with the CC component of it. Most times what it tells us is if you have a style or a program with 10 CCs, you don't need 10 CCs. We got to keep working on that. Sometimes multiple colors is an advantage, especially for Gap, but it is helping us very much understand the size of the power of the buy of that style. Within that style, it could be unique attributes within each style, but mostly it could be color or print and pattern.
All the results I've seen are very helpful for the team. We always got to apply commercial judgment and how do we gain market share to drive it, the tests are certainly validating some of that and getting at a big opportunity at Gap Inc.'s P&L, which is what I just told you was Athleta's towering strength, which is units sold at regular price. I think this is going to help quite a bit in 2015 on that metric.
Great. Thank you.
We go next to Susan Anderson with FBR Capital Markets. Please go ahead.
Good evening. Thanks for taking my question. I was wondering if you could give us an update on how Athleta is performing and maybe just any updates on growth trajectory. If you could also maybe talk about the landscape a little bit. It seems like a lot of players are trying to enter it and if you've seen any increase there at all. Thanks.
Look, I think, I was just saying to a previous question, whenever you have, I think I described as the trend is your friend. A lot of people try to jump in on this business. Now in fairness, Old Navy's been at it with their active line for about three plus years. Gap have GapFit. They've had that over three years also. We look at it that Athleta is a standalone business that focuses on women's performance product, and that's the first attribute. It's performance, but also has a fashion component to it. We look at it from a Gap Inc. portfolio. We're dominating for sure with Athleta because it's a standalone business. There are a lot of people getting into the category, but that doesn't mean they're going to be successful. We really like how Athleta's performing.
We like very much decisions the teams have made recently, whether that's on marketing or whether that's in the assortment strategy, whether that's on real estate. I think it's got a beautiful split in its business between online and stores. That's, as for those of you who've been following Sabrina and I for the last 7+ years, we untangled some of the store decisions of the past. We definitely promised ourselves we go into China when Old Navy goes international. If we buy something like Athleta, we're going to take those lessons with us and make sure that out of the gate, we see how customers want to shop and find a better split between our digital business and our physical business. Athleta certainly has a beautiful split in its business.
Great. Thank you.
We go next to Paul Lejuez with Wells Fargo.
Hey, guys. Just wonder if you could talk a little bit about cotton prices. Are you starting to see a benefit there? When might you expect that to become a tailwind in the P&L? Thanks.
Yeah. There's always a little bit of a lag because we place orders some months before. Obviously, they show up in stores, Paul. It's great news to see cotton coming down. Because of the lag effect, we would expect some small benefits probably in spring. Assuming that the prices stay down as they have been, you'd see a much more pronounced effect in summer, which is obviously good news as we look forward to 2015.
Thanks, guys. Good luck.
We go next to Barbara Wyckoff with CLSA. Please go ahead.
Hi, everybody. Could you talk about the potential for store closures end of this year? How many leases are coming due this year and next? I think last quarter you talked, Glenn, about Gap maybe being a place you might be looking at versus the others. Thanks.
Yeah, we're fortunate in some ways. I think the best math to apply is we have 2,500 odd stores in the U.S., about 500 leases come up every single year. That phenomenon plus the recession is what allowed us to do the work we did over the last four or five years. Going forward, Barbara, I think we're a little less focused on closures, although I'll admit to you, there's always opportunity to look at stores. That could be less about untangling this web that we inherited in 2007 and more about strategically looking at every single market, and does it make sense of a physical presence. With our omni-channel tools, the ones I talked earlier about, especially with Reserve in Store and Order in Store, we're much more now focused on what a physical presence does matter. What we're challenging is the size of the store.
We definitely did that at Old Navy and took out a lot of square footage in the last five years, now we are turning to Gap and to Banana Republic. We won't talk about on this call, but in the February call, we can definitely talk about some of the ideas we have for testing a different kind of physical space. We are working with our team here on bringing the digital and physical teams together, working on a store going forward that allow us to have a high touch store, lower square footage, and applying the current plus many more omni-channel tools to that store. I'm hoping that'll be a success for us and something we can deploy as we look at our real estate going forward. The great thing about the way our real estate team operates, we have lots of flexibility.
Great. Thank you.
Our final question today will come from Brian Tunick with J.P. Morgan. Please go ahead.
Thanks. Good afternoon, guys. Hoping to get, I guess, an update on denim trends and how you're planning inventory there. I guess, what is denim as a percentage of sales in the two big brands, and how does that impact your thinking on the timing of seeing positive comps, I guess at the Gap brand in the second half? Thanks very much.
Here's how I look at it, Brian. I'd say that denim, when you run a business and a portfolio full of American brands, and I think you're referencing obviously Old Navy and Gap, even those are heritage foundational categories for both of those businesses. To me, this is where commercial merchants earn their keep. Obviously, understanding trends, understanding their brands, understanding customers and competition. Let me just highlight one example.
We've had a team together of Jill Stanton and Jody Bricker at Old Navy now working together One, a creative director commercial executive, and one, a commercial leader on behalf of the business. Old Navy did a four comp in Q2 on top of six last year with denim across the marketplace, negative comp. I'm not saying their denim negative comp, I said across the marketplace. What'd they do? They knew that indigo denim was under-delivering in the marketplace. They played a different color game. They introduced, really worked hard on their fit pant, which is their active pant. Really invested in that, got behind it, double exposed it, gave it a lot of space online and digital content, introduced the Pixie Pant, introduced a redesigned fabrication on their chino pant. Now we're the first of our brands to embrace soft dressing.
When a commercial merchant works with their partner in design and figures out exactly that there's trends. Look, we've lived through skirts versus dresses, we've lived through knits versus wovens. It's going to happen. Now you got indigo denim. There's a little too much of it in the marketplace. If you can't understand the market, understand your customer, take advantage of it to gain share, then we probably don't have the right commercial merchants. In the Gap business, in fairness to them, Rebekka Bay, who's our creative director, who I have a lot of confidence in, didn't have a partner for the first half of this year. The first part of the relationship between Rebekka and Michelle is going to be introduced when our September product comes in. That's our mistake, by the way. That's not Rebekka's fault. That's my mistake. That's Steve's mistake.
We should have made sure day one she had a solid partner with her. She went six months with people she worked with. Not a partner to the caliber of Michelle. Let's see how they have figured out how to navigate. This is what they do for a living. Whether it's sweaters in holiday or outerwear, always understanding where they're going to gain share. Is that where the customer's at? How do they beat the competition? Ultimately, how do we win? I think that we've demonstrated that in one business. In the other one, not as well. That's why we're disappointed with our performance so far. It's explainable. I think you'll see hopefully an improvement in the back half as that tandem comes together. Thank you.
I'd like to thank everyone for joining us on the call today. As a reminder, our earnings press release, which is available on gapinc.com, contains a full recap of our second quarter results, as well as the forward-looking guidance included in our prepared remarks. As always, the investor relations team will be available after the call for further questions. Thank you.
Ladies and gentlemen, this does conclude today's conference. We thank you for your participation