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 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 1 I would now like to introduce your host, Katrina O'Connell, Vice President of Investor Relations.
Good afternoon, everyone. Welcome to Gap Inc. 2nd 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 ks 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 21, 2014, and 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. So Q2 internally, we even think about the quarter as a quarter which we made some progress. Some progress from the Q1, which we needed to make on a number of different areas, but it's progress nevertheless and 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. So I think that that's a sign of some of the changes we're making in the business to improve that very important line item in our P and L. We definitely made progress at Old Navy. I mean that was a really a very strong second quarter with a 4 comp on top of last year's 6 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.
So I'm very impressed with the Old Navy team. We opened up three stores in China for Old Navy. So now we have 4 stores. We have at least 1 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 6 Old Navy stores. I think that combination of the 2 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 gas stores. So 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. So I think that that's really going to shine for us in the second half. More importantly, we tested order in store. And as everybody in 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. So 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.
And we've been testing a loyalty program. And 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. And I believe this test we're doing in only 25 Manner Republic stores could become the basis of something we can use down the road to present a different twist on our value proposition.
And lastly, we have spent an incredible amount of time in the last 3 months 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 twenty fourteen. Some quick thoughts about the Q3, which we're 2 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. And 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. And 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 1st product put together by our merchant and design team of Michelle De Martini and Rebecca Bay, brand new marketing campaign from Wyden Kennedy, big change in our online site to match up. So 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. But at least it positions us in a much better way as we look forward to September going into the fall going into the 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.
Second half of this year, you're going to see the company push much harder into personalization. And this is on our mobile devices, on our desktops, on iPads. And we believe there's a huge opportunity here to personalize homepages, personalized content more than we ever have before. We've been tested on the first half and this is the ultimate definition of the use of big data. This week, we relaunched Piperline.
We don't talk about Piperline much. It only has one physical store and it's an online business. While it's easy to look at Piperline 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 other brands. And 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. But we've been very pleased with some long term future markets like Brazil, Mexico, UAE with strong growth midway through this year. And as a matter of fact, as I'm speaking to you, we're putting out a release 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.
So in closing, I just have one comment to make. Today is the 45th anniversary of Gap Inc. And 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, big thank you to the Fishers, this incredible couple who founded this business, who make us proud every single day. And 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 in the blaze trails and be a formidable force in the apparel business.
We have one goal and one goal only and I think Don Fish who passed away 5 years ago in September would appreciate this is to become the number one global apparel company in the world. And 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 described the financial results for the quarter, it's worth noting that all reported numbers include a $39,000,000 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 $44,000,000 including the gain. We delivered earnings of $332,000,000 and earnings per share of 0 point 7 $5 versus 0.6 $4 last year.
Year to date, we've generated free cash flow of $668,000,000 and we've distributed $802,000,000 through share repurchases and dividends. Regarding sales for 2nd quarter, total net sales were $4,000,000,000 and comp sales were flat for the quarter following last year's 5 comp. Total sales and comp by division are listed in our press release. Moving to gross margin. The 2nd 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 brand. Rent and occupancy deleveraged 20 basis points. As a reminder, we need positive comps to leverage rent and occupancy and the threshold for rod leverage is higher this year given our mix shift toward international markets like China that have higher rod costs. Regarding SG and A, 2nd quarter total operating expenses were $1,000,000,000 down $44,000,000 from the prior year.
Operating expenses versus last year benefit $39,000,000 from the gain on sale. Marketing expenses were down $6,000,000 to last year at $142,000,000 As a percent of sales, total operating expenses leveraged 180 basis points versus last year to 25.2 percent. 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 percent at the end of the Q2. We ended the quarter with about $1,500,000,000 in cash and used $364,000,000 to repurchase 9,000,000 shares, resulting in a quarter end share count of 4.34 $1,000,000 Regarding capital expenditures and store count, year to date capital expenditures were $328,000,000 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, 20 13. Store count and square footage details are listed in our press release. And 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 to $2.95 to $2.95 to $2.95 to $3 At its midpoint including the gain, this represents growth of approximately 9%.
On a constant currency basis, the growth rate is estimated to be 5 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 Q3, 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 $160,000,000 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 lack difficult comparisons from expense savings last year and as we invest to support marketing, especially at Gap Brands. We expect marketing expenses in the Q3 to be up about $25,000,000 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 and store openings are weighted toward China, Old Navy in Japan, Athleta and Global Outlets. We expect capital expenditures to be about $750,000,000 and depreciation and amortization to be about $520,000,000 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 1 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 gas division. And 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? And 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 2 questions.
Kidding aside, look, the Gap business, as I talked in my opening comments, I think that we can if we wanted to, we could rationalize away the Q1, 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. 2nd quarter was a bit of a carryover from the Q1, a combination of product and other issues they've done in the Q2. I think they've made a lot of changes. And 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, they're going to see a better face of the brand from a product perspective starting in the 1st week of September, much better communication. So I don't want to get into the full integrated plan.
You're really focused on merchandise and I think you see some changes in the product and 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 Rebecca Bay. We see how that works over at Old Navy and that's producing the results we're seeing now as we've redefined the role of the merchant to make a much more commercial, somebody who drives the business and doesn't necessarily just pick product. And we're seeing that in the early days of the relationship between our Banana Republic Twosome of Julie Rosen and Marissa Webb. So I think you will see a change in the merchandising. But as I said in my opening comments, it's the beginning.
Gap had a very nice run-in 2012 and 2013, 1st two quarters. I said that you could explain them. I'm not happy with them. You could explain them. And now I think you'll see the beginning of the change in the 1st week of September take us all the way through holiday and 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 shifted our relationship from vendor based relationships to mill based relationships. But we'll have a significant amount for us of our assortment on fabric platforming in the second half.
And 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. 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, but also as you consolidate your fabrics and create a much more tight 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, and you also talk about personalization. Overall, the digital growth rate for revenue has actually decelerated meaningfully from the run rate last year.
And I was just wondering, could you maybe speak to that a little bit? I'm not trying to poke 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 can we potentially expect a reacceleration? 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. And that some of the reasons I was just explaining to all of her earlier, I think they're just 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. But it was an 11% on top of 27%. So it was a 2 year 36%. So that's 18% per year, definitely market share gaining over 2 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 Q2 drives business to the stores. So even though those tools are there, you get the eyeballs from online, but the sale goes to the store. And I think personalization, what I tried to say in opening comments possibly wasn't clear. We're just testing it.
It's been about 6 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. But look, I think it was good performance online over 2 years. I said if the market's growing between 10% 12%, maybe I'm being generous when it comes to apparel. 2 years of back to back 18% is good. But I have my eye on that 11%.
I won't deny that. That was a number we circled at the end of our P and L because we know every part of our business has to fire at all cylinders for us to reach our goal. And the online business was did a decent job in the Q2, but we are always looking for strength, especially given your point in 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 at the outlets? I mean, you'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. I mean there's just this incredible relationship between the specialty business and our outlet business. I love this outlet business did very well in 2012 and 2013 because our core business was stronger at that time. So if certain malls around the country, mostly B malls, 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 a 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 Steven Sunnix 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. And 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 percentage 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. But for the most part, our investment for the last couple of years have been in interurban 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. And there's a lot of street locations we've gone into in interurban locations where there's no crossover between a specialty store. We've dropped in 1 of our factory store businesses there and done very well. So we're being careful not to just react like we did years ago to new square footage, but be thoughtful strategic on how we spread our outlet stores across the country.
We'll go next to Kimberly Greenberger with Morgan Stanley. Please go
This is Amber Turley on for Kimberly Greenberger. So 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? Or are you thinking in terms more of developing the fabric platforming such as 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 and these are no word 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, but 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. And I think the consumer is feeling slightly better, which now we think is good for the overall industry. But whether the consumer feels slightly better, but 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, which 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 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, omnichannel, sorry, reserve in store, order in store, other tools we have.
So we can talk about much more than the, 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. So 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 omni channel tools, which are unique to other people in the marketplace and 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 4 comp over 6, be aggressive and that's its role in the portfolio. That's to a previous question why outlet is so important to us. We have those three businesses, Old Navy, Gap Outlet, Banana Public 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. And 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 3 weeks ago when the 4th Old Navy opened. So I'm probably just a little pink just because that was a big to do. It's our 4th store, second one in Shanghai.
The first one is off to a tremendous start and this one, so far so good after just a few weeks. I would say that my instincts 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 is sitting here is my view. And I'd say, I could see that playing out in China. But definitely, we'll be able to go deeper. GAAP 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 for Old Navy 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. And so 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. But if I looked out the next 5 years, I could see where we would have more Old Navy's 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. And then Glenn, it's good to hear you talk about starting to maybe utilize of the big data. Thanks.
You guys know Sabrina is here too, right?
Yes. Hi Sabrina.
She's 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're joking the other day, it's amazing how quickly we got to 100 stores.
So 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 fit can you work in a mall? Can you work in street? Can you work in a strip center?
And we've proven all of that. So 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. So it's not a one dimensional business. I've also said many times our key competitors Nike. I know there's other competitors who get a lot more airtime. 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.
It's 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 through 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. So 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 4th 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. And lastly, what every business wants, but especially a business in the inferior and 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, so many things are going in their direction.
So we're very happy with it, love the team there and their leadership. So we're going to continue to spring and I get a very nice return on capital, which always makes the 2 of us happy. So we're going to continue to invest behind them.
All right, great. Thanks and best of luck.
We go next to John Morris with BMO Capital Markets. Please go ahead. Hi.
It's actually Janine Sichter on 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 Old Navy earlier this year. So just so you could give us kind of what percent of the assortment of 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 April at the analyst meeting, I think at the end of the meeting ahead Q and 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 Q1, same with rapid response. We have a little bit of benefit coming in the second half. That wasn't the original plan, but the fabric platforming work we've done should help us on the gross margin in the back half of twenty fourteen. I'd say I've seen every week I get a report on all the tests we do.
So we just finished doing a number of tests across all the businesses for the Q1. What it tends to point to, it helps us with range 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 is 300,000 unit buy 350,000 or 400,000.
Then within that, it helps us with the CC component of it. And most times what it tells us is if you have a style or a program with 10 CCs, you don't need 10 CCs. So 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. And within that style, it could be unique attributes within each style, but mostly it could be color or print pattern.
And all the results I've seen are very helpful for the team. And we always got to apply commercial judgment and how do we gain market share to drive it, but the tests are certainly validating some of that and getting that a big opportunity at Gap Inc. P and 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? And then 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 whenever there's 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 has been at it for with their active line for about 3 plus years. Gap have, Gap fit, they've had that over 3 years also. So we look at it that Athleta is a standalone business that focuses on women's performance product and that's the first attribute, but it's performance, but also has a fashion component to it. So we look at it from a gapping portfolio.
We're dominating for sure with athletic 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 is 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. And I think it's the it's got a beautiful split in its business between online and stores.
And that's as for those of you who've been following Sabrina and I for the last 7 plus years, we untangled some of the store decisions of the past. So we definitely promised to 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 and Athleta certainly has a beautiful split in its business.
Great. Thank you.
We go next to Paul Lejuez with Wells Fargo.
Hey, guys. Just wondering if you could talk a little bit about cotton prices. Are you starting to see a benefit there? If so, when might you expect that to become a tailwind in the P and L? Thanks.
Yes. There's always a little bit of a lag because we place orders some months before. Obviously, they show up in stores, Paul. So it's great news to see cotton coming down. So it's great news to see cotton coming down.
Because of the lag effect, we would expect some small benefit probably in spring. But assuming that the prices stay down as they have been, you see a much more pronounced effect in summer, which is obviously good news
as we look forward to 2015.
Thanks, guys. Good luck.
And 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 Glen about Gap maybe being a place you might be looking at versus the others? Thanks.
Yes. We're fortunate in some ways. I think the best math to apply is we have 2,500 odd stores in the U. S. So about 500 leases come up every single year.
So that phenomenon plus the recession is what allowed us to do the work we did over the last 4 or 5 years. Going forward, Barbara, I think we're a little less focused on closures, although I admit to 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 doesn't 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 about a physical presence does matter, but 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 5 years, but now we are turning to Gap and to Banana Republic. And we'll 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 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. And I'm hoping that will be a success for us and something we can deploy as we look at our real estate going forward. But the great thing about the way our real estate team operates, we have lots of flexibility.
Great. Thank you.
And our final question today will come from Brian Tunic with JPMorgan. 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 2 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.
Just as I look at it, Brian, I'd say that denim, when you run all business in 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.
So we've had a team together of Jill Stanson and Jody Bricker at Old Navy now working together, 1, a Creative Director Commercial Executive and 1 a commercial leader on behalf of the business. And Old Navy did a 4 comp in Q2 on top of 6 last year with denim across the marketplace, negative comp. And I'm not saying they're denim negative comp, it's across the marketplace. What they do? They knew that blue that indigo denim was under delivery 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 and now we're the first of our brands to embrace soft dressing. And when a commercial merchant works with their partner in design and figures out exactly that there's trends that we've lived through skirts versus dresses, we lived through knits versus wovens, it's going to happen. Now you've got indigo denim and there's a little too much of it in the marketplace. If you can't understand the market, understand your customer and 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, Rebecca 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 and the first part of the relationship between Rebecca and Michelle is going to be introduced when our September product comes in. That's our mistake by the way. That's not Rebecca's fault. That's my mistake. That's Steve's mistake.
We should have made sure day 1 she had a solid partner with her, but she went 6 months with people she worked with, but not a partner to the caliber of Michelle. So let's see how they have figured out how to navigate, but this is what they do for a living, whether it's sweaters and holiday or outerwear, always understanding where they're going to gain share, is that where the customer is at, how do they beat the competition, ultimately, how do we win. So I think that we've demonstrated that in one business and the other one not as well, that's why we're disappointed in our performance so far, but it's explainable. But 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. And as a reminder, our earnings press release, which is available on gapinc.com, contains a full recap of our Q2 results as well as the forward looking guidance included in our prepared remarks. And 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.